The Accretive Use of Metal Stream Financing: The Mine Financing Strategy that Reduces Dilution and Accelerates Production
Metal stream royalties are an accretive financing tool for both precious metals and base metals resource owners to deploy in an effort to reduce dilution and accelerate mineral production. Metal streams, also referred to as volumetric production payments or metal purchase agreements (such as gold purchase agreement or silver VPP deals)) are financing arrangements whereby a royalty company, such as Gold Royalties Corporation, offers a sum of capital upfront prior to mine infrastructure being built in exchange for a certain percentage of mine production once that mine enters production. In other words, a metals royalty company exchanges cash today for a stream of production down the road. Accordingly, a metal stream royalty is a financing tool for mining companies with NI 43-101 reserve reports to raise capital to help them reach first-pour production or expanded mine throughput levels predicated upon needing to build additional mine infrastructure first.
A metal stream financing deal works in a fairly direct manner. A precious metals royalty company or a royalties companies that does volumetric production payment royalties or resource purchase agreements (commonly metal stream companies) will offer a given amount of money per ounce, pound or tonne of a given ore type. For instance, a metal stream deal for gold might involve a metal stream company providing $300 per ounce upfront to the resource developer. This capital, likely provided on a staged basis as the junior mining company reaches mine build milestones, is used to assist with the financing of the mine. The second common attribute of a metal stream is a per ounce, per pound or per tonne contribution paid by those same metal stream companies to the mine operators once a mine reaches production. For instance, in the case of a gold resource stream, the gold mining royalty company might pay the mine operator a sum of $500 per ounce produced over the life of the mine. As with bankable reserves, most royalty deals only covered "reserves." When it comes to the broader, less certain "resources"category, a typical metal stream financing will provide that since the junior achieved production due in part to the metal stream financing, unknown value down the road of additional reserves beyond those technical established through feasibility studies at the time of deal are shared mutually. For instance, a metal stream company might purchase X% of a mine, say 20% of 100,000 ounces annually over the mine life of 10 years. In this example, the metal stream investors offer the resource developer 20,000 ounces X 10 years X $300 per ounces ($60,000,000) prior to production to assist the mine being developed. Next, over the course of the ten years of mineral production, the metal stream investment fund or royalty company would pay 20,000 ounces X $500 per ounce (or the price of gold, if lesser than $500). If the mine is extended in year 10 and forward, a metal stream financing deal typically allows the metal stream company to continue to acquire ounces for the "life of the mine" at a price equal to what they were paying as an operating cost during the anticipated mine life, in this case $500 per ounce. This way, both the metal stream company and the junior continue to experience resource upside but limit the risks in the situation that a mine is closed after known reserves are exhausted.
There are two common types of metal stream royalties, primary product metal stream royalty agreements and financing a mine development by arranging metal stream financing on secondary products.
In the first instance, a resource owner is looking for a financial partner to assist with raising the necessary capital to bring a single commodity mine into production, e.g. a silver only mine or a gold only mine. In this circumstance, the arranging of a metal stream can serve several purposes. One, a mining company may wish to share the risk of a given resource with multiple companies thereby bringing on partners who can assist with generating the capital required to reach production. Two, a mining operator may wish to reduce share dilution by financing mines on a project by project basis. In that situation, a given junior or senior listed or unlisted mining company may hold 2, 3 or 4 potential mines. If they needed to raise equity at the corporate level, shareholders in all mines would be diluted due to the financing. By using a precious metals metal stream royalty or a base metals metal stream royalty for a specific mine, the resource company can finance mines on a mine by mine basis, avoiding dilution at the corporate level. Three, single commodity resource companies often recognize that metal stream financing can add accretive value because the equity of an established royalty company trades at a higher level in the marketplace. Often a junior that has yet to reach production or is otherwise unknown to the public markets trades at a substantial discount on a per ounce or per unit of reserve basis. A royalty company or metal stream company might trade at a higher multiple due to their established nature and thus can offer better priced capital to fund mine development. For example, a publicly-traded metal stream company might trade at a value of $200 per ounce of reserves versus say $100 per ounce for a Venture- listed junior company that has yet to reach production. By having the metal stream company provide some of the funds, the resource developer can arbitrage that accretive spread and effectively raise equity for the mine at $150 per ounce (leaving both the juniors and metal stream companies with upside) and therefore have to issue much less equity to raise a necessary amount of capital to bring a mine into production than if done at $100 per ounce equivalent. By sharing ultimate production, the resource developer has obtained better priced equity for their shareholders and found additional capital which likely brings the mine into production sooner.
In the second situation, a resource owner has a multi-commodity mineral resource and is looking to bring those resources into production. In this fact pattern, a potential mine producer will look at the various commodities that will be produced by the mine. For instance, take a copper-gold mine. The majority of the resource value may rest in the copper reserves and the company trades as a copper company because of that dominance. However, while a minority of the reserve value, there are also gold ounces associated with the mineralization. In this circumstance, the copper company may pre-sell the gold reserves to a metal stream company that focuses on gold purchase agreements for a lump sum payment of cash upfront and an ongoing production fee. As in the above gold purchase agreement example, this permits the company to raise equity or capital for their proposed mine or mine expansion without having to sell equity in the corporate-level entity. In addition, a gold royalty company trades, due to the nature of its reserves and commodity position, at a different multiple in the market. Therefore, by doing a metal stream royalty with say a gold royalty company such as Gold Royalties Corporation, the copper company can raise equity at a price higher than they could have with their own stock while still delivering accretive benefits to their metal stream financing partner.
Keep in mind for both types of metal stream or metal purchase agreement royalties (single commodity and multiple commodities) that a metal stream may be arranged at one of two points in time. First, metal stream financing can be used to help reach first production. Alternately, metal stream financing can be used to help expand a mine and take that mine from a given level of mineral production to an increased level of milling or ore extraction.
Metal stream deals are also very good for both precious metals and base metals companies because they help source and raise capital faster. A mining company is constantly evaluated under an NPV or NAV basis. The further out that their mine is from production the more that the investment community must discount the cash flow arising from that mine to the present day. Longer discount periods mean that the NAV on the junior mining company's asset is lower. By contacting and leveraging a royalty stream company or volumetric production payment provider such as Gold Royalties Corporation, resource developers can raise their funds faster and bring their mines into production more quickly. This speed increase in reaching production reduces the DCF discount associated with their share equity resulting in higher share prices correlated to the nearer production date. In turn, with that higher share price and quicker share price appreciation, the resource company itself can also raise equity in a less dilutive manner as fewer shares are needed per dollar sought from the capital markets.
Metal streams for both base metals and precious metal companies are unique financing vehicles that help resource developers raise accretive capital for mines, both for new and expansionary objectives. Those metal stream financings, VPPs or reserve purchase agreements let you avoid raising dilutive equity and enable faster time to production. Furthermore, volumetric production payments, metal purchase agreements and metal streams are becoming increasingly common and better understood by analysts. The result is that junior resource companies that deploy metal stream financing arrangements in single commodity or multiple commodity resources are attaining higher trading multiples. For all these reasons, metal streams and related royalties can be a highly economic options for private and publicly traded mining companies to explore.
Gold Royalties Corporation works extensively with mining companies and prospectors to assist them in monetizing royalties and can assist with the fair market determination of royalty values involving gold, silver, platinum, palladium, copper, zinc, lead and many other metals on a metal stream, volumetric production payment or metal purchase agreement basis.
About the Author:
Ryan Kalt is the CEO of Gold Royalties Corporation.