Streaming & Royalty companies: mutually beneficial arrangements for everyone, including investors

The Antamina mine is one of the largest, lowest-cost copper mines in the world. It is located in the Peruvian Andes mountain range at an average elevation of 4,200 metres. The mine began producing in 2001 and is operated by Compania Miñera Antamina S.A. (“CMA”), a company jointly owned by subsidiaries of Glencore plc (“Glencore”), BHP Billiton Plc, Teck Resources Limited, and Mitsubishi Corporation.

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By Ellsworth Dickson

Mining stock investors are familiar with companies that specialize in exploring for minerals but have no interest in building or operating a mine. When the explorer has developed tonnage, the plan is to sell the project or company to a mine builder or would-be producer.

However, there are two other types of mining companies that investor may want on their radar screen – streaming and royalty companies. Some of these types of companies don’t own mineral properties, explore for minerals, build mines or operate them. Instead, they fill a need for mine builders and producers to access funds to build and operate a mine. However, there are some streaming and royalty companies that do have interests in mineral properties as well.

A streaming company provides funding to a mining company in exchange for a partial ownership of its mine (and its metal production) or has an agreement to buy a certain percentage of its metal production at a significant discount to the spot price of the metal. This usually involves gold or silver but can also involve industrial metals such as cobalt.

So, if the streamlining company can buy part of the mining company’s gold production at, say, 50% of the spot price, there is a robust profit margin to be gained when the streaming company sells its metal.

Streaming arrangement terms are all negotiated by the two parties. There are significant benefits to both the miner and the streaming company – and investors as well. Since building a mine is very capital intensive, if a mining company were to finance mine construction by issuing shares, the company’s shares would suffer substantial dilution. Even if a mining company could raise mine building funds via debt, of course the debt would have to be repaid.

A streaming arrangement eliminates share dilution as well as paying back millions of borrowed dollars which could be difficult if the mine for any reason is not profitable.

For a straightforward streaming company, it doesn’t have the risk of building and operating a mine. Usually the purchase price of the miner’s metal is sufficiently low that any decline in the price of metal would still enable the streamer to see a profit. However, if a mine is delayed in going into production, there won’t be any metal for the streaming company to buy. This is why many streaming and royalty companies have numerous agreements that lessen the risk.

For the investor, there are benefits too. Many streaming companies have a number of streaming arrangements which means that investor risk is spread out and thus lessened – unlike a junior explorer that often faces a difficult challenge to obtain exploration funds to outline an economic deposit – if there proves to be one to outline. Many fail with five years.

Some well-known streaming companies include Wheaton Precious Metals Corp. [WPM-TSX, NYSE] and Franco-Nevada Corp. [FNV-TSX, NYSE]. Franco-Nevada has both streaming and royalty agreements with producing miners.

Like streaming companies, royalty companies provide substantial amounts of cash up front to the mine builder in exchange for the miner’s net smelter return royalty on a property that could be anywhere from 0.5% to 5%.

Benefits for royalty companies are similar to streaming companies, miners and investors.

Royalty companies include Sandstorm Gold Ltd. [SSL-TSX; SDDXF-OTC; SAND-NYSE American], Ely Gold Royalties Inc. [ELY-TSXV; ELYGF-OTC], Osisko Gold Royalties Ltd. [OR-TSX; OSSPF-OTCQB], Sailfish Royalty Corp. [FISH-TSXV] and Altius Minerals Corp. [ALS-TSX; ATUSF-OTCQX].

Some streaming and royalty companies also want to be involved in mineral property ownership, exploration and sale. Ely Gold Royalties and EMX Royalty Corp. [EMX-TSX, NYSE American; 6E9-FSE] are examples of such companies.

Streaming and royalty companies fulfill a real need in the mining sector in addition to traditional means of raising funds.


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