Sept/Oct 2011

Eye on Business

A stream runs through it: Fishing for funding

By J. Lewis

A mineral royalty has traditionally provided a method for an owner of a prospective mineral property to retain a share in the upside potential of that property by reserving, at the time the property is sold or optioned off, a legal right to a share of the minerals that may be produced from the property. A royalty can also provide a method for a mineral property owner to partially monetize its resource, for example, to fund exploration and development,through granting and selling a royalty.The purchaser of the royalty will assess the potential and risk of whether the property will ever achieve production or, in the case of a producing property,of the anticipated life of mine and value of the production over that period. Due to the complex economic modelling required to make such an assessment, these “created royalties”are generally structured and purchased by companies whose businesses are purchasing and holding a portfolio of royalties.

Over the past decade’s bull run in mineral prices, a new approach has arisen – the streaming agreement. A streaming agreement is similar to a created royalty in that a sum of money is paid to the property owner in consideration for a stream of mineral product. However, there are a number of commercial, legal and tax distinctions between a streaming agreement and a royalty.

In a royalty, the property owner receives the royalty purchase price and is obliged to deliver to the royalty holder, for no further payment, a share of production or payment of its market cash equivalent. In a streaming agreement, the owner receives an upfront payment and, after a period of mineral product delivery from which the streamer achieves a deemed recovery of such upfront payment, additional payments based on the mineral product delivered, at a price that may be significantly discounted to market. The streamer receives the stream of mineral product from the owner, usually for the life of the mine. As in the case of created royalties, the sophisticated analysis required to accurately assess the value of a mineral stream results in stream creation and purchase being generally the preserve of companies that specialize in creating, purchasing and holding a portfolio of streams.

Initially, streaming was used to monetize a mineral byproduct. For example, an owner of a producing gold mine that produced silver as a byproduct would sell a stream based on some or all of that mine’s produced silver. It did not take long for the streaming model to evolve and be applied to the primary product from a producing mine. However, the next evolution was more significant, when a streaming agreement was adapted to fund the development of a new mine. Streaming now provides owners of mineral properties under development with a new source of development funds in addition to the conventional sources of equity, debt and created royalties. Novel uses of streaming will continue to evolve (a stream was recently used to partially fund a corporate takeover).

Streamers require some form of registered security for delivery of the minerals. This is often an area of contention between the miner and the streamer, as it might appear that the streamer is seeking all the advantages that accrue to both lender and equity participants. However, streamers are advancing large amounts of money and security is part of the overall package that is expected. The security taken can look remarkably like debt security, hence the necessity for comprehensive inter-creditor coordination to be negotiated with any project lender who may also be funding the development of a mine. Admittedly, such coordination is challenging, though by no means insurmountable.

Streaming agreements initially were made in respect of precious metals. However, in principle, there is nothing to so restrict their application (there have been recent reports of coal streaming). While it might seem to be a large jump from silver to coal, there is one legal aspect of security registration that may, in some cases, make coal streaming attractive to a streamer. The ideal security that a streamer prefers is a legally enforceable charge only charging the specific streamed mineral in the ground.

In many jurisdictions mineral rights are general, meaning that an owner has a right in respect of all minerals in the ground. An owner who enters into a silver stream agreement in respect of a project that primarily produces copper, but also gold and silver, may not wish to also grant the streamer a charge in all the copper and gold in the ground. In some jurisdictions, however, coal rights have a separate form of tenure from mineral rights and this may enable the streamer to take security specifically in the coal rights.

Streaming agreements are extremely complicated arrangements in respect of financial modelling, value assessment, legal drafting and security arrangements, and not least of all in respect of tax planning. Many precious metals streaming agreements do not call upon the miner to deliver a portion of the mine’s metal production to the streamer; instead, what is delivered is an amount of metal, from sources other than the mine, equal to the value of the applicable portion of metal production. At least one reason for this distinction is that it may be desirable to structure the transaction such that the miner is not making a capital disposition of a portion of the mineral resource, as such a disposition could have substantial adverse tax consequences to the miner.

Metal assayed to a certain purity from one specific mine, is essentially no different from such metal from any other source. On the other hand, coal from one mine is almost impossible to be duplicated from another source. As a result, it is improbable that a streaming agreement could provide for delivery of coal equivalent to that produced from the mine that is the subject of the stream. Accordingly, there may be an impulse for the owner to agree to deliver to the streamer a share of the coal produced from the mine. The tax consequences of this must be carefully canvassed and assessed and this is but one example of why it is imperative that parties receive rigorous legal and tax advice in respect of any proposed streaming agreement.

Josh_LewisJosh Lewis is a commercial mining partner with Fasken Martineau, Vancouver.
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