Cost of Capital, Financial Incentives, and the Hidden Economics

of Streaming Agreements in the Mining Industry

Cost of Capital, Financial Incentives,

and the Hidden Economics of

Streaming Agreements in the Mining Industry

In-depth financial analysis so you can make better deals

On the surface, a stream is simple.

The streamer advances an initial capital payment to a mining company in exchange for the right to purchase some share of production at a predetermined price, usually for the duration of a mine’s life.

Those three essential deal terms—the initial capital amount, the production share, and the ongoing purchase price—construct the outer walls of the agreement. Though the structure appears to be fixed and immovable, contained within is an entire world alive with economic movement: a cost of capital in constant motion, a liability regularly being rebalanced, latent sources of value being surfaced and siphoned away.

It is there, into those inner chambers of the transaction, that we must go if we are to understand the true character and consequences of a streaming agreement.

—Product Details

The Stream Runs Deeper Still: Cost of Capital, Financial Incentives, and the Hidden Economics of Stream Financing in the Mining Industry

Format

Pages

Publisher

Publication Date

ISBN

PDF

Santeri Strategies LLC

2023

9798987684207

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Table of Contents

Part I: The Streamer

1.1 Introduction

Imaginary Ridge

1.2 The Streamer’s Capital

Streamers can invest in individual assets

Streamers do not concede control over their capital

Streamers have discretionary capital deployment

Streamers have no environmental liabilities

Streamers do not have to manage mining operations

Streamers are predisposed to efficient growth

1.3 The Streamer’s Profit

Streamers have better profit margins than traditional mining companies

Streamers bear no risk of margin erosion due to cost inflation

Streamers have pure leverage to price upside

Streamers are protected from price downside

1.4 The Streamer’s Deliveries

Streamers benefit from process flow improvements

Streamers benefit from mine expansions

Streamers benefit from reserve growth

Streamers benefit from mine life extension

Streamers have transformed the mining model

Part II: The Valuation

2.1 The Streamer’s Valuation

Building the discounted cash flow model

Discounting cash flows for time

Discounting cash flows for risk

2.2 The Miner’s Valuation

Higher interest rates make streams appear cheaper

2.2 The Valuation’s Flaw

Part III: The Miner

3.1 The Miner’s Revenue

Streams implicitly leak value

Streams press miners into a price predicament

Streams are a permanent hedge

Streams have a cost of capital that is unknown and unknowable

Streams attach perverse incentives to the mine

Streams are like a progressive sliding-scale royalty

3.2 The Miner’s Profit

Streams erode profit across 100% of the production base

Streams get costlier with a rising market price

Streams incur upside loss at a rate equal to the production share percentage

Streams concede a measurable amount of upside

Streams make mining operations less durable to downside

Streams incur damage even where byproducts are sold to finance primary output

Streams earn their return out of the mine’s profits

Streams are indefinitely and indeterminately dilutive

Streams have earnings which are disproportionate to their production share

Streams impose a cap on a miner’s cash capture

3.3 The Miner’s Capital

Streams have a second disincentive to increasing production

Streams are like a variable rate loan with interminable interest payments

Streams are a liability that can never be erased from the balance sheet

Streams are all about opportunity cost

3.4 The Improvements

Improving the agreement

Pricing the agreement

Amending the agreement

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Billions have been deployed in streaming agreements in the last two decades. Many are nine figure deals. Most will last for at least ten years. Hundreds of millions of dollars in shareholder value hang in the balance with any given deal.

How will the stream affect the mining company’s financial statements? How will the stream’s financial incentives affect operations? Who stands to gain, by what amount, under what scenarios?

This report will arm you with answers.

It also dispels many misconceptions, like:

Streaming is not dilutive (it is)
Streaming improves the mining project’s IRR (it does not)
Streaming a byproduct does not affect the primary product (it does)

This report is not a primer, market survey, or industry database of deals that have been done. Nor is it a case study of any particular streaming agreement. It is the synthesis of many, distilled into generalized principles that apply to all streams.

It is therefore written as a guidebook for mining companies and specialty finance providers—but not them alone. It is written for institutional investors and individual investors; for lawyers, advisers, consultants, and analysts. And it is written for anyone else interested in how we get real stuff into the real world—because ours is a world that will always run on metals.

—In the news

MINING.com

As the world looks to secure metal supply, miners must beware the hidden costs of streaming agreements

Op-ed published on MINING.com, 05 April 2023

The mutual dependence between man and metals means that we are inescapably bound to mining companies in an inherent social contract: we provide them with capital and they provide us with metals.

This social contract is made manifest by entering into actual agreements whereby capital is actually provided so metals can actually be produced. These financial contracts take many forms. One of them is called a streaming agreement…

Article continues on MINING.com

Mining Journal

Miners lose cash as metal streams drain their resources

Paul Harris, 16 February 2023

Metals streaming agreements host many hidden costs which miners can never remove from their balance sheets, Alex Godell, the author of The Stream Runs Deeper Still, a research report exposing the many added costs of streams, told Mining Journal.

In the report, Godell, a mineral economist who was formerly part of the finance and strategy team at leading US aluminium producer Alcoa, seeks to enlighten developers and miners who are thinking of encumbering their assets with a streaming deal as part of a financing package, of the true cost of such deals and the asymmetric rewards they entail.

“The hidden costs are nameless and faceless, and you only see them when you dig into the financial statements. Once you understand how the contract works, you can focus on improving the deal. The report’s purpose is to arm miners with a complete understanding of these deals inside and out,” said Godell…

Article continues, Mining Journal subscription required

Mining Journal no. 1 most read article week of 20 Feb 2023

Mining Stock Daily Podcast

Beating Exploration’s Poor Odds and Minding the Hidden Costs of Streaming Deals

Hosted by Trevor Hall and Paul Harris, 24 February 2023

Second segment beginning at 42 min

“Paul Harris then interviews Alex Godell who recently wrote a piece titled “The Stream Runs Deeper” which is critical of some of the accounting tools used within streaming deals as financing tools. Its an intricate interview filled with very specific items investors must recognize when seeing new and current streaming deals within the mining space.”

—Author

Alex Godell

After completing a Master of Science in Mineral and Energy Economics from the Colorado School of Mines, I joined the Finance & Strategy team at Alcoa, where our group developed and executed a portfolio restructuring strategy that included capital investments, curtailments, divestitures, and acquisitions. I then left to co-found Santeri, a services company focused on developing a system for fair price discovery in precious metals markets.

If you’d like to get in touch, please feel free to send me an email at

You can also find me on Linkedin