Or: Gold Miners' Doom Is Streaming Companies' Boom.
The gold and silver miners are in crisis, as metal prices hover around
break-even for many and capital dries up for most. Dozens of companies are
one or two quarters away from running out of cash and closing down, and their
executives are are ready to deal.
This is, in short, the part of the cycle when the smart money sets itself
up to make a fortune in the next bull market. Chief among this bunch are the
streaming companies that finance developing mines in return for a share of
future production.
In good times they do alright but find it hard to cut deals on favorable
terms because the miners have access to cheap capital from less discerning
banks and equity investors. But at the bottom of bear markets -- like now --
the streaming companies find themselves virtually alone in the industry in
having both cash and an interest in putting it to work. Miners who need
financing to survive now have nowhere else to turn, and the streaming
companies are feasting. Here's a recent Bloomberg profile of the biggest of
them:
Franco-Nevada
Mulls Credit as `Hokey' Streaming Goes Mainstream
For Franco-Nevada Corp., the best time to take on debt is at the bottom of
a market. The day may be approaching for the Canadian royalty and streaming
company as the commodity rout boosts demand for alternative funding.
"There are so many opportunities out there, we might have to dip into
our credit lines," Chief Executive Officer David Harquail said in an
interview last week from his Toronto offices. "The ideal is you lever
yourself up at the very bottom of the bear market and hopefully, if you've
called it right, then you really benefit as the market turns around."
Streaming companies like Franco-Nevada, Silver Wheaton Corp. and Royal
Gold Inc. give miners upfront payments in exchange for the right to buy
metals at a discount in the future. Franco-Nevada also does royalty
agreements, tying portions of production to land titles.
Plunging metal prices, with copper down 24 percent and gold 11 percent in
the past year, combined with surging credit costs and volatile stock markets,
have made streaming attractive even for majors such as Barrick Gold Corp. and
Freeport-McMoRan Inc., giving the business more credibility.
"It's something that's gone from being seen as kind of hokey, to
where now every major company and their CFO has to consider it among their
financing options," Harquail said.
Unused Credit
With no debt, about $610 million in cash, plus $110 million in marketable
equities and an unused line of credit worth about $1 billion, the company has
plenty of scope for more deals. "Without going back to the equity
markets, right now, we've got one and a half billion to play with,"
Harquail said.
Two types of deals have become more common in recent years, Harquail said.
Medium-sized producers are turning to royalty and streaming companies for
help buying assets from larger miners. Lundin Mining Corp.'s purchase of
Freeport's Candelaria copper mine, which Franco-Nevada helped finance in exchange
for a gold and silver stream, is a case in point, he said.
Also, the largest producers are now willing to sell streams on their most
prized assets, Harquail said. "We're getting the opportunity to bid on
some of the best mines in the world."
For an idea of how much things have changed in mining, consider Glencore.
With a 2011 market cap of $100 billion, it could have swallowed all the
steaming companies without getting indigestion. Then commodities tanked and
Glencore's stock crashed -- and now it's scrounging for the funds to keep its
mines afloat:
Glencore
in talks on streaming deals on Chile, Peru mines
(Reuters) - Glencore is in talks with Franco-Nevada Corp, Silver Wheaton
Corp, Royal Gold, and Osisko Royalties to sell portions of the future
production of three South American copper mines. One source said on Wednesday
the talks could expand to include other Glencore mines.
The longer the gold/silver bear market grinds on, the more desperate the
miners become and the better deals the streaming companies receive. And when
prices rebound -- as they will (since if they don't the mining industry will
collapse and supplies will dry up) the streaming companies will generate
massive cash flow.
Here's what this meant for the market values of the biggest streaming
companies following the 2008 precious metals bear market:
Will they do this again? No. They should do a lot better because the 2008
precious metals bear market lasted less than a year, which was too little
time for the proper amount of panic to take hold. This bear market has been
grinding on for three years, and now the miners are out of cash and
desperate, which should allow far more ounces to be bought at bargain
basement prices -- and far more cash to be generated on those ounces when
prices start rising.
