Royalty companies that raked in cash from strong precious metal prices in the last three years look poised to drive a wave of deal activity in the Canadian mining sector, especially among junior players hungry for financing.
These companies, which fund projects in return for a portion of future revenues, generated huge amounts of cash flow from existing deals as the price of gold and silver soared since the beginning of 2009.
Now, with the recent pullback in precious metal prices and slumping stock markets, they could be the saviors for small and mid-tier miners wh o are eager to grow but strapped for capital.
Europe's debt crisis and slowing Asian growth have tempered banks' appetite for lending. And miners are not keen to issue equity when their share prices are severely depressed, leaving few alternatives to royalty and stream deals for small miners looking to fund project development.
A lot of the juniors we work with are looking at turning over whatever rock they can in order to get financing. They are exploring it, said Krisztián Tóth, a partner with law firm Fasken Martineau in Toronto.
But as to whether they are going to get it is really going to come down to the quality of the project.
Miners typically try to avoid royalty and stream deals, as they tend to negate any future upside from rising metal prices.
In royalty deals, financiers provide cash upfront in return for a set percentage of future income. In stream deals miners get cash in exchange for agreeing to sell by-products in the future at a discounted price.
Royalty companies like Franco-Nevada Corp, Silver Wheaton Corp, Royal Gold Inc, Sandstorm Gold Ltd and Anglo Pacific Group now find themselves in the perfect spot to strike new deals and secure their own future growth.
It's the busiest we have ever been and we're just trying to make sure we only engage with people that we can realistically do some business with, Franco-Nevada Chief Executive David Harquail told Reuters.
It's a function of what the available sources of capital are, he added, noting that investors do not want to buy into new mining equity issues now, even as the number of banks willing to provide project debt financing decline due to the European debt crisis.
The level of equity financing activity in the metals and mining sector has swooned this year. Oreninc, which tracks equity financing activity in Canada, notes that first-quarter financings in the sector fell almost 50 percent from year-ago levels.
Silver Wheaton, one of the largest royalty companies, last month reported a 20 percent increase in first-quarter earnings. The company, focused on silver stream deals, said it is actively scouting for new targets to build on its portfolio of assets.
Chief Executive Randy Smallwood noted that Silver Wheaton, which has $1 billion of cash on hand, an undrawn $400 million revolving credit facility and forecast annual operating cash flows in excess of $600 million, is well-positioned to pounce.
Other royalty companies are also cash rich. Gold focused Franco-Nevada has working capital on hand of almost $1 billion, an undrawn credit facility of $175 million and investments that are valued at over $100 million.
Really, if you look at it, we could do $2 billion of commitments right now, just with what we have and what we will be cash flowing over the next three years, said Harquail.
And there is no shortage of companies vying for these funds, from miners in the development stage to junior producers.
I think particularly the smaller cap companies are actively looking at streams as being a financing alternative, so that is definitely back on people's radar screen' said Mike Boyd, who heads mergers and acquisitions at CIBC World Markets.
Earlier this year, junior gold miner Lake Shore Gold Corp struck a $50 million deal to sell Franco-Nevada both an equity stake in itself and a royalty interest on the sale of minerals from its Timmins West mine in Ontario.
In May, Franco's smaller rival Royal Gold struck a deal to buy a net smelter return royalty on the Ruby Hill gold mine from International Minerals Corp, while Sandstorm settled on two separate royalty deals with Magellan Minerals Ltd.
To do a quality streaming deal, you have to be bankable, said Benjamin Cox, who heads Oreninc. You need to pass over the bankable feasibility threshold to do a deal that is not absolutely horrific, because streaming companies do not like taking construction risk, unless it's construction risk they understand.
Even some mid-tier miners are now mulling stream deals to finance mega projects. Last month, Inmet Mining Corp said it plans to raise roughly $1 billion from a stream deal to fund a portion of the construction costs for its $6.2 billion Cobre Panama copper project in Central America.
Right now we are running ahead, said Harquail. But it's a bit of feast and famine. When the equity markets are back, we probably won't do too much business.