Private equity, pension funds eye more metal streaming deals

By Nicole Mordant and Euan Rocha
VANCOUVER/TORONTO Dec 14 (Reuters) - Private equity and
pension funds may provide the next wave of funding to the
slumping mining sector through metal streaming deals as
dedicated funding sources struggle to raise their own cash,
industry sources said.
With many miners unwilling to issue equity given their
weakened shares amid falling commodity prices, streaming may
help them avoid credit downgrades and fund new mines.
About $4.5 billion worth of these deals, an alternative form
of financing where miners are paid cash upfront for future
output, have been inked this year, making 2015 a record year for
metals streaming as miners slash debt five years into a
commodities downturn.
But the bumper deal-making year has reduced the coffers of
dedicated stream funders like Silver Wheaton Corp SLW.TO ,
which face their own challenges raising additional debt and
equity.
Private equity groups and institutional investors, who are
already minor players in the market, say this dynamic is likely
to drive up returns, creating an opportunity to expand their
presence.
"While the classical mineral royalty and streaming companies
are tight on funds, you're going to see private equity and other
investment type groups step up to the plate," said Douglas
Silver, portfolio manager at Orion Resource Partners, a
U.S.-based mining-focused private equity group.
Silver declined to disclose how much Orion would put into
streaming deals in 2016, but said it intends to do more than in
2015. Orion, along with its partners, pumped more than $200
million into streaming transactions in 2015, equal to about half
of that done by private equity and fund managers, according to a
Thomson Reuters analysis of publicly announced deals.
Two sources at two North American-based institutional
investors who declined to speak on the record as it is not fund
policy to talk to the media, said they are interested in doing
streaming deals if the price is right.
At current metals prices, returns on streaming deals are a
mere 3-4 percent. But returns have already risen to mid-single
digits on deals currently being negotiated, said a source at one
of the streaming companies who is involved in several
transactions.
Private equity groups and institutions are also able to bolt
streaming onto a broader funding deal that could include debt
and equity, resulting in a higher blended return.
An example is the $325 million construction financing
package Lydian International LYD.TO signed earlier this month
for its Armenia-based Amulsar gold project.
Potential new market entrants include CPPIB, Canada's top
pension fund manager, and smaller fund PSP Investments.
Incumbents expected to increase their exposure include
investment firm Blackstone (N:BX) Group LP BX.N , Quebec pension fund
Caisse de depot et placement du Quebec, and private equity group
Resource Capital Funds.
CPPIB, PSP, the Caisse, Resource Capital and Blackstone
declined to comment.
To be sure, stream funders face risks including losing the
money they front if a miner goes bankrupt as they typically
would rank behind senior secured creditors such as banks or
other project finance lenders.
There is as much as $4 billion worth of potential streaming
opportunities available, Silver Wheaton's Chief Executive Randy
Smallwood said in an interview on Nov. 4. Global miner Glencore
GLEN.L is among those weighing such deals.

The world's five primary streaming and royalty companies,
including Silver Wheaton, Franco-Nevada FNV.TO and Royal Gold
RGLD.O , only have the capacity to fund about $2.4 billion
worth of deals over the next year, with more than half of that
amount funded by credit, RBC Capital Markets analyst Dan Rollins
said in a Nov. 10 research note.
"Investors are becoming increasingly concerned with the use
of debt to fund future stream acquisitions," BMO Capital Markets
analyst Andrew Kaip said.

($1 = 1.3558 Canadian dollars)