Dr. P.V. Viswanath
Glencore Looks to 'Streaming' Deals for Quick Cash
|Scott Patterson, Wall Street Journal, 11 Oct 2015|
Glencore executives, including Chief Executive Ivan Glasenberg, said in a meeting with fund managers in New York on Wednesday that the company expects to raise between $1 billion and $1.5 billion from streaming deals, according to people familiar with the presentation.
In these deals, miners get an upfront, lump-sum payment from so-called streaming companies in exchange for the future delivery of precious metals, such as gold and silver. The streaming companies take delivery of the materials--the "metal stream"--which they either sell or store, hoping prices rise.
Glencore needs cash quickly to follow through on a pledge to cut its net debt by $10 billion this year. It already has issued $2.5 billion in new shares, promised another $2.4 billion by cutting dividends, and is trying to sell a stake in its agricultural business. The company is also looking for buyers for some its oil-and-gas assets, according to people familiar with the matter.
Investors concerned about Glencore's net debt of nearly $30 billion have sent the Swiss miner and trader's stock price on a wild ride . The stock is down more than 50% this year, and it plunged nearly 30% on Sept. 28 before recovering in recent days. Glencore has said its business "remains operationally and financially robust " and that the company has "absolutely no solvency issues."
The company joins other miners increasingly seeking out streaming deals, market experts say. A slide in commodity prices, sparked by an economic slowdown in China, has depleted mining-company balance sheets, and high debt loads are raising concerns.
Miners are also having trouble raising cash on the stock market, because investors generally aren't enthusiastic about investing in the companies as commodity prices hover near multiyear lows. Streaming deals are an alternative source for a quick infusion of funds.
Silver Wheaton Corp., a Vancouver streaming company, launched the industry in the early 2000s. Now, there are about 50 firms offering streaming deals, roughly double the number five years ago, according to Neil Passmore, chief executive of Hannam & Partners, a London firm that advises clients on streaming deals.
"There's tens of billions of capital available" for miners interested in the deals, Mr. Passmore said.
In 2014, Silver Wheaton pulled in 25.7 million ounces of silver from streaming deals, nearly 60% more than it got from such deals in 2009.
"This is the best I've ever seen it in terms of opportunities," said Randy Smallwood, chief executive of Silver Wheaton, speaking of the market for streaming deals.
Miners enter the deals for a variety of reasons. They might use the cash to expand their operations or purchase other assets. They might also need it to finance ongoing operations and pay off debt.
But the deals also carry risks, experts say. Miners are exchanging future revenue, and the potential upside in prices, for a quick infusion of cash.
They can also be seen as signs of desperation, indicating trouble with mining operations and concerns about a miner's ability to fund its business in a commodity downturn.
Mr. Smallwood of Silver Wheaton said a number of deals his company has done recently are "repairing" balance sheets of miners. "We're applying medicine," he said.
Glencore has become the poster child for such concerns and is racing to raise cash.
The streaming deals could be a quicker way to raise cash than asset sales.
A deal to sell some of the firm's agriculture assets, for example, isn't likely to be reached before year-end because of its complicated nature, according to a banker familiar with the talks. Japanese trading house Mitsui & Co. and Singapore's sovereign-wealth fund have expressed interest in a sale that could fetch between $2 billion and $3 billion, according to people familiar with the discussions.
The streaming deals could be announced within days or weeks, say people familiar with the discussions. The miner has been holding discussions with streaming specialists such as Silver Wheaton and Franco-Nevada Corp., according to people familiar with the talks. Franco-Nevada didn't respond to a request for comment.
Glencore previously struck a deal to provide silver to Silver Wheaton in 2006. Silver Wheaton agreed to purchase up to 4.75 million ounces of silver a year for 20 years from Glencore's Yauliyacu mining operation in Peru in exchange for $285 million, plus about $3.90 per ounce of silver as it is delivered. As part of the deal, Silver Wheaton has the right of first refusal on any future silver streaming deals offered by Glencore.
Last week, Teck Resources Ltd., a Vancouver miner, said it struck a deal to deliver silver from its share of the Antamina mine in Peru to Franco-Nevada for $610 million.
Citigroup Inc. analysts said the deal is a "positive development" for Glencore, which owns about one-third of the Antamina mine. Glencore has said it is also holding discussions to sell silver from the mine.
Citigroup said Glencore could get about $915 million from a silver streaming deal at Antamina, based on the deal with Teck Resources, which owns 23% of the mine.
Glencore is also in discussions to sell precious metals in streaming deals from its stake in a Chilean copper mine, Collahuasi, and Antapaccay, a copper mine in Peru.