As challenging financing markets persist in the mining sector, miners are using increasingly creative combinations of financing options to fund project development and acquisitions. It is now common for transactions to feature multiple financing sources, with equity and debt being raised in conjunction with streaming, off-take and/or royalty financing.
No longer confined to junior and mid-tier transactions, stream and royalty financing is playing a key role in high-profile transactions, and streams and royalties are evolving to suit the needs of both mining companies and their financiers.
In a stream transaction, a streamer agrees to purchase, at a pre-agreed price or formula, future deliveries of minerals from an identified property in exchange for an up-front payment, called a deposit, which is applied against those deliveries. The streamer normally takes security over the project assets to protect its deposit and secure the performance of the delivery obligations.
As creatures of contract, streams and royalties are adaptable and have recently been used concurrently with debt and equity to bridge the funding gap for both project development and M&A transactions. Streams are also used by miners as an alternative to non-core assets sales, whereby the miner completes a forward sale of by-products from a mine while retaining control over the mining operations. As the use of stream and royalty financing becomes more frequent, these instruments are evolving to suit the particular needs of the parties to the transactions.
Inter-creditor issues are a key part of negotiating transactions with an increasing number of financing sources. Royalties and streams give rise to unique inter-creditor considerations as the interests of royalty holders and stream financers often conflict with those of traditional creditors in an enforcement scenario.
Major royalty and stream companies, such as Franco-Nevada, Silver Wheaton and Royal Gold, continue to be the primary participants in this area. New participants, such as major pension funds and mining-focused private equity firms, are becoming increasingly active. For example, La Caisse de dépôt et placement du Québec (La Caisse) agreed to provide C$275 million in stream financing in connection with the proposed partnership between Osisko Mining and Yamana Gold as an alternative to Goldcorp’s original hostile bid for Osisko. La Caisse also partnered with the Orion Mine Finance Group, a mining-focused private-equity investment business, in a stream financing described below.
As royalty and stream financing continues to evolve, increased participation from new players entering this arena can be expected.
There have been several recent examples of multifaceted financing packages for project development and M&A transactions.
In July 2014, Stornoway completed a C$944 million comprehensive financing package for the construction of its Renard diamond project in northern Quebec. The financing package consisted of a combination of public and private equity financing, separate senior secured debt, convertible debt, cost overrun and equipment financing facilities and a US$250 million first-of-its-kind stream financing based on diamond production, provided by Orion and La Caisse and designed to allow further syndication of the stream. The application of the stream vehicle to diamonds, a non-fungible product, required innovative structuring in order to achieve the commercial, legal and tax goals of the parties.
Stream financing played a key role in Lundin Mining’s US$1.8 billion acquisition of Freeport-McMoRan’s 80% ownership stake in the Candelaria/Ojos del Salada copper mine. The acquisition was funded with a combination of equity financing, senior secured debt and stream financing. Lundin raised US$1 billion through the sale of senior secured notes in two tranches and C$674 million through equity financing. The balance was funded through a stream transaction with Franco-Nevada consisting of the sale of 68% of Candelaria’s gold and silver production for an up-front payment of US$648 million. Franco-Nevada also provided C$50 million of the equity financing.
Royalty financing was significant in the recently announced acquisition by Noront Resources of Cliffs Natural Resources’ chromite mining claims in Ontario’s Ring of Fire mining district. To finance the acquisition, Franco-Nevada agreed to lend US$22.5 million to Noront for a five-year period at a 7% interest rate with interest to be accrued and paid at the end of the loan term. In return, Franco-Nevada is to receive a 3% gross royalty over the Black Thor chromite deposit and a 2% net smelter return royalty over substantially all of Noront’s remaining property in the region. In addition, Noront will receive US$3.5 million in cash consideration from Franco-Nevada as part of the granting of the royalty arrangements.
As challenging conditions continue to impact the mining sector, streams and royalties will continue to evolve to meet the needs of mining companies, their financiers and prospective financiers.
Torys LLP is an international business law firm that works with clients who expect the best advice and service. Michael Pickersgill is a partner and Peter Danner is an associate at the firm.
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