Streaming isn’t so Holy

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Nolan Watson, CEO of Sandstorm Gold, a streaming and royalty company, is of the opinion that for juniors planning to build mines debt is a bad idea, according to a recent interview by Gold Investing News. “I don’t think it makes sense for the junior mining companies,” he is quoted as saying. The argument goes that for single-asset juniors hoping to build a mine, taking on debt is incredibly risky because when things go wrong and you can’t make loan repayments shareholders lose out. In his words, “debt is the most risky form of capital because bankers are inherently nervous beasts and they like to call in loans and send you to bankruptcy if things don’t work out well.”Sandstorm Gold

He argued this was especially true for juniors focused on a single project. “I believe that true debt is a very bad idea for a one-asset company. That’s because if you have any technical problems, or any permitting problems on that one asset, and you can’t pay back your debt, you violate your debt and go insolvent immediately.” With that said he argued debt makes more sense for larger miners, the Rio Tintos and Goldcorps of the mining world. But not juniors.

I disagree. Indeed, I think it’s just as important to consider the downside of streaming and royalties, as debt, or equity financings. A bit more on that in a moment, but first I have to agree with Nolan on the risk that comes with debt. In mine development debt deals can end up being toxic for shareholders when ramp-ups and repayments go wrong. Recall some awesome blowouts where shareholders, who usually hold equity that is unsecured to assets, basically ended up not being shareholders after mine ramp-up issues – delays, surprises, capital costs gone FUBAR – led to restructuring. Baja Mining. Northland Resources. Colossus Minerals. After these largely one-asset juniors saw mine building go awry, their shareholders ended up being stripped of meaningful ownership after painful reorganizations.

So Nolan correctly points out streaming or equity financings in mine-building scenarios are more forgiving down the line when things go horribly wrong. A streamer/royalty company like Sandstorm Gold pays some cash upfront to secure the right to buy a portion, often in the 10% range, of life of mine production at a very low cost, and in doing so does not typically get a secured interest on the asset, as can be the case with loans. If things don’t proceed as planned on a project – it doesn’t become a mine on time or at all – then a streamer/royalty company has paid for nothing, at least nothing until or if a mine is developed. In this sense streaming can be a relatively safe way to raise cash for juniors in the eventuality that a ramp up goes very poorly.

But if the devil in debt is the potential for unsecured or lower rung shareholders to lose an asset to creditors, there too is a devil in streaming. You are forward selling gold, at a very low price, on a project often for life of mine (i.e. ~$400-$500/oz gold) which, to some degree, strips away some future profits from the company, and thus shareholders. There are many shades of this, of course, with some deals covering a wider property – future discoveries included – to more narrow, capped deals where the forward selling can max out on specific resources. Some CEOs thus avoid streaming and royalty deals in favour of debt/equity largely for that reason, or they at least view all three funding sources as a competitive mix, where the pros and cons must be weighed. In this calculation the sale of future production at a low price, or the sale of a royalty (a cut of revenues), may be seen as too costly in comparison to debt. Or not, of course.

Sandstorm Gold

It’s not without reason many of the leading single-asset gold juniors have turned to debt – both from banks and in the form of convertible notes – as a major component of their financing plans for projects. Osisko Mining, since taken over by Yamana and Agnico-Eagle, relied heavily on a variety of loans, including $225 million in long term debt (which it renegotiated when it needed to) to build the Canadian Malartic project. Detour Gold did $500 million in convertible notes to help turn its Detour Lake gold project into a top Canadian gold mine. (Of course that debt is unfinished business. It’s unsecured, by the way, and due in 2017, and one suspects Detour may look to refinance it.) Torex Gold brought in banks to get a $300 million debt deal @ 4.25% + LIBOR, secured against assets, with hedging on 204,000 ounces gold, and maturity in 2022.

Did these deals not make sense? Sure there’s risk, but I wouldn’t go so far as to label them as senseless. By using debt heavy financing over heavy streaming/royalty deals, the likes of Osisko, Detour and Torex, favoured future production that is relatively unencumbered and more open to the potential for gold price increases. Don’t get me wrong. Streaming has an important place in funding junior companies. But I think debt does too. Whether it is part of a junior’s financing plans is not really a case of not making sense at all and more a case of calculating risk and costs of funding and assessing confidence in project timelines and cash flows.

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