,,,,,,,,,,,,,,,,STREAMING AGREEMENTs 101 ,,,,,,,,,,,,,,,,, Streaming Agreements
As is the case with Royalties, there is no “standard form” Streaming
Agreement, but the main concepts of such agreements are fairly standard.
Generally, in a Streaming Transaction the operator agrees to sell, and the
Purchaser agrees to purchase, a certain percentage (or all) of one or more
minerals produced from a mining operation at a Fixed Price, which is
below the market price and usually approximates the cost of producing and
delivering the minerals purchased (typically between US$4 and US$6 per
ounce of silver and US$400 per ounce of gold but may be higher for some
operators). The duration of Streaming Transactions is usually long term
(several decades) or life-of-mine. Typically, the mineral sold under a
Streaming Agreement is a by-product of the mining operation, although
this need not be the case. In exchange for the right to acquire the minerals,
the Purchaser agrees to pay an up-front deposit (or make a series of
payments based on achieving certain milestones), which may be large
(several million to a billion or more dollars), and which can replace other
forms of financing such as equity or debt. Such an up-front payment can be
very attractive for a development company that is not yet in production,
which is able to monetize the streamed minerals prior to extracting them
and apply the funds towards development and construction of its mine. The
Streaming Agreement will set out whether the operator may spend the
deposit as it sees fit, or whether the deposit must be spent only for specific
purposes. Like Royalty Agreements, Streaming Agreements are nonparticipating
interests in the mining operation.
A Streaming Agreement usually requires a repayment of the deposit
back to the purchaser upon termination of the agreement under certain
circumstances, such as breach of the agreement by the operator. However,
Streaming Agreements usually provide that if the Fixed Price paid by the
Purchaser is less than the market price of the mineral, the difference
between the market price and the Fixed Price is “credited” toward the
deposit, effectively reducing the amount of the deposit that must be paid
back upon termination of the agreement. In addition, Streaming
Agreements usually provide that once the deposit has been credited down
to zero, the Purchaser will continue to purchase the streamed minerals at
the lesser of the Fixed Price and the market price for the remaining term of
the Streaming Agreement.
A Streaming Agreement may require delivery of actual metal (e.g.,
gold or silver bars) or, more typically, a credit to the Purchaser’s metal
account. When the Streaming Agreement provides for the operator to credit
the Purchaser’s metal account, no actual metal must be delivered. Rather,
the operator will need to purchase credits (such as gold credits or silver
credits) on metals markets such as the London precious metals markets
maintained by the London Bullion Market Association and transfer those
credits to the Purchaser’s account in lieu of delivery of actual metal.
Usually, the Purchaser will then sell the credits without ever receiving the
streamed minerals.
Unlike most Royalty Agreements, Streaming Agreements usually
contain representations and warranties by each party to the other. Each
party will typically represent and warrant that as a corporate entity (i) it is
in good standing; (ii) it has complied with all required corporate acts and
proceedings to approve the Streaming Agreement; (iii) it has all requisite
corporate power, capacity and authority to enter into the Streaming
Agreement; (iv) it has received all required third-party approvals to enter
into the Streaming Agreement; (v) it has not suffered an insolvency event;
(vi) entering into the Streaming Agreement will not conflict with any
agreement, other obligation, or constitutional documents of the company,
or violate any law, and (vii) the Streaming Agreement constitutes a legal
and binding obligation of the company. The operator will usually further
represent and warrant that (i) it is the legal and beneficial owner of the
mining properties as described in the Streaming Agreement; (ii) no person
has any right or option to acquire the mining properties or the streamed
minerals; (iii) all outstanding taxes have been paid; (iv) the mineral
properties are in good standing; (v) there is no outstanding judgment or
pending or threatened claim that could materially affect its assets; and
(vi) all documents and data provided to the Purchaser in due diligence
regarding the mining properties and the operator’s material contracts were
true and correct. Of course, the parties may make other representations and
warranties as well, depending on the circumstances.
Streaming Agreements also usually contain covenants from each party
(First Party) to the other (Other Party), whereby the First Party agrees to
indemnify the Other Party for losses incurred by such Other Party as a
result of an inaccuracy in a representation or warranty or a breach of any
obligation in the Streaming Agreement by the First Party. Streaming
Agreements may also include provisions prohibiting solicitation by the
Purchaser of the operator’s employees, and standstill provisions prohibiting
the Purchaser from acquiring any (or more than a set percentage) of shares
of the operator. The operator also typically agrees to provide copies of all
offtake agreements to the Purchaser and agrees to enforce them if there is
any breach of the offtake agreement by the offtaker.
Streaming Agreements typically provide conditions precedent to
payment of the deposit (or of any particular payment if the deposit is to be
paid in stages over time), which may include delivery of an officer’s
certificate confirming that all representations and warranties made in the
agreement are true and correct along with delivery of documents and legal
opinions evidencing the truth and correctness of certain of the
representations and warranties, delivery of security agreements, delivery of
inter-creditor agreements (if required) and, if applicable, delivery of a
commingling plan.
Streaming Agreements usually contain rights of each party to terminate
the Streaming Agreement for breach of the agreement by the other party. In
addition, the Purchaser may be given the right to terminate the Streaming
Agreement if the conditions precedent to payment of the deposit (or of any
particular payment if the deposit is to be paid in stages over time) are not
satisfied.
A potential benefit of a Streaming Transaction is that the value of the
by-product mineral(s) being sold may not be fully reflected in the
operator’s share price (especially true for by-product minerals) and may be
more valuable in the hands of the Purchaser (streaming company),
resulting in an arbitrage opportunity that could create value for both the
Purchaser and the operator’s shareholders. In addition, the operator
receives a large up-front payment (or payments) that may be used to build
or expand its mine without the requirements to make periodic payments of
principal and interest, as with a debt transaction, or a dilution of the
interests of existing shareholders, as may occur with equity financings. A
Streaming Transaction may also be seen by the market as a “vote of
confidence” by the streaming company in the operator or its mine. On the
other hand, a Streaming Agreement may reduce the valuation of a mine if it
is to be sold, if the value of the streamed mineral rises after the agreement
is entered into.