Bracewell ( UK ) LLP / Anglo Pacific Group PLC 5 to its main production , meaning that , for example , a streaming agreement may relate to silver produced as a by-product of gold production . However , over the past decade , stream financing has become more mainstream and now spans more diverse commodities , particularly for mining companies that have otherwise struggled to access equity markets .
Streams are inherently bespoke arrangements that can be structured in a number of ways , but typically relate to a specific percentage or specific quantity of production from a mine . This right to purchase may be subject to an overall cap or run for the life of the mine – for example , a Stream Investor could acquire the right to purchase 50 % of the cobalt production from a mine until delivery of 10 million tonnes and a right to purchase 25 % thereafter , or it could acquire the right to purchase 50 % of the cobalt production for the life of the mine .
A “ life-of-mine stream ” would expose the Stream Investor to reserves risk but could also , depending on how the streaming agreement is structured , allow the Stream Investor to benefit from any subsequent expansions to the mine .
Streams for producing assets often involve a one-off upfront payment upon the closing of the transaction , whereas a streaming agreement for a development asset ( that is , a mine that is not yet in production ) might be structured so that the mining company receives multiple staged payments upon satisfaction of certain pre-agreed specified milestones . A Stream Investor will make additional payments calculated on the basis of each unit of metal that is delivered , typically either at a fixed price , subject to indexation , or as a percentage of the spot price at the time of delivery . The difference between the additional payment and the prevailing market price is “ credited ” against the upfront payment .
Importantly , streaming agreements are structured as contractual arrangements between the Stream Investor and the mining company , and so do not grant the Stream Investor a proprietary interest in the mine itself . Consequently , Stream Investors often seek security over the mining company ’ s assets and are typically secured creditors .
Figure 2 : Streaming structure
Common types of royalties include :
■ Gross Revenue Royalties – these entitle the Royalty Holder to a fixed portion of the mine ’ s gross revenue before any deductions .
■ Net Smelter Return Royalties – these entitle the Royalty Holder to a fixed portion of the net revenues received from a smelter or refinery by the mine operator following the deduction of certain costs , such as transportation , insurance , smelting and refining .
■ Net Profit Interest Royalties – these entitle the Royalty Holder to a fixed portion of the profits of the mine after deduction of production-related costs .
Where permitted by local law , royalty arrangements are often structured to create an interest in land , thereby establishing property rights in favour of the Royalty Holder . As noted above , this is in contrast to a streaming arrangement , which is typically limited to a contractual arrangement between a Stream Investor and the mining company . However , in jurisdictions where an interest in land cannot be created under the royalty arrangement , a Royalty Holder may also only have a contractual arrangement , which it may seek to protect , where possible , with security in the same way as a Stream Investor .
Figure 3 : Royalty structure
* Upfront amount for stream is often a single payment , but can be staged for development projects
Benefits of Streaming and Royalty Agreements
* Upfront amount for stream is often a single payment , but can be staged for development projects
Royalty Agreements
Royalty agreements typically involve a single upfront payment to the mining company . The “ Royalty Holder ” then receives payments from the mining company that represent a proportion of production or revenues on an ongoing basis . This means that , in effect , royalty arrangements are ( typically ) settled by the delivery of cash to the Royalty Holder , whereas streaming arrangements are settled by the delivery of product to the Stream Investor .
The use of innovative financing structures has a number of benefits for a mining company when compared to project financing or equity financing .
Issuing new equity in the mining company or a listed parent will naturally result in dilution of the current shareholders ’ interest in the mine and , although streaming and royalty agreements also result in a dilution of the revenues from that mine , the dilution is limited to the specific asset and specific production from that asset . This is further mitigated , particularly in the case of a stream , if it is in respect of a by-product , meaning that shareholders in the mining company retain an undiluted interest in core production from the mine .
An additional significant benefit for a mining company is that compared to a standard project financing , streaming and royalty agreements are often “ covenant-lite ”, with fewer controls imposed on the mining company ’ s parameters of operation . The effective “ repayment ” of royalties and streams is ( by virtue of their nature ) not a fixed repayment ( unlike the amortisation of a project finance loan ) and is wholly dependent on the level of production and / or the revenue produced by the mine . Consequently , Stream Investors or Royalty Holders effectively share similar risks to equity ( as they receive lower revenue when the mine ’ s production levels or commodity prices fall ).
Mining Law 2023 © Published and reproduced with kind permission by Global Legal Group Ltd , London