Metal Streaming: negotiation points for project sponsors

Recently, the topic of metal streaming has been coming up with a little more frequency than usual. This is in part driven by the increase in demand for battery metals – producers are looking at streaming deals as a possible means to advance their projects. Streams may also be granted alongside senior debt at the project financing stage.

In essence, metal streaming involves the streaming company providing an upfront deposit (which is a debt – usually interest free) to the project company. The project company then sells a proportion of its mined metal for a fixed price. The upfront deposit is reduced by the difference between the fixed price and the market price of the metal. When the deposit is repaid, the metal continues to be sold at the fixed price.

Streams are long-term arrangements - typically life of mine, so great care needs to be taken when structuring them to ensure they are sufficiently flexible to accommodate future financings and other important events. In this regard, many streaming deals are confined to a side-product of the main metal, so that the stream does not materially impact debt-sizing for the project debt financing.

Streams can have an anti-dilutive effect from a shareholder perspective, but will be revenue-subtractive when the mine is in production. When negotiating a stream, here are some of the points typically negotiated by a project sponsor:

• Agree a set of intercreditor principles up front in the stream agreement to allow for other secured creditors to be introduced later. Intercreditor principles are essential and are usually the biggest point of contention in streaming arrangements. They will widely differ from deal to deal. These should ideally be addressed as early in the process as possible to avoid delays to both the grant of the stream and any future secured financing.
• Try to keep covenants as light as possible and negotiate ample cure periods for defaults – the stream is usually life of mine, so the less burdensome the covenants are the better. If the stream is not for life of mine, it’s a very good idea to clearly delineate when and how the arrangement comes to an end.
• Consider a mechanism to marginally increase the fixed price over time, which will allow that price to maintain pace with economic inflation.
• Consider what triggers the grant of the stream. For example, make the stream arise on payment of the upfront deposit. Also, is it possible for the upfront payment be topped up, if additional resource is added to the deal?
• Include an option for the project sponsor to buy back some or all of the stream at a future date according to a pricing formula.
• Agree the scope of the security package to be granted to the stream company – can certain security interests be released on achieving certain production hurdles?
• How accurately defined is the area of influence applicable to the stream? This should be precisely quantified. In many instances, the stream company’s return takes account of the exploration upside surrounding a known resource.
• Specify that the project company is not obligated to produce a minimum quantity of product. Streaming deals also should not fall into default if the mine is placed on care and maintenance or production is otherwise uneconomic.

The above list is by no means exhaustive.

The team at Wright Legal have advised on numerous alternative financing structures for mining companies, including metal streaming, offtake prepayment and royalty financing arrangements – whether as standalone arrangements or in conjunction with a senior project financing. We enjoy assisting our clients in navigating the issues safely.

If you are considering a transaction like this, we are happy to help.