September 21, 2015 / 7:59 PM / 2 years ago

UPDATE 1-Miners turn to alternative finance to cut debt as downturn grinds on

4 Min Read

(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, 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 and diversified miner Teck Resources .

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, Toronto's Franco-Nevada and Vancouver-based Silver Wheaton, 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 and Freeport McMoRan are also possible streaming candidates, sources said. Neither company responded to requests for comment.

Anglo American said it was not interested in streaming deals. Rio Tinto declined to comment and BHP Billiton 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. (Additional reporting by Sonali Paul in Sydney, Olivia Kumwenda-Mtambo in Johannesburg and Stephen Eisenhammer in Rio de Janiero; Editing by Diane Craft)

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