The importance of the roles of the mining developers in order to capitalize on the upside of their projects can be best understood through the clear definition of three basic terms: streaming deals, royalty financing and upside of the project. The term “streaming deal” refers to alternative way of financing where the investor provides the upfront investment in return of the right to purchase the future production of the mine at a predetermined discounted price. The term “royalty financing” refers to the situation where upfront investment is made in return of getting the percentage share of gross revenue of the future project.
The fundamental difference between these two financing mechanisms lies in their connection with the market fluctuations. Under the royalty contract, the upside is shared: with the rising prices of the commodity or increasing production, the gross revenue rises, and the royalty gets his share proportionately. Under the streaming contract, however, the relationship changes. As the streamer has locked up the discounted price of the future purchase of the metal, the upside belongs not to the operator but to him in case of sharp increase of the market prices (Staritz et al., 2024).
The assessment of the effectiveness of any of the two mechanisms on maintaining the total upside depends greatly on the kind of assets being used. In the scenario where a company mines for copper and generates silver as its byproduct, then entering into a streaming agreement for silver ensures that there is no dilution of capital while protecting the upside of the main copper business. Through this arrangement, there is a sacrifice of upside in the secondary asset in order to protect the upside of the primary asset.
Operational risks and cost inflation need to be well-modeled in order to assess upside protection. Royalty financing usually taxes the top-line revenue; hence, it is insulated from the day-to-day capital expenses. Cost inflation will reduce the margins of profit for the operator since the royalty tax will remain the same with respect to the revenue generated, hence reducing the upside of the operator (Carmichael & Edmonson, 2018).
The strategic contractual flexibility becomes yet another vital factor for consideration when measuring the upside preservation ability of the two methods. Neither financing option is inflexible, and each can be designed in such a way that the investor’s profit will be capped. To ensure upside preservation, operators typically negotiate terms in which the owed percentage will become very low after the threshold delivery is achieved or the buy-back term allowing the operator to buy back the obligation once the initial investment is repaid.
In summary, the decision regarding whether or not to go for the stream financing or royalty depends on the financial modeling of the asset. If the operators find themselves working in inflationary times and mining multiple commodities, then ceding the upside of the byproduct through the stream financing option will prove more useful. In case the operators would like to have all the physical goods from the mining, then the royalty with buy back options may work out well.
References
Carmichael, D. G., & Edmonson, C. G. (2018). Risk in stream and royalty financing of infrastructure development. CSID Journal of Infrastructure Development, 1(1), 23. https://doi.org/10.32783/csid-jid.v1i1.7
Staritz, C., Tröster, B., & Wojewska, A. N. (2024). Price-making in provisioning systems and social-ecological transformation? The cases of the electric vehicle metals copper, cobalt, and lithium. Sustainability: Science, Practice and Policy, 20. https://doi.org/10.1080/15487733.2024.2327667
