Alternative Mine Finance – Production-related lending, royalties, and streaming agreements

Production-linked lending has become an integral part of mining finance – especially for base and precious metals. The two predominant production-related models are often referred to as “License fees“Precautions and”Streaming“Precautions.

The origins of the royal family go back centuries,^[1] but emerged as a method of private financing in the 1980s. The origin of the streaming arrangement is much more recent, with the earliest deals showing up in the 2000s^[2].

License and streaming financing has been popular in Canada for many years, but we are seeing increasing interest in licensing and streaming solutions in the UK from UK-listed investors such as the Anglo-Pacific Group and Trident Royalties. Vancouver-based Wheaton Precious Metals also recently completed its third listing on the London Stock Exchange in addition to the New York and Toronto stock exchanges.

What is a license fee?

The earliest royalties date back to medieval Europe and involved the delivery of some of the mined mineral or payment to a landowner and / or sovereign in exchange for being granted mining rights. This concept was later adapted by the private sector, with holders of a mining right sometimes retaining a contractual right to a license fee when selling or transferring a portion of that mining right to a third party.

The term “royalty” is still used in this sense – many resource-rich nations collect royalties from international mining companies in return for exploration rights. Ghana’s state-owned gold producer Agyapa Royalties receives around 76% of the royalties from Ghana’s largest mines^[3].

The concept of royalties has been adapted to provide mining finance, and it is this “royalty” that we focus on. A funder (or ‘License holder‘) Financing through lump-sum payments to the mining company (or’Grantor‘) against regular payments based on the extraction of mined minerals. The license fee forms the right to regular payments. Such license fees can be structured in several ways:

• The license is likely to last for a long period (possibly up to the life of the mine). Depending on the jurisdiction in which the mine is located and the specific terms of the agreement, the license holder may also acquire a “stake” in the land on which the mine is located, thereby binding future buyers of the mine to the license holder’s license participation . Such license fees are said to be “running with the land”, which gives the licensee additional protection compared to a purely contractual license fee between the licensee and the grantor (which is not running with the land).
• The license fee can be limited in value.
• The license fees can be secured or unsecured through the mining facilities.
• The license fees can be guaranteed by the operating company’s holding company and / or the ultimate parent company.

License fees are flexible. They can be customized to replace or accompany many other types of capital increases. They were used in lieu of early equity investments to fund exploration, project finance during construction, and working capital facilities during the life of a mine. As a result, there is no standard market agreement where the royalties are tailored to each grantor. Gowling WLG has experience with a wide variety of royalty deals and can help you tailor a financing package to meet your goals.

The contractual calculation of the amount of the license fee can vary. The most common include the following:

• ‘Standard license‘: The royalty payment is based on the price per unit (e.g. $ per KG) that the concessionaire achieves on the free market or under purchase agreements, without taking costs into account.
• ‘Gross license fees‘: Payments are based on a percentage of gross sales.
• ‘Net Smelter Returns Royalty‘: This is similar to a gross license fee, but is based on the’ Net Melting Return ‘that the grantor generates from sales proceeds, with certain deductions allowed for production costs such as transportation and refining costs.
• ‘Net Income Interest Fee‘: This goes one step further than a gross license fee, with payments based on the profits made by the grantor on the sale of the minerals. This is less attractive to both parties as it is based on the actual profitability of the mine and places a higher administrative burden on the license holder.

Common terms are: reporting requirements, site visits, meetings (if relevant), company agreements, confidentiality, defaults, transfer provisions and rights of first refusal. We can help you find a balance between your needs and those of the license holder.

Why does a license agreement make sense?

As an alternative to equity or traditional debt financing, there may be benefits for a mining company to raise capital through royalties:

• Unlike equity financing, there is typically no dilution of ownership or control.
• Royalty is often less regulated than equity financing – so it can be cheaper and faster.
• Unlike debt financing, the obligation to pay royalties usually doesn’t begin until production has started and the deal is cash-effective – although hybrid arrangements may apply, so this is not always the case.
• The covenant and default package achieved is often less burdensome than with external financing, since the license holder generally requires less control than a bank.
• Raising capital through royalties can open the door for future capital increases.

However, there are also disadvantages that need to be considered, including:

• The pricing is usually more expensive than traditional debt financing.
• Royalty can dilute the net present value of a mine, making the mine less attractive to buyers.
• There can be an administrative burden to calculating the recurring royalties and there is potentially more room for dispute about how these calculations were made.
• The license finance market is quite small.

Streaming arrangements

Streaming agreements include the forward purchase of minerals produced and no payments based on production metrics. The agreement often relates to a by-product of the mining operation rather than the main mineral that is produced (which could also be subject to a license fee), but can also apply to the main mineral.

In return for the prepayment (the ‘deposit‘), the concessionaire undertakes to sell, and the buyer undertakes to buy a certain percentage of the minerals produced at a fixed price in the future (the’electricity‘). The fixed price will likely be below the market price at the time of execution. The grantor may be required to physically deliver the minerals to the funder, but more often the sale is credited to the funder’s metals account with a recognized metals market such as the London Metals Exchange.

Like license fees, streaming agreements can be secured and / or guaranteed. The type of security for both streams and royalties depends on the jurisdiction in which the mining facilities are located.

Streaming arrangements have benefits similar to license fees:

• Streams are useful during mine development as the grantor can monetize the deposits prior to production.
• The terms of the arrangement are typically less restrictive than traditional debt financing.
• There is usually no watering down of ownership or control.
• The arrangement is typically less onerous than the debt financing, as the grantor has more control over the operations.

Streaming arrangements also have certain advantages over license fees:

• Unlike royalties, the grantor typically does not need to use any income to repay the deposit once the mine generates cash.
• The difference between the fixed price and the market price is usually offset against the repayment of the deposit, which reduces the capital amount.

Pricing is a key risk in streaming agreements – if the licensor agrees to a fixed price that is too low, he will not benefit from an increase in market value. Therefore, streaming agreements often include buyback options for the concessionaire.

Risk-sharing inherently similar and other characteristics as Islamic Istisna’a or forward leasing structures, streaming and royalty agreements are suitable for Sharia-compliant structures – they may open up another source of capital for mining companies.

Production-Linked Loans – A New Path?

Gowling WLG, led by project finance partners Andrew Newbery and Nath Curtis, recently traded on a new contract structure for AIM-listed Bushveld Minerals: a $ 30 million manufacturing finance deal (‘PFA‘).

The PFA is structured as a $ 30 million non-revolving term loan facility, but bears little resemblance to typical debt financing arrangements. Interest is calculated based on vanadium production at Bushveld’s South African mine – not a base rate and margin. The redemption amounts are calculated using both a gross income rate and a flat rate. These production-related payments are then used to repay the principal and interest payments.

The PFA has been paired with a $ 35 million convertible bond under which the lender can make an equity investment. Gowling WLG Corporate Partner and Head of Natural Resources (UK), Charles Bond, led the equity investment.

Commenting on this new approach, Andrew Newbery said, “Royalty and streaming funding models have become an integral part of Gowling WLG’s mining customers in recent years. Bushveld’s production finance agreement is another innovative example of how we’ve helped our customers to raise long-term capital. ” “.

Another example of our structuring advice on production-linked mining loans is the advice we provided to Bacanora on the development of its Sonora lithium project in Mexico^[4]. The Sonora facilities were structured as two separate Eurobonds. One bond had a LIBOR interest rate, while the second had a 20-year term that, with reference to monthly lithium production, had to be repaid at an agreed US dollar rate per tonne produced.