November 12, 2015 / 9:00 PM / 2 years ago

With lending tight, miners look to swap cash for royalties

SYDNEY, Nov 13 (Reuters) - A slump in mineral prices that’s making it tough for miners to borrow is providing more opportunities for companies such as Anglo Pacific Group Ltd , whose business is exchanging cash for production royalties on commodities out of favour with lenders.

Banks are becoming increasingly wary of lending to fund exploration and development work as profit margins shrink or outright disappear. This is driving miners to find other avenues to raise cash.

“At the end of the day we are a shadow lender to a distressed sector,” said Julian Treger chief executive of Anglo Pacific.

Given a lack of access to traditional sources of funding, many companies are exploring alternatives, according to a report prepared by Deloitte.

These include getting cash for royalties, guarantees to purchase output, equipment financing and high-yield debt, it said.

Royalty contracts can also hold appeal for some mining companies looking to avoid debt after years of financing new projects through traditional lenders.

Anglo Pacific extends cash to companies looking to develop mines. Once the mines are running a portion of the proceeds flow back to Anglo Pacific.

“We are talking with people to give them up to $1 billion, but we would do that with co-investors,” Treger told Reuters.

While it is the only company of its kind trading on the London Stock Exchange, an army of royalty companies operate in North America.

One of the biggest, Toronto-based Silver Wheaton, holds rights to purchase silver at a very low fixed cost from 18 operating mines in North and South America and Europe. Last week, Glencore Plc agreed to sell future silver output from a mine in Peru to it for $900 million in cash.

Others include Franco-Nevada Corp, Royal Gold Inc and Osisko Gold Royalties Ltd

Anglo Pacific already holds royalty contracts with Rio Tinto and BHP Billiton in coal and iron ore and with other companies in gold, uranium, copper and vanadium.

Earlier this year it completed its biggest royalty acquisition to date with Australia’s Whitehaven Coal Ltd for $65 million on a mine forecast to yield 7.7 million tonnes of coal annually.

“Every time they (Whitehaven) sell a dollar of coal, they give us a penny,” Treger said.

Overall royalty income in the first half exceeded what the company received for the whole of 2014 despite sagging commodities prices, and Treger is expecting a strong leap in full-year income for 2015.

“The only thing we know about the commodity sector is that there are cycles and people are unable to predict pricing. It’s an educated leap of faith and I am happy to do that.”

Anglo Pacific faces risks other than pricing.

It received royalty income of only 1.7 million pounds in 2014 from Rio Tinto’s Kestrel coal mine in Australia, compared to 9.9 million pounds in 2013.

The significant drop was due to production being conducted largely outside Anglo Pacific’s private royalty land.

However, this year Rio Tinto has indicated it should mine on 50-55 percent of land eligible for Anglo Pacific royalties, rising to more than 90 percent in 2017, according to Treger.

Royalties from the Kestrel mine vary, but can reach as high as 15 percent, he said. ($1 = 0.6595 pounds) (Editing by Ed Davies)

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