NEED FOR CAPITAL
Sibanye could use streaming to raise funds
While different from hedging, which entails selling future production at an agreed price, streaming has its proponents and its detractors
Sibanye Gold is considering a financing option that has been around for a decade but is little used by South African mining companies, particularly those stung by hedging or selling forward their gold production in the past.
While different from hedging, which entails selling future production at an agreed price, streaming has its proponents and its detractors.
Streaming entails an upfront payment, almost a deposit, from a streaming company for future, heavily discounted deliveries of a set amount of physical metal, generally a by-product of the mining process. These contracts may run for the life of the mine.
Local analysts describe the financing option as a largely North American one and a scheme that is not well understood or liked locally, as it tends to impart too much value to the streaming company.
Sibanye spokesman James Wellsted says the difference in multiples stems from the fact that streaming companies have no operational costs or risks that are associated with mining companies and that streaming offers a relatively cheap, off-balance sheet, nondilutive option when it comes to raising finance when compared with debt or issuing equity.
Sibanye is buying US-based Stillwater Mining, a palladium and platinum producer, for $2.2bn. To pay for the transaction and to fund the $550m early settlement of a Stillwater convertible bond, Sibanye has secured bridging finance of $2.65bn from a consortium of financial institutions, which it will repay as soon as it can.
Sibanye has said it will issue $1bn worth of shares and $1bn worth of straight corporate bonds to secure $2bn before the end of June.
It needs to raise a further $500m before the end of 2017 and for this, it is considering streaming, a convertible bond, bank debt or a rights issue. There is more than $300m of cash in Stillwater to offset the bond buyback.
If there is a streaming deal, it would be put in place over a portion of the platinum output from Stillwater, where palladium is the primary source of production and revenue, Wellsted says.
Harmony Gold, which jumped at the chance in 2016 to hedge 20% of its gold output for two years at R682,000/kg, well above the prevailing R548,600/kg price, will not consider streaming.
"Harmony hedges, which equals cash certainty. Streaming equals a form of debt. So, no, we will not consider streaming," says spokeswoman Marian van der Walt, when asked if Harmony would consider it as a funding mechanism for its multibillion-rand Golpu copper and gold project in Papua New Guinea.
Gold Fields CEO Nick Holland has steadfastly said the company would not hedge its production, but the miner, with operations on three continents, could consider streaming.
"We would not use streaming at this stage as it is a relatively expensive form of financing," the company said on Wednesday.
"We have access to the more traditional markets. Interest rates are still very low and we have a good debt rating.
"Also, we have sufficient facilities in place to cover our funding needs. We would view streaming as a financing option of last resort," Gold Fields said.
AngloGold Ashanti falls into the Harmony camp of thought regarding streaming, with management’s feelings towards the option fairly closely aligned to an analyst who derided it when Sibanye said on Tuesday that streaming was under consideration.
"Streaming is nothing good," said the analyst, who declined to be named for company policy reasons.
"Ask any gold company that has done a streaming deal over the past 10 years and just look at the ratings of the streaming companies relative to the gold producers to see where the value of those deals lies," the analyst said.
On the Mining Prospects website, Roger Taplin and Patrick Deutscher say: "Metal streaming transactions are an adaptable and evolving financing alternative by which a cash-strapped mining company may receive a capital injection without sacrificing control over operations or compromising shareholder equity."