Canada’s streamers making hay in the Africa

By
David McKay
-
Gold

CANADIAN metals investor Sprott was in Johannesburg last month to drum up some business. “We are always looking for opportunities and places to invest our capital,” says Caroline Donally, the South Africa-born partner of Sprott Resource Streaming and Royalty.

Streaming and royalty companies provide alternative means of cash to mining firms, sometimes for projects and at other times to restructure balance sheets. Miners sell a portion of production at an agreed price as a viable alternative to debt or — perish the thought — selling shares.

In 2018, Sibanye-Stillwater sold $500m worth of gold and palladium production to Wheaton Precious Metals. In 2019, Royal Bafokeng Platinum sold gold credits for $185m to settle debt with Anglo American Platinum. That deal was with Triple Flag Precious Metals, which has been prolific. It stumped up $80m in 2022 in a financing deal with Orion Minerals, which is developing copper and zinc projects in the Northern Cape, and this year provided Toronto-listed miner Allied Gold with $58m for its West African projects.

Wheaton Precious Metals, Triple Flag Precious Metals and another famous streaming company, Franco-Nevada, one of the longest in the business, are all Canadian. In a market that deeply encourages speculative minerals development, streaming and royalty businesses are de rigueur. It’s no coincidence that streaming companies don’t exist in South Africa’s financial services sector, with its paucity of mineral resource entrepreneurship.

“We have a very developed financial system in South Africa and I’m surprised we haven’t developed this financing model,” said RECM founder Piet Viljoen at the Joburg Indaba conference in October. “I would be interested to see this developed further as it could add tremendous value here.”

There is no point in trying to finance a 15-year mine with a three-year facility. It’s like trying to finance your house on your credit card – Caroline Donally

Viljoen was flanked by Donally, a former RMB banker. “Mines are long-dated operations and you need a form of financing that frankly matches the tenure of the operation,” said Donally. “There is no point in trying to finance a 15-year mine with a three-year facility. It’s like trying to finance your house on your credit card.”

Focusing on Africa

Increasingly, streaming and royalty companies have been moving into Africa’s precious metal companies. On October 25, Wheaton Precious Minerals agreed with UK gold mining developer Montage Gold to buy 19.5% of payable gold from the firm’s Koné project in Ivory Coast for $625m. Wheaton will buy Koné’s metal at 20% of the spot price of gold — about $540/oz, assuming a gold price of about $2,700/oz in round figures.

For companies such as Montage Gold, deals of this nature are not only more flexible than senior debt, they also reduce or avoid having to issue (normally undervalued) shares to finance future production, which is expensive. “Streaming companies are a way to reduce risk in mining,” says Viljoen.

As an investment proposition, however, streaming companies are pure Marmite. Buying shares in Wheaton Precious Metals derisks the hazards of buying mining equities, and they are efficient businesses. “Wheaton makes $1bn a year with only 42 people,” says Viljoen. But there’s valuation risk: Wheaton Precious Metals trades on a 40 p:e. Cheap it is not.

Streamers not in sweet spot

Depending on the future direction of gold and silver especially, this might also not be the best time for the streamers.

“If we start to get a gold bull market, these companies will underperform badly because of the rich valuations and low leverage to the gold or silver price,” says Georges Lequime, portfolio manager for UK asset management firm Amati Global Investors.

“Also, it is in the business of very expensive financing, which falls away when investors support the equity market for gold equities.”

This has been an extraordinary year for gold shares. Investors in Pan African Resources, a mid-tier gold producer operating in Mpumalanga, would have doubled their money whereas the gold price is up “only” 32%.

Everyone in the West is very wary of the gold price because of recent central bank purchasing and geopolitical problems, so they are not buying the gold stocks – Georges Lequime

The looming question is where gold will head next year.

A Donald Trump presidency raises the prospect of tax cuts, bad for the fiscus but encouraging of the gold price further. US politics aside, central banks are expected to remain net buyers of gold while geopolitical distress and polarisation will also support the metal into 2025, economists say. But how long can gold be expected to stay at record levels?

According to Mohamed El-Erian, president of Queens’ College, Cambridge, there might be a greater dislocation at play to do with the US economy’s ability to tether the global financial system. “What has been happening to the gold price is not just unusual in terms of traditional economic and financial influences,” he wrote in the Financial Times on October 21. “It also goes beyond strict geopolitical influences to capture a broader phenomenon which is building secular momentum.”

Seen in these terms, the normal economic guardrails by which gold’s valuation operates are being dismantled. But the clamour and enthusiasm for gold is at a worrying decibel. If then one is contrarian in disposition, buying shares in a streaming company such as Sandstorm Gold — Lequime’s preferred stock when pushed to take a view — might be a defensive means of playing the precious metals market risk.

“Everyone in the West is very wary of the gold price because of recent central bank purchasing and geopolitical problems, so they are not buying the gold stocks,” says Lequime. “Tactically, the streamers give you the lowest risk exposure to gold.”

Analysts at UK bank Berenberg recommend Wheaton Precious Metals as their preferred option among the streaming companies, partly based on its recent deal with Montage Gold. Based on the bank’s conservative $1,550/oz forecast for the gold price, it gets a 3% internal rate of return on Wheaton’s Koné deal, rising to 9% on $2,500/oz gold.

“Wheaton remains a lower-risk, high-quality way to gain precious metals exposure in our view,” the bank said in a recent report.

A version of this article first appeared in the Financial Mail.

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