| * Critics say such deals damage the mining industry * Gold sector holds best opportunities in mining - QKR By Silvia Antonioli and Clara Denina LONDON, Jan 14 (Reuters) - Struggling gold miners are turning increasingly to alternative sources of finance for funds as banks and equity investors shy away. Stream financing and royalty deals and investments by private individuals are throwing a lifeline to some bullion miners but critics say it comes at the expense of future returns, damaging the industry's longer-term appeal for more conventional investors. They may also be keeping alive production that would not be viable at current spot prices, delaying a rebalancing of supply and demand. Gold shed around a quarter of its value in the last two years after a more than decade-long bull run. "We have never been busier," said David Harquail, chief executive of royalty and streaming company Franco-Nevada . "Our office is now full and we spend all our time trying to juggle which projects we can devote resources too." Large European banks, which have withdrawn en masse from commodity trading, have also tightened gold mine financing and equity investors have lost confidence in a sector that squandered money on costly expansion during boom times but failed to control costs. Gold companies have underperformed the price in the last four years. According to a PwC global survey of gold, silver and copper mining companies, the number of miners that were able to raise capital in the equity market in the 12 months to November 2014 has halved and project financing has declined by about a fifth. In a royalty deal, a company buys the right to receive an annual share of a producer's revenue while in streaming, firms make a payment upfront in exchange for an annual a slice of the miner's production at a fixed, discounted price. The first royalty deals were done in the 80s and 90s and streaming deals began in the early 2000s but both have gained prominence in the last three to four years. Although still niche as a financing tool, the PwC survey shows that about five percent of the companies polled have signed royalty deals and an equal number has agreed a streaming arrangement, up from around four and three percent respectively. Royalty and streaming firms -- most of which strongly outperformed the gold equity sector in 2014 -- say they expect more business in coming months. They see gold prices near multi-years low as the perfect opportunity to bag low-cost deals before the market turns. Randy Smallwood, the head of the largest company specialised in streaming, Silver Wheaton, said they had looked at twice as many opportunities in 2014 than in 2012 and expected 2015 to be even busier. "Timing is everything... We do think that we are close to a bottom here now, just by virtue of the cost to produce metals," he said. The deals on offer are evolving as demand rises. While initially mainly struck for by-products, now streaming companies are able to buy the primary product too. And while initially most of them focused on financing new projects, deals are now also happening with more mature companies that are looking to make acquisitions or to repay their debt. About a year ago, miner Teranga Gold struck a streaming deal with Franco Nevada and used the upfront payment to complete an acquisition in Senegal and to cut its debt. A $648 million streaming deal with Franco Nevada in October also helped miner Lundin Mining to buy a majority stake in a mine in Chile from Freeport-McMoRan. The risks are great. If one of the companies they strike a deal with goes out of business, they can see their investment wiped out. If the metal price falls, they may lose money too. Some have been burnt in the past. Advocates say they help miners cope with a volatile market. For critics, the appeal to such investment structures only underlines the stresses bearing down on much of the gold mining industry. "We have seen some pretty aggressive royalty and streaming structures coming up into the market. They effectively just keep the companies alive but put them under pressure and essentially take away the upside from the (mining) equity investors," Randgold Resources Chief Executive Mark Bristow said. Private investment firms founded in the last few years by industry experts are also eager to step into the gap and invest in the down cycle hoping for longer term gains. Lloyd Pengilly - head of mining fund QKR Corp - is convinced the gold sector holds the best opportunities in mining. In June QKR bought the Navachab Gold mine in Namibia from AngloGold Ashanti. It is now in talks with a number of gold companies for potential acquisitions, joint ventures and funding deals. "It is definitely fertile ground," Pengilly told Reuters, talking about the gold sector. "I am seeing distressed prices, below net asset value, and that's a rare event. In copper, iron ore, these companies are still trading at a premium." (Additional reporting by Susan Taylor in Toronto and Nicole Mordant in Vancouver; Editing by Tom Pfeiffer and Susan Thomas)
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