(Adds comments from Silver Wheaton CEO)
By Nicole Mordant
DENVER, Sept 21 (Reuters) - A niche form of mining industry
finance is emerging as the new go-to funding for miners bowed by
debt, another sign of the sector's distress as it plods through
the fourth year of a commodities' downturn.
Glencore GLEN.L , the world's third-biggest miner, is in
talks to raise more than $1 billion in so-called "streaming"
deals, coming on the heels of transactions by No.1 gold producer
Barrick Gold ABX.TO and diversified miner Teck Resources
TCKb.TO
More such deals are expected as shareholders, ratings
agencies and lenders pressure miners to slash debt amid a gloomy
commodity price outlook and as other debt-cutting tools such as
asset sales, dividend cuts and share issues are not enough.
Until now so-called "streaming" finance - upfront funds for
miners in exchange for a portion of a mine's future output - has
most commonly been used by mid-sized miners with limited access
to capital to fund mine builds.
That the world's biggest miners are now prepared to do deals
that see them giving up a portion of their future production,
earnings and cashflow to cut debt is a reflection of their
limited options.
"It is a sign of the times," said Andrew Kaip, an analyst at
BMO Capital markets.
"Equity markets are to a large degree closed... Miners are
looking for alternatives. Unfortunately this is an alternative
of last resort," he said.
WINNERS
Companies providing stream financing, including U.S.-based
Royal Gold Inc RGLD.O , Toronto's Franco-Nevada FNV.TO and
Vancouver-based Silver Wheaton SLW.TO , say they have never
been busier.
"We have never seen a market as attractive as we have seen
it for the last six months or so," said Tony Jensen, Royal
Gold's Chief Executive.
Most of the streaming opportunities right now are for
repairing balance sheets, said Silver Wheaton CEO Randy
Smallwood.
"If I look at all the opportunities out there that I find
appealing... it is probably between $4 billion to $5 billion
worth," Smallwood said in an interview at the Denver Gold Forum,
an annual gold mining industry conference.
All three CEOs expect streaming companies may have to start
teaming up on deals as transaction sizes get too big for anyone
to fund alone. But they say miners do not like syndication as it
reduces competition for deals, making them more expensive.
At end-June, streaming companies had some $4.5 billion of
cash and credit available for new deals, BMO's Kaip said.
Besides Glencore's potential $1 billion deal, Teck
Resources, whose credit rating was slashed to junk this month
due to its heavy debt load, has said it is open to more deals.
Debt-laden copper miners First Quantum Minerals FM.TO and
Freeport McMoRan FCX.N are also possible streaming candidates,
sources said. Neither company responded to requests for comment.
Anglo American AAL.L said it was not interested in
streaming deals. Rio Tinto RIO.L declined to comment and BHP
Billiton BLT.L did not respond to a request for comment.
DEBT SPIRAL
An acquisitions and mine-building spree during a decade-long
commodity price boom that ended in 2011 is largely to blame for
the industry's excessive debt load.
Large metals and mining companies held around $691 billion
of net debt at the end of their last financial year, according
to data from Thomson Reuters Eikon, equal to a hefty 64 percent
of their combined market value.
That compares with 46 percent for the energy industry,
another capital-intensive industry, 36 percent for consumer
cyclicals and just 13 percent for healthcare.
Although mining company shareholders are not fans of
streaming as, like hedging, it means miners are selling off
future income, some say it is a necessary evil of the times.
"You have to do what you can. But it is really unfortunate
that they got themselves into this situation," said Caesar
Bryan, manager of the New York-based Gabelli Gold Fund.