antamina

Glencore in Talks with Franco-Nevada & Silver Wheaton

Issue 140, September 2015

Continued from Page 1 ➤

...from Antamina, Collahuasi and Antapaccay is 82,000 ounces of gold and 7.7m ounces of silver each year, equal to annual cash flow of over $200m, even at current prices.

Silver Wheaton

Streaming was coined by Vancouver-based Silver Wheaton in 2004, paying C$262m for all future silver from the Luismin gold mine in Mexico. It has since bought streams over 21 different mines in deals totalling $5.7bn, but has long coveted the vast gold and silver byproduct thrown-off by the world's largest diversified miners.

Silver Wheaton “cracked” the dormant market in 2013, analysts at TD Securities wrote at the time, after the company landed a $1.9bn gold deal with Brazil's Vale, the largest streaming deal concluded to date. The breakthrough was dealt a setback however when credit-rating agency S&P reclassified streaming agreements, ranking them as debt, on the basis that they are done “in lieu of borrowing” and are sometimes repayable in cash.

The policy has since been softened, but will be a critical consideration for Glencore, which is trying to lower its leverage in the eyes of rating agencies, to uphold the profitability of its debt-heavy trading business.

Agreeing the classification of streams with S&P is “a negotiation and balance”, one source said, with several workable options on the table. Streams over Glencore's mines, for example, could be secured against the group's underlying holding companies, meaning they would not register as borrowing for the parent company, Glencore International AG.

One-Way Growth

It is unclear whether Denver-based Royal Gold, the third largest streaming player by market cap, is also involved in the process. The company is sitting on around $1.4bn in cash and undrawn credit and typically structures its streaming deals through the Swiss canton of Zug, where Glencore is also based.

Franco-Nevada is sitting on $611m in cash and $750m in undrawn credit, whilst Silver Wheaton has $72m in cash, $715m in debt and $1.3bn in undrawn credit.

Analysts have questioned whether Glencore can meet its target of $2bn in asset sales, given current market conditions, but its sudden move towards streaming highlights how many levers the group can pull. It also highlights the one-way growth of the royalty and streaming sector, which catches new assets when markets fall, only adding to its cash flow and firepower when prices recover.

Glencore already has a 20-year streaming deal with Silver Wheaton over the Yauliyacu mine, Peru, struck in 2006 for $285m, but Rio Tinto and BHP Billiton, which mined a combined 670,000 ounces of gold last year, are yet to fall into the net.

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