The growing demand for metals and the specialized nature of the mining industry is bullish for royalty and streaming companies, said McKinsey in a study released today.
The authors examined the business model of the steaming and royalty companies and predicts that “…this particular type of alternative financing could be set for significant expansion over the next decade.”
Traditional financing is not wholly suited to the sector, which has unique business needs.
“Although public equity and debt markets are starting to ease for some miners and jurisdictions, these sources of capital will likely be too slow to materialize and be on less attractive terms. Therefore, alternative financing sources such as streaming and royalty will be presented with many investment opportunities—and may even result in increased exploration spend,” writes the report’s authors.
McKinsey thumbnails how the royalty and streaming business arose. The royalty model is believed to have originated with Franco-Nevada in the mid-1980s, writes McKinsey.
“The mining company’s first royalty investment in 1986 involved spending half the corporate treasury to acquire 4 percent of the revenues from a mine in Nevada owned by Western State Minerals. Following this initial transaction, Franco-Nevada went on to purchase royalties in various other commodities, further developing the mining sector’s royalty business model,” writes the study’s authors.
Next up was streaming.
“The arrival of the precious-metals streaming business model is often attributed to Wheaton River: while seeking to raise funds in 2004 to expand its core business of gold mining, the company conceived the idea of streaming silver by-product from the San Dimas gold mine in Mexico to a new subsidiary company, Silver Wheaton.
“In the world’s first streaming agreement, Silver Wheaton purchased yet-to-be-produced silver from Wheaton River’s operations in Mexico in return for an up-front payment and additional payments on delivery of the silver.”
Streaming and royalty companies have a strong geographic focus with 50% of their deals associated with just four countries: Canada, Mexico, Peru, and the United States. McKinsey said streaming and royalty companies favor areas where there is an established mining tradition and strong legal frameworks.
McKinsey notes that streamers have only just started to expand their business into other metals that are in high demand, like cobalt and nickel. Precious metals are still royalty and streaming companies bread and butter. Looked at from a by-product basis, McKinsey estimates that streaming and royalty deals cover about 14% of total gold by-product production and less than 6% of silver by-product.