In the context of raising funds for junior mining firms, metal streaming has become a good way of raising capital without using loans. With metal streaming, there is provision for a financier to make a cash advance to a mining firm, whereby the financier has the right to buy a share of metal produced in the future at a set price that is much lower than market rates (Carmichael & Edmonson, 2018). Such arrangements are consistent with the operations of the mines during their operational life cycle.
The second option of raising non-loan capital is through royalty financing. Under this arrangement, a junior mining firm gets an advance in capital and, in return, the financier gets the rights to pay royalties on a fixed percentage of its gross sales receipts from the project during its entire life cycle (Omonbude, 2024).
Junior mining firms encounter substantial hurdles in trying to access financing through conventional sources because they mainly engage in exploration activities. For this reason, junior firms have unstable cash flows within which lenders find them unreliable regarding repayment capacity (González-Ruiz et al., 2021). Moreover, frequent issuance of equity diminishes value to early investors, thus making non-recourse financing methods such as streaming and royalties more appealing.
The creation of a successful stream depends on the negotiations done by the two parties in order to create a stream deal because the smaller mining company will have access to the funding from the finance company. In the process of producing metals, the streaming company buys the negotiated amount of metals at the negotiated discount. When sold in the market, the margin of profit represents the financial benefit of the financier (Carmichael & Edmonson, 2015).
On the other hand, drafting a royalty agreement revolves around establishing the revenue base and the term of payment. Common agreements use a percentage of revenue minus the specified cost of the process involved. The risk associated with commodity price variability is mitigated by the fact that if there is a fall in the market price, the actual amount payable through the royalty payment falls, thus relieving pressure from the miner (Omonbude, 2024).
In essence, these agreements are both strategies for dealing with volatility while avoiding a situation where one is unable to pay off strict debt covenants. Unlike the normal method of loan repayment, these contracts depend entirely on production and are thus less risky (Carmichael & Edmonson, 2018). Through these agreements, junior miners obtain necessary capital and go into full-scale production without diluting their stocks.
References
Carmichael, D. G., & Edmonson, C. G. (2015). Risk in Stream and Royalty Financing of Infrastructure Development. CSID Journal of Infrastructure Development, 1, 23. https://doi.org/10.32783/csid-jid.v1i1.7
González-Ruiz, J. D., Mejia-Escobar, J. C., & Franco-Sepúlveda, G. (2021). Towards an Understanding of Project Finance in the Mining Sector in the Sustainability Context: A Scientometric Analysis. Sustainability, 13, 10317. https://doi.org/10.3390/su131810317
Omonbude, E. J. (2024). Metals Streaming and Royalty Financing: A Framework for Assessing Mining Sector Financial Benefit–Sharing Implications for Governments. Revue internationale de politique de développement, 17. https://doi.org/10.4000/11q98
