Back in October, BlackRock warned
that investors' disdain for mining stocks will threaten the green revolution. As the sector gets starved of capital, a shortage of metals that are essential for producing batteries, solar panels, and other green technologies will be created. A scarcity of metals will prevent any progress for the green transition.
While BlackRock brings up a great point, it's important to remember how badly investors were burned from the down cycle that began in 2014. Investors no longer want to own mining stocks because the risk of those stocks underperform the market is near guarantee and metal prices remain volatile. Luckily, a new form of financing for mining companies has already been made since the 1980s. This alternative financing source is called streaming and it was started by Franco-Nevada, which is the largest commodities streaming company today.
The story of Franco-Nevada is interesting. In 1986, it spent half of its cash reserves to acquire the rights to 4% of the revenues from a mine in Nevada owned by Western State Minerals. The precious-metals streaming business model truly expanded in 2004 when Wheaton River, a gold mining company, needed capital to expand their core gold mining business and decided to create a new business called Silver Wheaton to buy the silver byproducts of the mine's operations. Since then, many other commodities streaming financiers have entered the industry. As raising capital from equity and debt markets has been difficult for mining companies, streaming as a financing source boom.
Mining companies can find many advantages to streaming as a financing source. When compared to debt financing, streaming deals usually have longer payment periods with no fixed cash obligation each year. As commodity prices fluctuates, streaming reduces the stress that miners have when it comes to generating cash flows necessary to pay their debts and fulfilling their debt covenants. When compared to equity financing, streaming deals won't dilute shareholders and are advantageous when the mining company's stock is trading below net asset value. Miners choose to enter streaming contracts for a variety of reasons, with the most common reasons being that they need to improve their balance sheet strength and to gain actual funding for a project.
For the streaming investors, they gain exposure to commodities without many of the risks of traditional mining companies. As the mines that they finance expand, they gain their share of the benefits at no cost. If the deal is well-structured, investors can receive sustainable cash flow and thus resulting in streaming companies generating attractive returns in the stock market.
While the majority of streaming deals relates to gold mining, there are streaming deals that relate to silver, oil, and other commodities. With more funding from investors, the industry will be able to afford more streaming deals with cobalt, lithium, and rare earth metal miners. After learning more about commodities streaming, I believe that this alternative funding source will be the key to bridging the gap between future demand and future supply for these metals. The streaming business model is a win-win for both miners and investors wanting a smarter way of gaining exposure to the commodities space.