Alternative Mine Financing - Production-Linked Lending, Royalty And Streaming Arrangements

• Published date: 06 January 2021
• Subject Matter: Finance and Banking, Energy and Natural Resources, Financial Services, Mining
• Law Firm: Gowling WLG
• Author: Mr Charles Bond, Andrew Newbery and Nath Curtis

Production-linked lending has become a staple of mining finance - particularly for base and precious metals. The two dominant production linked models are often described as "Royalty" arrangements and "Streaming" arrangements.

The origin of the Royalty goes back centuries,¹ but emerged as a method of private finance in the 1980s. The origin of the Streaming arrangement is much more recent, with the earliest deals emerging in the 2000s².

Royalty and Streaming finance has been popular in Canada for many years now but we are seeing an increased interest for royalty and streaming solutions in the UK through UK-listed investors such as Anglo-Pacific Group and Trident Royalties. Vancouver-based Wheaton Precious Metals also recently completed its third listing on the London Stock Exchange, in addition to listings on the New York and Toronto stock exchanges.

What is a Royalty?

The earliest Royalties date from medieval Europe and involved the delivery of a portion of the mined mineral or a payment to a landlord and/or sovereign in return for the granting of mining rights. This concept was later adapted by the private sector whereby those with a mining right sometimes retained a contractual right to a Royalty upon selling or transferring an interest in that mining right to a third party.

The term 'Royalty' is still used in this sense - many nations rich in natural resources collect a royalty from international mining companies in return for exploration rights. Ghana's state gold producer, Agyapa Royalties, receives approximately 76% of the Royalties at Ghana's largest mines³.

The concept of the Royalty has been adapted to provide mining finance, and it is this 'Royalty' that we are focusing on. Under a simple Royalty finance arrangement, a funder (or 'Royalty holder') provides financing by way of lump sum payments to the mining company (or 'grantor') in return for periodic payments based on the production of mined minerals. The right to the periodic payments constitute the Royalty. Such Royalties can be structured in a variety of ways:

• The Royalty is likely to last over a long period (potentially up to the life of the mine). Depending on the jurisdiction in which the mine is located and the specific terms of the arrangement, the Royalty holder may also gain an 'interest' in the land on which the mine sits, binding future purchasers of the mine to the Royalty holder's Royalty interest. Such Royalties are said to 'run with the land' which gives the Royalty holder...