DEALTALK-Alternative form of mine finance seen boosting tepid M&A

Fri Jun 6, 2014 1:29pm EDT
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By Nicole Mordant

VANCOUVER, June 6 (Reuters) - A funding technique mostly used to help companies build new mines is moving into the mainstream as a way to pay for acquisitions and could help boost industry deal volumes that have fallen for the past three years.

Stream financing, through which miners get cash upfront in exchange for agreeing to sell a fixed percentage of future production at a discounted set price, was part of Yamana Gold Inc's white-knight bid for a 50 percent stake in fellow Canadian gold miner Osisko Mining Corp in April. Osisko was trying to defend itself against a hostile takeover from gold sector giant Goldcorp Inc.

Yamana's C$930 million ($853 million) bid was partly financed by a C$275 million stream transaction with the Caisse de dépôt et placement du Québec, a large Canadian pension fund. In return for putting up the funds, the Caisse would get 37,500 ounces of gold a year from Osisko's flagship mine at a price equal to 42 percent of the spot gold price.

Although trumped by a higher offer, the bid was one of only a few to use streaming, a decade-old funding concept, as a tool to help pay for acquisitions. At a time when equity and bank funding remains tight for miners after industry profits sank to a decade low last year, streaming companies have big pools of capital that may be tapped to make acquisitions.

In January, Terango Gold Corp, a gold miner listed in Canada and Australia, closed a $135 million stream deal with royalty and streaming company Franco-Nevada Corp to fund the purchase of the rest of a gold property in Senegal that it did not own already, and to repay debt.

"Inevitably, as streaming gains prominence across the sector, it is increasingly being considered as a form of acquisition finance, and will continue to do so," said Lee Downham, the lead partner for Global Mining & Metals Transaction Advisory Services at consulting firm EY.

The volume of mergers and acquisitions in the mining and metals sector globally fell by 30 percent between 2011 and 2013 to 703 deals, according to EY.   Continued...