On July 17, 2014, Moody’s Investors Service (Moody’s) released a report on metal streaming transactions, in which it discusses the impact of streaming transactions on the credit profiles of mining companies. Generally, Moody’s views metal streaming transactions as a form of equity investment, rather than debt financing. This is in contrast to criteria released by Standard & Poor’s (S&P) in 2013, which characterize the upfront payment aspect of metal streaming transactions as debt.
Metal streaming transactions (the subject of an earlier post on this blog, available here) are a form of alternative financing in which a mining company accepts an upfront cash payment from a streaming company in exchange for the right of the streaming company to acquire a portion of the future production (usually of a precious metal by-product) from a particular mine at a discount to market price. Typically, the streaming company is entitled to the return of all or a portion of the upfront payment upon termination of the agreement if it has not recouped the full amount of the upfront payment by such time. Many of the companies undertaking streaming deals do not have credit ratings.
In its report, entitled “North American Mining Industry: Streaming Deals Provide Alternative Sources of Capital for Mining Companies”, Moody’s states that it generally does not add the upfront payment made in a metal streaming transaction to the mining company’s debt. Moody’s basis for distinguishing a metal stream transaction from a debt financing is that in the former: (i) the financier assumes production, reserve and commodity price risk, and (ii) the financier typically does not have a right to call default if the relevant mining project fails.
However, Moody’s indicates that the individual characteristics of a streaming transaction could lead to the upfront payment being considered debt-like, and the company’s debt metrics being adjusted accordingly. Such characteristics include:
1. Short Term of Agreement
Moody’s will examine the likelihood that the mining company will be required to repay the upfront payment to the streaming company as a result of insufficient quantities of metal being delivered to the streaming company during the term of the agreement. The shorter the term of the agreement, the more likely that a portion of the upfront payment will need to be repaid. Moody’s gives the example of a 50 year term rendering the chance of compelled repayment remote, and the transaction thus being treated as an equity investment.
2. Completion Guarantees
Similarly, where the mining company is required to repay the upfront payment in the event that it fails to meet a construction or production milestone, Moody’s will look to the probability that repayment will actually be required. This will include an examination of the mining company’s ability to meet its commitments under the streaming agreement, as well as the likelihood that the streaming company would require repayment. For example, in respect of Silver Wheaton’s investment in Barrick’s embattled Pascua-Lama project, Moody’s notes that Silver Wheaton would be incentivized to forgo demand for repayment from Barrick in order to keep its metal stream in place.
3. Security Package
Typically, if the streaming company holds security in the mine that is subject to the metal stream, such security will be subordinated to project financing. Moody’s would be more likely to treat a streaming transaction as debt if the streaming company were given priority over project financing lenders or other creditors of the mining company.
4. Fixed Delivery Amounts
If the mining company is required to deliver pre-determined quantities of metal under the streaming agreement, the transaction would resemble a debt financing, indexed to the price of the relevant metal, and Moody’s would likely treat the transaction as debt.
In contrast to the above, S&P treats metal streaming transactions as debt for credit profiling purposes, to the extent that they have “some combination” of the following features:
- if they are done in lieu of borrowing;
- if the upfront payment is repayable in cash in the event that insufficient product is delivered to the streaming company;
- if the streaming company has recourse to the mining company or a guarantor in the case of an insolvency event;
- if repayment of the upfront payment can be accelerated upon an event of default; or
- if there is a high level of overcollateralization or security to production coverage or some other mechanism that provides greater certainty of repayment.
While Moody’s emphasizes the importance of the economics underlying a given streaming transaction in characterizing it as debt or equity and points to the cash-generating capacity of the mining company as the ultimate determinant of its credit rating, it is debatable whether the more formulaic, broad brush approach for evaluating streaming transactions adopted by S&P is sufficiently responsive to the true implications of a streaming transaction on a mining company’s credit worthiness. Much will depend on how S&P applies its criteria in practice.