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By Nicole Mordant
VANCOUVER, June 6 A funding technique mostly
used to help companies build new mines is moving into the
mainstream as a way to pay for acquisitions and could help boost
industry deal volumes that have fallen for the past three years.
Stream financing, through which miners get cash upfront in
exchange for agreeing to sell a fixed percentage of future
production at a discounted set price, was part of Yamana Gold
Inc's white-knight bid for a 50 percent stake in fellow
Canadian gold miner Osisko Mining Corp in April. Osisko
was trying to defend itself against a hostile takeover from gold
sector giant Goldcorp Inc.
Yamana's C$930 million ($853 million) bid was partly
financed by a C$275 million stream transaction with the Caisse
de dépôt et placement du Québec, a large Canadian pension fund.
In return for putting up the funds, the Caisse would get 37,500
ounces of gold a year from Osisko's flagship mine at a price
equal to 42 percent of the spot gold price.
Although trumped by a higher offer, the bid was one of only
a few to use streaming, a decade-old funding concept, as a tool
to help pay for acquisitions. At a time when equity and bank
funding remains tight for miners after industry profits sank to
a decade low last year, streaming companies have big pools of
capital that may be tapped to make acquisitions.
In January, Terango Gold Corp, a gold miner listed
in Canada and Australia, closed a $135 million stream deal with
royalty and streaming company Franco-Nevada Corp to
fund the purchase of the rest of a gold property in Senegal that
it did not own already, and to repay debt.
"Inevitably, as streaming gains prominence across the
sector, it is increasingly being considered as a form of
acquisition finance, and will continue to do so," said Lee
Downham, the lead partner for Global Mining & Metals Transaction
Advisory Services at consulting firm EY.
The volume of mergers and acquisitions in the mining and
metals sector globally fell by 30 percent between 2011 and 2013
to 703 deals, according to EY.
Vancouver-based Silver Wheaton, the world's biggest
streaming company, is busier on bid financings than it has ever
been and has submitted as many as four bids as part of
acquisition teams, Chief Executive Officer Randy Smallwood said
in an interview.
Smaller streaming company Sandstorm Gold Ltd, also
based in Vancouver, is working on "an idea" that would involve a
stream being used as acquisition financing, CEO Nolan Watson
To be sure, stream-backed acquisition finance will likely
remain a niche type of funding mostly for mid-sized miners,
which have less access to bank and debt funding than their
Opportunities for large mining companies with credit ratings
to use streaming for acquisitions may have been cut after
ratings agency Standard & Poor's last year changed how it
classifies streaming. That change hasn't been followed by other
BUCKETS OF CASH
The streaming finance model was developed 10 years ago by
Silver Wheaton. Its biggest competitors are Toronto-based
Franco-Nevada and Denver-based Royal Gold Inc.
At the end of the first quarter, the trio were sitting on
more than $3 billion in capital, built up over a decade-long
metals price boom, which ended in 2011.
Streaming companies typically have low operating costs as
they often have only have a few dozen employees focused on
hunting for financing opportunities.
"We do have significant amounts of capital available to
deploy into the marketplace at a time when other capital sources
are hard to find," said Royal Gold CEO Tony Jensen.
Shareholders generally want cash to form a "significant"
part of an acquisition price and streaming can help to fund
this, said John Gravelle, global mining leader at consulting
group PwC in Toronto.
Teranga chose to fund its Senegal purchase with a stream as
an equity financing to raise cash would have been dilutive to
shareholders given the company's depressed share price at the
time, said Teranga CEO Richard Young. Taking on more debt could
have put its balance sheet at risk.
"The good-housekeeping seal of approval of having a
Franco-Nevada do the due diligence and vet your asset... I think
is helpful for existing and potential shareholders," Young said.
It's not just buyers who are looking at using streaming
finance. Smallwood said large mining companies who want to sell
non-core assets have approached Silver Wheaton about adding a
stream onto an operation to potentially increase its value for a
buyer, and hence its selling price.
Streams are frequently created on by-product metals from a
mine, such as silver from a lead-zinc mine, output that
investors give little value to. Using this overlooked by-product
to secure finance can create value for a potential acquirer.
Streaming also has its critics, who say it is complicated
and expensive as forward sales of metals are done at prices that
can be 50 percent to 80 percent below spot prices. Unlike debt
that can be repaid, streams are long-term arrangements sometimes
remaining in place for the life of a mine.
Streaming may not be appropriate to finance all
acquisitions, "but clearly it brings certain advantages and in
such a difficult M&A market it could be the difference between a
deal progressing or not," EY's Downham said.
(Additional reporting by Cameron French in Toronto; Editing by
Jeffrey Hodgson and John Pickering)