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Teranga Gold's operations in Senegal; the company struck a $135m stream with Franco-Nevada in 2013, allowing it to buy-out the mine's
co-owners

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Issue 151, December 2015

One corner of the mining industry has enjoyed a blowout year. After a record run of deals, the royalty and streaming sector is on the brink of pumping its
20-billionth dollar into the mining industry, according to data compiled by Global Mining Observer.

Streaming agreements have shot to the forefront of the mining industry in the last 12 months, after $4.2bn of transactions, a record for the sector. As metal prices have tumbled, the deals have bailed-out many of the world's largest mega-miners, including Glencore, Vale and Teck, at the industry's most vulnerable point in the cycle.

Described as “hokey” by Bloomberg and “weird” by the Financial Times, streaming is an example of financial engineering at its best.

Glencore, for example, is one of the world's largest silver producers, mined as byproduct from its vast zinc and copper operations. Yet because silver accounts for less than 0.5 per cent of its revenue, its silver exposure is outweighed by other metals and goes unrecognised by the market.

Hiving-off the group's future silver production, by selling it upfront, realises the latent value and gives a massive injection of capital.

The logic behind such agreements has seen them proliferate like popcorn in recent years: in November, Glencore raised $900m by selling all future silver production from its Antamina copper mine in Peru to streaming giant Silver Wheaton, which coined the model in 2004.

Anglo American

Led by Silver Wheaton, Franco-Nevada and Royal Gold, streaming companies have rolled from one deal to the next in 2015, injecting $18.3bn into the mining industry in the last 12 years. And with more deals flying down the pipe, the binge looks set to continue.

Streams over Glencore's Collahuasi and Antapaccay copper mines in Chile and Peru, as well as Teck's Red Dog zinc mine in Alaska, are all thought to be under negotiation. Freeport-McMoRan and Anglo American are yet to turn to the model, but as metal prices have fallen, putting their balance sheets under pressure, both companies are believed to be edging their way to the table.

Exploration Upside

The Financial Post has criticised streaming deals, saying they “eliminate” exploration upside and amount to “a massive transfer of wealth” from mine operators to streaming companies.

Data suggests the opposite. By injecting capital into mining companies, streaming has helped finance exploration spending directly: more than 350m ounces of silver have been discovered on properties subject to Silver Wheaton's streams since 2004, equal to $5bn of metal.

Streaming companies, in fact, usually pay so fully for future gold and silver production that a large

part of their returns depend on ongoing exploration success.

Silver Wheaton struck a $900m deal with Vale this year over its Salobo copper-gold mine in Brazil; the deal provided 96 per cent of the mine's expansion costs, leaving a ludicrously high rate of return for Vale and a major cash flow boost for Silver Wheaton.

Permanent Capital

The win-win deals, which amount to an arbitrage between precious and industrial metals, explain why the model has spread so quickly, expanding the streaming sector into a critical source of funding for the industry as a whole.

Other sources of capital have instead dumped the industry: mining shares have collapsed with metal prices since 2011, making equity issuance too expensive, whilst debt investors are renowned for taking away the umbrella whenever it begins to rain.

Bond issuance by mining companies has dropped from $120bn in 2011 to $52bn last year, according to accountancy Ernst & Young.

The Collahuasi copper mine in Chile, co-owned by Glencore and Anglo American, has not yet entered any streaming deals

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Streaming has “largely replaced equity financings in recent years”, according to analysts at Investec, “given that the equity market is virtually closed to all but rescue placements.” The biggest risk, the bank says, is that streaming companies run out of capital to fund new agreements, slowing the flow of money.

That is unlikely, according to Scotiabank, which has previously raised equity for Franco-Nevada and Silver Wheaton, because both companies have the capacity to raise more capital to finance further deals.

If current deal flow continues, Franco-Nevada could become the world's largest gold group by market cap in 2016, Scotiabank predicts. The company's current market cap of C$10.1bn ($7.3bn) is 20 per cent short of Barrick Gold and 36 per cent shy of Goldcorp, the world's largest gold mining company.

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Vale's Salobo copper-gold mine in Brazil entered a $900m gold stream with Silver Wheaton earlier this year

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