Streaming Companies - Part I

Streaming companies as a whole have been the best performing sector within the metals and mining industry, easily outperforming the TSX and DOW and some outperformed even gold.

The following table and charts illustrate this performance:

This new Series is dedicated to Streaming Companies – what they are about and how we value them.

Streaming Companies are exposed to commodity prices however they have little in common with the actual miners. Streaming companies do not own or operate mines, have little overhead and for the most part no debt - all attributes making them far more resilient to low commodity prices.

HOW STREAMING WORKS

Streaming companies make agreements with exploration and development and mining companies to purchase all or part of their production at a low, fixed, predetermined price that is far below the market price. The streamer can then sell the metal for a profit.

The mining company gets much needed capital by immediately monetizing part of its future production and the streaming company buys metal at fixed prices without having to invest in exploration, development, or operations of the project.

This model has proven to be extremely lucrative for the streaming companies since scarcity of capital during downturns put miners in a position to cut overly sweet deals for the provider of capital. The streaming companies were able to buy significant amounts of gold and silver at extremely high discounts to the spot price especially as commodity prices took off. Miners have raised US$4.2 billion from 11 stream sales in 2015 which is nearly double the US$2.2 billion raised in 2013, which is the second biggest year on record.

2015 was one of the worst years for major mining companies; metal prices continue to fall in the aftermath of years of expensive acquisitions, heavy borrowing and high cost of operations. Major miners such Barrick Gold (ABX), Glencore (GLCNF), Teck Resources (TCK) and Vale SA (VALE) all sold streams in 2015. 

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Disclaimer Cipher Research Ltd. is not a licensed broker, broker dealer, market maker, investment banker, investment advisor, analyst, or underwriter and is not affiliated with any. There is no ...

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