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Streaming: Where's the Ceiling?

A financing device described as “hokey” by Bloomberg and “weird” by the Financial Times has become one of the industry's best sources of capital. But when will the growth stop?

In 2004, three bankers in Canada with a deal pitch book and a bright new piece of financial engineering started dropping in on the offices of copper-zinc companies.
   The deal book was full of output forecasts and Black-Scholes models, but it contained a simple idea: silver miners, loved by the market, were trading at abnormally high levels, so copper-zinc miners could sell their future silver byproduct into a new specialist silver company, playing the arbitrage in between.
   In banking parlance, executives could “butterfly-off” their silver into a “synthetic silver mine”, says one of the key bankers involved. “We weren't doing anything very sophisticated.”
   One by one, companies bought into the idea. Mining billionaire Lukas Lundin, who had just bought a zinc mine in Sweden for $100m, sold its future silver production for $80m. Then trading giant Glencore, which was squeezing zinc tonnage out of its Yauliyacu mine in Peru, sold the mine's future silver for $285m.
   Imaginative companies could lift “hundreds of millions of dollars” out of a byproduct they had largely ignored, one banker says. “It wasn't a Hail Mary concept for the guys that got it early. It was just smart to surface some value.”
   Little over a decade later and the synthetic mines created have done over $15bn of deals, pumping money into every corner of the mining industry, from M&A to exploration, clipping a small chunk of future production in exchange. The so-called royalty and streaming sector is now worth over $30bn, whilst its two largest players, Franco-Nevada in Toronto and Wheaton Precious in Vancouver, have outgrown most of the companies that mine their metal.
   A financing device described as “hokey” by Bloomberg and “weird” by the Financial Times has become one of the industry's best sources of capital: Teck, Glencore, First Quantum and Barrick Gold have all leaned on the model for money, whilst Brazilian mining giant Vale has raised $3.6bn by selling off future gold production from its vast copper mines.
   Cash is meanwhile pouring into the offices of Franco-Nevada and Wheaton Precious, which have small teams of geologists and accountants, weighing-up new deals. Franco pulled in $675m in 2017, generating around $500m of free cash flow. With 30 employees and a C$16bn ($13bn) market cap, the company is now bigger than Barrick, the world's largest gold producer, and boasts the highest dividend in gold, paying out $167m last year.
   Bankers who put together the sector's first deals say they could not have imagined

its growth. George Brack, now 56, sits on Wheaton's board, whilst Marcus Chalk, 47, is one of the mining industry's top bankers. Dan O'Flaherty, 35, has meanwhile launched his own streaming company, Maverix Metals, pushing up its market cap to C$262m ($200m) in its first two years.
   New players, including New York-based hedge fund Elliott, have also launched their own replica vehicles, to try and tap into the fastest-growing corner of the mining industry.
   Where's the ceiling? How big could the sector become? “We can't have a whole industry of streaming companies,” one chief executive says. “There have to be some operators.”
   The world's forty largest mining firms turnover around $500bn each year. If two per cent of that was sold into royalty and streaming contracts, jacked-up onto Franco-Nevada's multiple of 20 times sales, the sector could be worth $200bn, allowing for seven-to-tenfold growth in the market from today's levels.
   Alternatively, streaming has done $1.2bn of deals on average each year, versus $26bn of equity financings by mining companies in 2017; that “shows you how much more it can displace,” says Haytham Hodaly, head of new business at Wheaton Precious.
   From his desk, even if streaming companies cherry-pick the best assets, limiting themselves to byproduct from mines more profitable than the industry average, Hodaly still sees 350m ounces of silver and 10m ounces of gold within streaming's potential strike zone. At spot prices, that adds up to nearly $80bn of metal each year.
   There are also new avenues to explore, from expanding into bulk commodities through to club-deals, with companies syndicating mega transactions. One player has also looked at packaging-up its older assets, if metal prices rocket, and selling them on to pension funds.
   In the meantime, royalty and streaming groups are sucking external capital into the mining industry at low rates: Wheaton Precious has funded its largest deals with debt priced at 1.67 per cent, ludicrously low for the mining industry, whilst Franco-Nevada has only ever issued equity when its stock has been trading an all-time high, raising a pocketable $920m in 2016. Few other investors in mining can raise money at such favourable rates.
   Large equity funds, already under pressure from the rise of passive funds and algorithm investing, may one day be replaced as the biggest capital pools in the industry. The royalty and streaming model looks young yet. “There is no ceiling,” Hodaly says.



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