Or: Gold Miners’ Doom Is Streaming Companies’ Boom.
The gold and silver miners are in crisis, as metal prices hover around break-even for many and capital dries up for most. Dozens of companies are one or two quarters away from running out of cash and closing down, and their executives are ready to deal.
This is, in short, the part of the cycle when the smart money sets itself up to make a fortune in the next bull market. Chief among this bunch are the streaming companies that finance developing mines in return for a share of future production.
In good times they do all right but find it hard to cut deals on favorable terms because the miners have access to cheap capital from less discerning banks and equity investors. But at the bottom of bear markets — like now — the streaming companies find themselves virtually alone in the industry in having both cash and an interest in putting it to work. Miners who need financing to survive now have nowhere else to turn, and the streaming companies are feasting. Here’s a recent Bloomberg profile of the biggest of them:
Franco-Nevada Mulls Credit as `Hokey’ Streaming Goes Mainstream
For Franco-Nevada Corp., the best time to take on debt is at the bottom of a market. The day may be approaching for the Canadian royalty and streaming company as the commodity rout boosts demand for alternative funding.“There are so many opportunities out there, we might have to dip into our credit lines,” Chief Executive Officer David Harquail said in an interview last week from his Toronto offices. “The ideal is you lever yourself up at the very bottom of the bear market and hopefully, if you’ve called it right, then you really benefit as the market turns around.”
Streaming companies like Franco-Nevada, Silver Wheaton Corp. and Royal Gold Inc. give miners upfront payments in exchange for the right to buy metals at a discount in the future. Franco-Nevada also does royalty agreements, tying portions of production to land titles.
Plunging metal prices, with copper down 24 percent and gold 11 percent in the past year, combined with surging credit costs and volatile stock markets, have made streaming attractive even for majors such as Barrick Gold Corp. and Freeport-McMoRan Inc., giving the business more credibility.
“It’s something that’s gone from being seen as kind of hokey, to where now every major company and their CFO has to consider it among their financing options,” Harquail said.
Unused Credit
With no debt, about $610 million in cash, plus $110 million in marketable equities and an unused line of credit worth about $1 billion, the company has plenty of scope for more deals. “Without going back to the equity markets, right now, we’ve got one and a half billion to play with,” Harquail said.Two types of deals have become more common in recent years, Harquail said. Medium-sized producers are turning to royalty and streaming companies for help buying assets from larger miners. Lundin Mining Corp.’s purchase of Freeport’s Candelaria copper mine, which Franco-Nevada helped finance in exchange for a gold and silver stream, is a case in point, he said.
Also, the largest producers are now willing to sell streams on their most prized assets, Harquail said. “We’re getting the opportunity to bid on some of the best mines in the world.”
For an idea of how much things have changed in mining, consider Glencore. With a 2011 market cap of $100 billion, it could have swallowed all the streaming companies without getting indigestion. Then commodities tanked and Glencore’s stock crashed — and now it’s scrounging for the funds to keep its mines afloat:
Glencore in talks on streaming deals on Chile, Peru mines
(Reuters) – Glencore is in talks with Franco-Nevada Corp, Silver Wheaton Corp, Royal Gold, and Osisko Royalties to sell portions of the future production of three South American copper mines. One source said on Wednesday the talks could expand to include other Glencore mines.
The longer the gold/silver bear market grinds on, the more desperate the miners become and the better deals the streaming companies receive. And when prices rebound — as they will (since if they don’t the mining industry will collapse and supplies will dry up) the streaming companies will generate massive cash flow.
Here’s what this meant for the market values of the biggest streaming companies following the 2008 precious metals bear market:
Will they do this again? No. They should do a lot better because the 2008 precious metals bear market lasted less than a year, which was too little time for the proper amount of panic to take hold. This bear market has been grinding on for three years, and now the miners are out of cash and desperate, which should allow far more ounces to be bought at bargain basement prices — and far more cash to be generated on those ounces when prices start rising.
25 thoughts on "The Most Interesting Story In Gold"
Do SLW etc. get paid in gold or dollars from the mines they finance?
They buy silver at a lower than market price, then sell it in the market.
What happens when we find out that the US Treasury has leased most of Fort Knox to banks who sold to keep the price down over the past 15 years? Audit the gold and we will find out. It’s a black swan in the waiting.
Hi John,
I see your area has an annual Hemp Fest . Will Idaho legalize anytime soon?
This is not the bottom of PM mining equities. They will fall with the general stock market. Once debt deleveraging is in full swing, the stock market is 50%+ less, and virtually no one has access to credit, that may be closer to the bottom. Besides, the physical has further to fall yet and cash will be king for a time.
its hard to time the markets. might be better to buy some now and some later.
Jason could be right. The wild card is the Fed; we know that the Fed is determined not to be seen as reacting too late to the market. The market now is accustomed to the idea of QE, so the Fed could engage in QE4 without that alone creating alarm. I suspect that the Fed will try to get way ahead of the market this time around; if so, I think that gold will go up at the first breath of QE4. This will have to have a positive effect on the miners, so rather than trying to time the bottom to maximize profits, I just get in now and remain patient. Sandstorm is a particularly interesting streamer as it really flies under the radar even among royalty/streaming companies.
More money to be made as “the bear market has been grinding on for three years” well prices are going to be subdued for years “And when prices rebound — as they will” The China boom is over, resource demand for copper etc is gone gone, China borrowed $23T for local infrastructure that has collapses and half the building are unoccupied, the west is up to their eyeballs in debt, the great US and European consumer is gone. During the boom lots of new mines came into production or expanded… No hope for resource recovery other than gold price going up as the world economy tanks.
Gold at $1600 AUD is pretty good for the Australian company’s.
Brazilian Real as well. Dollar not quite yet.
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Maybe US gold and silver miners are doing it tough. But your argument does not hold in other countries where there currencies have had huge devaluation against the USD. Take Australia (second largest gold producer). Gold miners are working to a margin that has been increasing in the last six months.
Pretty sure he’s talking about U.S. and Canadian miners.
I placed an order a couple weeks ago and almost everything was out of stock and would be shipping at later dates. I ordered the only silver rounds in stock and still took 5 days before it shipped. Seems there are more shenanigans going on now.
Nobody has yet explained how miners who were presumably profitable with gold at $300 just 15 years ago now cannot break even at above $1100.
I agree. I wouldn’t touch the PM mining industry with “a ten foot pole”. That industry is notoriously corrupt, flimflam and poorly managed. Besides that, it seems the height of irony that gaining fiat currency in the midst of hyperinflation and a loss in confidence and panic is somehow a good thing. It’s like investing in something that “the house” is shorting, or betting that the status quo will always prevail. The only way it makes sense is if the contracts are written with “gold clauses” (that the investors can opt to have payments in gold and not just “legal tender”) which are currently illegal.
don’t you get it |BruceC? that’s essentially what SLW and other streaming companies do…they have contracts payable in delivered gold and Silver at insanely low USD prices. SLW is also artificially low because of a recent possible tax adjustment….its a screaming buy, which you can sell call options on every 2 weeks for additional income, as well as its dividend.
SLW did great in the stock market panics these last months, held value, with lower volitility than general mkt and bounced back fully, now rising with silver.
Well good for “SLW” but investors in SLW and all its derivatives/options are still in fiat. My point is that people are still thinking in terms of a dollar centric “universe”, analogous to Ptolemy’s geocentric vs Copernican heliocentric models. Get THAT.