Mine Finance In Africa: Production-Linked Loans, Royalties, And Streams

• Published date: 10 February 2021
• Subject Matter: Finance and Banking, Energy and Natural Resources, Financial Services, Mining
• Law Firm: Gowling WLG
• Author: Mr Charles Bond, Nath Curtis, Andrew Newbery and Dan O'Donnell

Alternative methods of financing mining projects received renewed attention during 2020 as commodity prices rose, with royalties and streams becoming ever more popular.

Royalty and streaming finance has been used in the North American markets for many years, but we are now seeing growing interest in royalties and streams from investors in London. 2020 saw Wheaton Precious Metals (LSE: WPM) join Anglo-Pacific Group plc (LSE: APF) and Trident Royalties (LSE: TRR) on the London Stock Exchange. Such companies have a strong track record of investing in Africa, typically in precious metals but increasingly in base and battery metals. In addition to these public companies which give access to a broad range of investors, there are also a growing number of private royalty and streaming funds to which mining companies turn, such as Orion Resource Partners and Sprott Resource Lending. Private debt funds are also increasingly providing borrowers with more standard term loans and project finance facilities.

Royalty and streaming groups make an attractive investment for institutional investors who are looking for strong returns during a time of record-low interest rates. Investors do not have to invest directly into the mining company but can take advantage of potential upside and income generation from a portfolio of mining projects. These vehicles are contributing to the increased investment in African mining from investors without historic exposure to the metals and mining markets in Africa. We saw this trend improve during 2020 given the renewed focus on African precious metals thanks to rising commodity prices, and we expect it to extend to African base and battery metals as nations move towards renewable sources of energy.

All of this presents junior and mid-tier miners across Africa with a renewed opportunity to access the capital necessary to adapt to the rapidly changing landscape without diluting existing shareholdings or increasing leverage. In this article, we explore exactly what royalties and streams are, and assess why miners should consider them as part of their capital structure

Royalties

Royalties involve the financier (or "royalty holder") purchasing a right to a percentage of the future revenues of a mine (the "royalty") from the miner (or "Grantor") in return for an upfront payment. This concept is not uncommon and has been used for several decades now - it differs from the royalties (essentially taxes) collected by sovereign governments in return...