On the surface, a stream is simple.
The streamer advances an initial capital payment to a mining company in exchange for the right to purchase some share of production at a predetermined price, usually for the duration of a mine’s life.
Those three essential deal terms—the initial capital amount, the production share, and the ongoing purchase price—construct the outer walls of the agreement. Though the structure appears to be fixed and immovable, contained within is an entire world alive with economic movement: a cost of capital in constant motion, a liability regularly being rebalanced, latent sources of value being surfaced and siphoned away.
It is there, into those inner chambers of the transaction, that we must go if we are to understand the true character and consequences of a streaming agreement.
Format
Pages
Publisher
Publication Date
ISBN
60
Santeri Strategies LLC
2023
9798987684207
Read free excerpt
Table of Contents
Imaginary Ridge
1.2 The Streamer’s Capital
Streamers can invest in individual assets
Streamers do not concede control over their capital
Streamers have discretionary capital deployment
Streamers have no environmental liabilities
Streamers do not have to manage mining operations
Streamers are predisposed to efficient growth
1.3 The Streamer’s Profit
Streamers have better profit margins than traditional mining companies
Streamers bear no risk of margin erosion due to cost inflation
Streamers have pure leverage to price upside
Streamers are protected from price downside
1.4 The Streamer’s Deliveries
Streamers benefit from process flow improvements
Streamers benefit from mine expansions
Streamers benefit from reserve growth
Streamers benefit from mine life extension
Streamers have transformed the mining model
Building the discounted cash flow model
Discounting cash flows for time
Discounting cash flows for risk
2.2 The Miner’s Valuation
Higher interest rates make streams appear cheaper
2.2 The Valuation’s Flaw
Streams implicitly leak value
Streams press miners into a price predicament
Streams are a permanent hedge
Streams have a cost of capital that is unknown and unknowable
Streams attach perverse incentives to the mine
Streams are like a progressive sliding-scale royalty
3.2 The Miner’s Profit
Streams erode profit across 100% of the production base
Streams get costlier with a rising market price
Streams incur upside loss at a rate equal to the production share percentage
Streams concede a measurable amount of upside
Streams make mining operations less durable to downside
Streams incur damage even where byproducts are sold to finance primary output
Streams earn their return out of the mine’s profits
Streams are indefinitely and indeterminately dilutive
Streams have earnings which are disproportionate to their production share
Streams impose a cap on a miner’s cash capture
3.3 The Miner’s Capital
Streams have a second disincentive to increasing production
Streams are like a variable rate loan with interminable interest payments
Streams are a liability that can never be erased from the balance sheet
Streams are all about opportunity cost
3.4 The Improvements
Improving the agreement
Pricing the agreement
Amending the agreement
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How will the stream affect the mining company’s financial statements? How will the stream’s financial incentives affect operations? Who stands to gain, by what amount, under what scenarios?
This report will arm you with answers.
It also dispels many misconceptions, like:
- Streaming is not dilutive (it is)
- Streaming improves the mining project’s IRR (it does not)
- Streaming a byproduct does not affect the primary product (it does)
It is therefore written as a guidebook for mining companies and specialty finance providers—but not them alone. It is written for institutional investors and individual investors; for lawyers, advisers, consultants, and analysts. And it is written for anyone else interested in how we get real stuff into the real world—because ours is a world that will always run on metals.
—In the news
MINING.com
This social contract is made manifest by entering into actual agreements whereby capital is actually provided so metals can actually be produced. These financial contracts take many forms. One of them is called a streaming agreement…
Article continues on MINING.com
Mining Journal
Paul Harris, 16 February 2023
In the report, Godell, a mineral economist who was formerly part of the finance and strategy team at leading US aluminium producer Alcoa, seeks to enlighten developers and miners who are thinking of encumbering their assets with a streaming deal as part of a financing package, of the true cost of such deals and the asymmetric rewards they entail.
“The hidden costs are nameless and faceless, and you only see them when you dig into the financial statements. Once you understand how the contract works, you can focus on improving the deal. The report’s purpose is to arm miners with a complete understanding of these deals inside and out,” said Godell…
Article continues, Mining Journal subscription required
Mining Stock Daily Podcast
Hosted by Trevor Hall and Paul Harris, 24 February 2023
Second segment beginning at 42 min
“Paul Harris then interviews Alex Godell who recently wrote a piece titled “The Stream Runs Deeper” which is critical of some of the accounting tools used within streaming deals as financing tools. Its an intricate interview filled with very specific items investors must recognize when seeing new and current streaming deals within the mining space.”
—Author
Alex Godell
After completing a Master of Science in Mineral and Energy Economics from the Colorado School of Mines, I joined the Finance & Strategy team at Alcoa, where our group developed and executed a portfolio restructuring strategy that included capital investments, curtailments, divestitures, and acquisitions. I then left to co-found Santeri, a services company focused on developing a system for fair price discovery in precious metals markets.
If you’d like to get in touch, please feel free to send me an email at
You can also find me on Linkedin
