To stream or not to stream? Rethinking alternative mining finance

Alchemy recently hosted an engaging and insightful panel discussion on the merits of evolving, non-traditional bank financing in the African mining sector. The event, held on a particularly warm afternoon in Cape Town, coincided with the 31st Investing in African Mining Indaba.

With a stellar line-up of experts representing different funding perspectives, the discussion sought to demystify alternative financing options for mining projects, and particularly the streaming model.

Senior partner Morné van der Merwe opened the discussion by emphasising the complexity of mining finance and the increasing need for alternative funding solutions. The conversation began with the recognition that equity, in some form, remains fundamental to any mining project. Cash is king, but is often difficult to secure, making it essential for miners to explore a mix of funding options.

The central question posed was: How can miners access capital when traditional bank financing is not feasible?

The panel, moderated by Alchemy partner Wildu du Plessis, included industry leaders from banking, streaming and mining investment:

• Arnold van Graan (head of Market Research: Nedbank)
• Mpho Mofokeng (director of Project and Resource Finance: Absa)
• James Dendle (chief operating officer: Triple Flag Precious Metals)
• William De Landtsheer (global head of Structured Finance: Traxys)

The financing landscape and the role of equity

Debate kicked off around more traditional funding in the form of equity and whether, although typically more expensive, there is still an appetite for it.

Du Plessis proffered that the original view of equity has changed, making for a very different financing field today. Commentary suggested there is always a requirement for having a minimum level of equity (it’s a necessity for a project to commence); however, providers of equity have changed in Africa – and for small, listed companies, it poses a conundrum, as they are usually unable to raise equity, which becomes a stumbling block to getting a project off the ground. Plenty of evidence exists of smaller companies being destroyed by trying to raise money.

In addition, with equity comes huge requirements to deliver growth and development. “I think the treadmill to deliver news and exciting results in the short term often results in companies taking shortcuts and making suboptimal decisions,” articulated Dendle. “There are exceptions, of course, but I think it drives the wrong results.”

Given the challenges of traditional debt structures including mechanisms such as mezzanine debt and the fact they are no longer always suitable for mining projects due to the nature of risks, long development timelines and the inherent danger of chasing returns, the panel explored the rise in more specialised financing instruments including streaming, royalty financing, prepaids, project funding and sustainability funds.

What works and what doesn’t?

The streaming debate

Streaming involves a financing arrangement where a company provides upfront capital to a miner in exchange for a percentage of future production at a predetermined price. This model offers miners access to capital without diluting equity or increasing debt, but it does come with trade-offs. Once considered a last resort and priced accordingly, it has evolved significantly and is “now more sophisticated and complementary than it was in the past”.

However, it is not a one-size-fits-all solution. “Streaming is not the right fit for every situation,” noted Dendle.

The debate continued to expand on what constitutes a good or a bad stream. Successful streaming transactions typically focus on byproducts rather than core commodities, ensuring miners can secure upfront capital without significantly diluting their primary revenue stream. Streamers often provide capital before project financiers, assuming risk throughout the mine’s lifecycle.

Furthermore, good streams have a value-recognition angle. On the other hand, if a stream consumes too much cash flow, it can alter mine plans, sterilising the economics and disincentivising the mining operator, making for a suboptimal stream.

With the discussion revolving around the fact mining is a high-risk sector, it was reiterated that it is critical to look at the timeline of the cycle, before adopting one or other financing instrument.

Van Graan mentioned that a negative aspect of streaming is its long tenure; however the market for streams and the way they are used has changed. In addition, as a streamer you don’t have to set volumes, so in a way, you are taking on some of the production risk. And as an operator, you are hedging against the product commodity price.

From a banker’s perspective, Mofokeng noted that a stream doesn’t count toward your indebtedness and its impact on EBITDA is small. He added, “A stream cleans up the balance sheet, so from a bank’s perspective it looks better.”

Streaming is also a viable option when the capital stack needs diversification to manage risk effectively. As Dendle explained, “The ideal stream is a small slice of a big pie.”

The panel, however, cautioned against excessive reliance on streaming, as it could overburden a project’s cash flow and deter future lenders. In the ideal world, a mining company should balance streaming with other funding mechanisms to maintain financial flexibility.

Mofokeng also commented toward the end of the discussion that streaming can be “flat for the life of the project or it can step up or down”.

