Metals streaming provides a source of non-dilutive capital without many of the operational restraints – while simultaneously giving financial sponsors and other investors exposure to the commodities cycle with minimal operational and ESG risks.
Increased constraints on equity and debt financing in the resources sector are impacting projects at all stages – from larger joint ventures looking to refinance or restructure, mid-size entities seeking alternate funding, through to fledgling companies commencing exploration or development of prospective resources.
With constraint comes opportunities for adaptation. The resources sector has become increasingly open to alternative investment models which present investors with an opportunity to diversify their portfolios, gaining direct exposure to the commodities cycle while minimising operational and ESG risks.
Metals streaming is one such alternative investment model.
In a metals streaming transaction:
- the investor or “streamer” makes an upfront payment to the miner as an advance for the future delivery of a proportion of mined metals to the streamer
- for the miner, the upfront payment is a source of non-dilutive capital which it can deploy with few operational constraints
- as minerals are produced, the miner delivers the agreed proportion of mined metals to the streamer at a pre-determined price or “delivery fee” (generally at a discount to the prevailing spot rate), typically by crediting metals to the streamer’s account with a metals exchange
- the streamer then sells the streamed metals at the prevailing spot price.
Metals streaming presents two key opportunities:
- Unlocking value: the streamed metals are usually a by-product of a base metals mine - for example, a copper mine may also produce gold and silver as a by-product. These metals are typically undervalued in the miner’s portfolio given the core operation is to mine the relevant base metal. Streaming allows the miner to sell these metals up-front and use the proceeds to fund its core operations. The streamed metals are worth more in the streamer’s precious metals portfolio which can be more readily valued by the market. The streamer also benefits from diversification of its portfolio over time and avoids many of the operational risks associated with taking a physical interest in the resources project.
- Reducing funding risk: for those investing in resources projects, metals streaming transactions are being increasingly seen as a viable option to raise non-dilutive capital. Receipt of an upfront payment against the future delivery of metals when the mine’s operations have commenced or achieved a certain milestone can reduce the funding risk associated with the orphan period before operations commence, or any other period during mining and extraction where significant capex outlay is required before the project realises returns from that outlay. For a discussion of these periods in the context of the resources project lifecycle.
Metals streaming is distinct from royalties. Private royalties have traditionally been used to allow investors to take an economic interest in resources projects. Similar to metals streaming, royalties provide the miner with an upfront source of cash. However, the investor is entitled to cash returns on a proportion of sales revenue once the miner reaches key production milestones, as opposed to taking a physical interest in a by-product of the mine which can then be traded in the commodities market.
Metals streaming is also distinct from offtake transactions. Like streaming, offtake transactions allow an investor to take a physical interest in mine product. However, the investor takes the physical product, for example, the minerals produced from the base metals mine, at the prevailing spot rate or against an index, rather than just taking the metal by-products. Offtake transactions are typically the domain of global miners and traders with a large customer base or infrastructure owners reliant on secure supply of the base metals inputs.
In addition to the key opportunities outlined above, for those looking to invest in a metals streaming transaction, such investment presents an opportunity to get direct exposure to the relevant commodities market. This exposure, together with contractually fixing the “delivery fee”, may reduce the inflationary pressures on them over time.
As the number of metals streaming transactions increases in Australia, so too will opportunities for companies looking to capitalise on the benefits of metals streaming. Those companies may also become attractive targets for investors, as opposed to pursuing investment opportunities in individual metals streaming transactions or resources projects.