The low-risk, high-reward world of mine streaming

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SIMON BROWN: I’m chatting now with Keith McLachlan of Element Investment Managers. Keith, appreciate the early morning. Streaming companies – not Netflix – we’re talking streaming mining companies. I have to say, I’d never heard of this probably a year ago. Earlier this year I saw BHP did a big streaming deal on one of their silver assets.

I suppose the first question, top level, is how do they work? What is a streaming company?

KEITH MCLACHLAN: Morning, Simon. Probably the best way to explain it is to imagine lending money permanently into a mine or development or expansion of a development. You say: “Don’t pay me back. Instead, in lieu of paying me back, give me some of the product.”

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Now there are different ways to structure it. Royalties are settled in cash. Classic streaming agreements are physically settled, but basically you’re lending money into a mine and getting a percentage of its production or top line out – preferably for life of mine, but not always.

Sometimes there’s a fixed period for it. And that’s classically really what a streaming company is; it’s actually a finance house.

SIMON BROWN: I was going to say it’s essentially a finance house, because I imagine they would work across multiple different mines and perhaps even different commodities, although doing some digging.

I see they do seem to sort of focus on a particular commodity, more or less, but they’re not necessarily exclusively going to say one commodity. For me the attraction is, I get a lower-risk environment.

KEITH MCLACHLAN: Well, if you think of the risks that a mine has, once you’ve settled resource risk and you’ve built the mine and you’re operating and things like that, you still have cost pressures, labour pressures. There can be a range of things that impact your margin. Now, a streamer is exposed to the commodity upside.

They typically have a very low-to-zero cost of that commodity that they’re getting out of the streaming agreement – be it royalties or streaming – but they have production risk. They don’t have a cost risk. They don’t have all many of these old labour risks and things like that.

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In other words, if the mine stops production, they suddenly have a hit because they’re not getting a percentage of what’s being produced. But if a mine carries on producing but, for example perhaps very pertinent to this discussion right now where we are in the world, is if the cost of fuel jumps dramatically and the margins in the mine are under pressure, the streamer doesn’t care to the point that that doesn’t impact production.

Obviously if the mine becomes unprofitable and stops producing, this will directly impact the value of that streaming agreement.

But everything else short of that – the streamer doesn’t care.

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SIMON BROWN: In essence therefore, absolutely. So if things go wrong at the mine – as you say costs go up – now, of course, if there’s no production, a different story – costs are not your concern. And that is the attraction.

We were having a conversation last week and you mentioned Franco-Nevada as a gold streamer. The point is that gold mines are probably going to see costs rise but Franco-Nevada doesn’t care.

KEITH MCLACHLAN: Certainly. Just contrasting Franco-Nevada to Barrick Mining, Barrick has 20 assets. They are amazing big mines with fantastic resources, but huge capex costs, huge labour, huge amounts of fuel costs that go into running these mines. Some of them are in jurisdictions where, when the authorities are under pressure, mines are easy targets for all sorts of things.

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Franco-Nevada has well over a hundred assets. It has a net-cash balance sheet, well over 100 currently streaming agreements. It has an exploration portfolio of probably another couple of hundred. And if they ever get into production, it will get those upsides. It has an equivalent exposure to gold, but no exposure to the costs of mining, which fuels a big one.

And, in contrast, Franco-Nevada started diversifying into other commodities where gold is running only about 70%, silver is about 20%, and oil and gas is actually 10% because with ESG [environmental, social, and governance] pressures, there was a lack of funding in this sector and they stepped in and structured a stream agreement.

So they actually have a portfolio that generates upside in this environment, and you could see that in terms of their one-month move, where Barrick is down 20-odd percent, and Franco-Nevada is only down in the teens.

But they are fundamentally different businesses with different risks. In periods of high inflation, streamers tend to outperform miners.

SIMON BROWN: That’s the point. Let’s stick with Franco-Nevada as our example. They have a very small head office, I imagine. They receive the revenues and they’re essentially going to run their office. They’re probably going to do some new deals, and then the rest is for shareholders.

KEITH MCLACHLAN: Just to your very first point about a small payroll – Barrick employs almost 30 000 people around the world. Franco-Nevada employs about 50. That that says everything you need to know about the differences in the business model.

But then just go back to 2023 and go have a look at Cobre Panama, which was 20% of effectively what they call GEOs, gold equivalent ounces, that Franko-Navara reports. Cobre Panama shut down and that took out about a fifth of the streaming effectively revenues in Franko-Nevada.

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So it very much has production risk. But it has a completely different cost base, completely different balance sheet; it’s far more diversified.

But this is also why it demands a higher valuation in the market. Barrick is at 13 times multiple, and Franko-Nevada is at about a 40. It’s not that necessarily as miners we should care about price earnings. It’s really about ETFs … and NPV [net present value] for them. But it’s just to contrast these things.

SIMON BROWN: Yes, that’s a good point. I think it’s a billion rand that’s tied up in that Cobre Panama project.

We’ll leave it there. Keith McLachlan, Element Investment Managers, I appreciate the early morning.

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