Royalty and streaming companies are all the talk these days as cash-strapped junior miners look for investors. Capital raising has dried up, equity financing is dilutive at current share prices, and the appetite for debt financing has shrunk.
The trend, it seems, is for unconventional financing using royalty and metal-streaming deals. Dilutive at the asset level, as miners have to either give up a share of future metal production or promise to sell the investor metal in the future at a discounted price, it remains to be seen whether juniors will fall prey to this type of financing during today’s tough financial times.
Juniors are targets, said Randy Smallwood, CEO of Silver Wheaton (TSX:SLW,NYSE:SLW), one of the four biggest royalty and metal-streaming companies. The four majors – which include Silver Wheaton, Franco-Nevada (NYSE:FNV,TSX:FNV), Royal Gold (NASDAQ:RGLD), and Sandstorm Gold (TSXV:SSL) – have about $2 billion to spend, according to some estimates.
In an interview with Resource Investing News, Smallwood said he is in talks with several companies and is seeing a lot of interest. “With early-stage juniors that have strong indications of a resource, we’re willing to up front them anywhere from 5 to 15 million dollars. Instead of being an equity shareholder, we come in and give the cash up front and within 10 years we’ll put that as a credit towards the silver stream.”
No stock dilution
He added, “for us it’s a good way to get exposure and lock up some assets early stage. They get the benefit of financing without stock dilution … The advantage for the company is they can now take that [money] and throw that into the ground and hopefully build up the project to the point where the share price has recovered enough that we can continue financing the project going forward.”
A royalty company generally gives cash to a junior in exchange for a future percentage of all mined metal. A streaming company invests in a junior in exchange for the right to purchase metal over a fixed, generally discounted price over the life of the mine. Some companies invest through both streaming and royalty. And investing models are constantly changing.
For example, Silver Wheaton’s Smallwood said the firm has come up with a new model called the “early advance silver stream” whereby it will invest in an early-stage junior with the aim of using that money as a credit towards a future silver stream arrangement when and if the junior becomes a producer.
Nobody able to get capital
The total number of financings on the TSX Venture Exchange fell to 132 in June from 158 in May and 147 in the year-ago period, TMX Group reported. IPO financing on the exchange fell sharply to $3.6 million from $25.6 million from June 2011. Total financing fell to $425.3 million in June compared with $990.5 million in June 2011.
“The pendulum has swung from anyone being able to get any amount of capital on just about any terms, to nobody being able to get any amount of capital on any terms,” Nolan Watson, chief executive of gold-streaming firm Sandstorm said recently. “It’s much worse for raising equity capital now than it was even in 2008 and 2009.”
The situation has made some smaller precious metals explorers and producers targets for acquisitions or stake buys.
In May of this year, Sandstorm paid Magellan Minerals (TSXV:MNM) $7.5 million and said that it will subscribe to one million shares of the gold company for $0.50 each in exchange for a 2.5 percent net smelter returns royalty on Magellan’s Coringa gold project and a 1 percent royalty on its Cuiu Cuiu gold project, both of which are located in Brazil.
Earlier this year, junior gold miner Lake Shore Gold (TSX:LSG) orchestrated a $50 million deal to sell Franco-Nevada both an equity stake and a royalty interest on the sale of minerals from its Timmins West mine in Ontario. In May, Royal Gold struck a deal to buy a net smelter return royalty on the Ruby Hill gold mine from International Minerals (TSX:IMZ).
One article, however, argues that juniors are not bound to fall prey to royalty and streaming companies. While there could be a bonanza of junior deals, there is also the likelihood of one or two mega deals with an intermediate or major metals producer. However, big acquisitions will not come cheap as metal prices remain strong even though equity valuations may be down. The article also points out that dividends have been rising in the mining sector, including at royalty and streaming companies. And with cash continuing to flow at these companies, their dividends will have to rise, creating a drain on the cash needed to make acquisitions.
Securities Disclosure: I, Karan Kumar, hold no positions in any of the companies mentioned in this article.