In response to a question from the audience regarding whether only certain commodities are suited to streaming, Dendle confirmed products that require marketing or those that don’t have a confirmed market price are very difficult to stream, such as diamonds, for example. Contract-based commodities are also tricky and there is not a great market for coal. Some base metals and lithium can be streamed, but streaming is definitely more suited to precious metals such as copper, gold, platinum group metals and others with a defined market value. He stressed, “You don’t want to be on the wrong side of a commodity that is not your core business.”

Alternative funding and future transactions

Du Plessis queried the panel on the extent to which non-banking funding could affect one’s ability, later on in a project, to carry out mergers, acquisitions or other corporate transactions. While some financing structures impose limitations, streaming agreements often include buy-back options and flexible terms. Compared to traditional debt, streaming usually has fewer restrictive covenants. However, the complexity of alternative financing structures remains a challenge.

It was also mentioned that export credit agency (ECA) finance is very complicated and typically policy-driven. In South Africa, it is usually through state-owned entities and it also has dimensions for commercial banks. So in general, ECAs, development finance institutions and sustainability funding will be significantly more restrictive in terms of future transactions in which a miner may wish to engage due to more stringent operating and compliance conditions imposed.

Tax considerations

Du Plessis further questioned the panellists on whether there are any special tax considerations that people need to think about if they opt for one of the alternative funding mechanisms. The panel agreed that tax implications are relatively straightforward.

“A prepaid is just an advance on future deliveries,” explained De Landtsheer. “So they will just pay corporate tax on physical deliveries.”

Similarly, royalties are taxable upon receipt. In a zero-tax world, every stream would be a royalty – but that is not the case. While some view a stream as a form of royalty with tax benefits, it remains a contractual agreement that avoids upfront tax burdens.

Finding the right funding mix: A recipe for success

The consensus among the panellists was clear: Funding solutions should be flexible and adaptable over time. A mining company’s financing strategy needs to evolve alongside the project’s development, market conditions and operational needs. “Over time, you can flex your funding solution – you don’t want a suit that is too tight,” emphasised De Landtsheer.

Du Plessis went on to remark, “Your funding requirements are not static – they change over time,” and reinforced the need for miners to remain adaptable in their approach to financing. He also reiterated that if you want to finance a project, you need to decide what to sequence and when.

Key takeaways from the panel

In concluding the discussion, each panellist shared their key insights for mining companies seeking alternative financing.

Van Graan acknowledged that the rise of alternative funding is a reflection of the inability of miners to raise traditional equity. He recognises streaming has changed and it has its place, and it should be part of every funding mix. He did mention, though, that it is also priced according to risk.

Mofokeng suggested that as a sponsor looking to put together a complex funding arrangement, one needs to know what one’s options are and get bespoke advice.

Dendle added that there is almost always availability and surety of streaming capital, which is a valuable drawcard for junior miners in particular.

De Landtsheer highlighted that timing is key, especially for streaming; that it has its place and that over time you can flex your funding status. He emphasised the importance of miners retaining funding flexibility, specifically in such a dynamic industry.

In summary, their key takeaways were:

• Funding requirements aren’t static and need to be tailor-made to suit requirements. Miners need to remain flexible and adaptable as financing needs evolve over time.
• An in-depth understanding of your funding needs and long-term financial strategy is imperative at the outset of a project.
• Miners will most likely need to include a mix of different types of financing structures, so obtain independent expert advice to navigate the complexities of mining finance.
• Be mindful of the implications of streaming and other alternative structures on future transactions. Streaming was shown to have evolved significantly over the past decade to be more sophisticated and complementary; however, it was still noted it is not the right fit for every solution or commodity. The audience was encouraged to think carefully about the future and to plan as life will change.

Looking ahead

As the African mining sector grows, alternative finding structures such as streaming will play an increasingly important role in getting projects off the ground. The ability to mix and match financing options – from equity and debt to streams, royalties and prepaids – will be crucial for miners in overcoming capital constraints.

The panel concluded with a key message: Financing is not a once-off, one-time decision but a strategic process that evolves over the project’s life. Mining companies should proactively plan their funding mix, seeking independent expert advice to structure deals that provide both immediate capital and long-term sustainability.

As Van Graan aptly asked, “Why are banks losing out to streams?”

The discussion left attendees with valuable insights into navigating the intricacies of mining finance. As miners look ahead, understanding and structuring the right financing mix will be key to long-term success.

To stream or not to stream? The answer, ultimately, lies in the details, the timing and the strategic fit.

Watch the video of the full panel discussion.

Read more about exploring alternatives to traditional financing here.

Image credit: pressfoto/Freepik