Tag Archives: Franco-Nevada

John Rubino: Huge Miner Bankruptcies Possible Soon; Great News For Gold And Silver, Bad News For Streaming Companies?

By John Rubino, Jan 13, 2016

The commodities bust may be about to claim some brand-name victims:

Freeport-McMoRan Inc: The Hits Just Keep Coming

Freeport-McMoRan (NYSE:FCX) is off to a brutal start in 2016 with its stock price down nearly 40% in just over a week. The company is being battered by a barrage of negative news items, with the latest being another analyst downgrade. The rough start, which follows a very tough 2015, has a lot of investors wondering if the company will make it through the year in one piece.

The weakness in the copper price has been the biggest weight on Freeport-McMoRan’s stock this year. Its price recently hit a six-year low due to growing concerns of a worsening slowdown in China, which is the world’s biggest copper market. With copper falling below $2 per pound it calls into question Freeport-McMoRan’s ability to generate sufficient cash flow to both manage its debt and fund its capex plan. It’s a plan that is based on a $2 copper price in 2016 and $45 per barrel for oil. Presently, copper is a few pennies below that level, while oil has plunged into the low $30s.

Those price weaknesses not only will weigh on the company’s cash flow, but are weighing on the value of oil and copper assets. That’s making it even less attractive for Freeport-McMoRan to pursue asset sales to pay down its large debt load. In fact, asset values have fallen so steeply that one Jefferies analyst is concerned that “window of opportunity for Freeport-McMoRan to repair its balance sheet may have closed.” That’s after the company has yet to find a funding solution for its oil and gas business after searching for alternatives for more than a year.

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Glencore Debt Swaps Jump to Six-Year High as Copper Price Slides

(Bloomberg) – The cost of insuring Glencore Plc’s debt against default rose to a more than six-year high as the price of raw materials such as copper continued to tumble.

The trader and miner’s credit default swaps increased to as much as 946 basis points, the highest since April 2009 on a closing basis, according to data from S&P Capital IQ’s CMA.

Slumping commodity prices have battered Glencore, prompting it to scrap a dividend payment, sell new shares and outline asset sales as it seeks to curb debt to maintain its investment-grade rating. Copper dropped to a six-year low amid a rout in metals as muted Chinese inflation increased concern that demand from the world’s largest buyer of raw materials will slow.

“CDS levels are driven by commodity prices and in the case of Glencore, especially copper,” said Max Mihm, a Frankfurt-based portfolio manager at Union Investment, which holds Glencore bonds among assets totaling about $271 billion. “If prices fall further and stay low Glencore will need to do more to protect its IG ratings.”

A lot of big, diversified miners produce silver and gold as byproducts, so if, say, a copper mine closes because of that metal’s recent price collapse, that also takes precious metals out of the production stream and other things being equal raises their price. So far so good for gold bugs.

But fans of gold and silver streaming companies, including this writer, are watching the carnage in copper and oil with mixed emotions. Many of the miners now teetering on the edge of insolvency have cut deals in which they promise to sell their byproduct gold and silver to streaming companies in return for big up-front payments. That money may now be at risk.

Franco Nevada, the biggest streaming company, recently paid Canadian miner Teck Resources $610 million for a future share of the silver produced by the latter’s Peruvian mine. The number two streaming company, Silver Wheaton, has paid Glencore and Vale over $1 billion for portions of the gold and silver produced by some of their mines.

What happens if some of these miners subsequently go bankrupt? That’s not clear, but it can’t be good for the streaming companies whose cash will be tied up (at best) and might simply disappear.

Meanwhile, the never-ending precious metals bear market is producing a steady drumbeat of smaller gold and silver mining failures, some of which are streaming company partners. Most recently, Rubicon Gold fell to effectively zero after announcing that oops, its reserves were only one-tenth of what it had previously promised. Streaming company Royal Gold is on the hook for $75 million to this one.

Looking on the bright side, the streaming companies are highly diversified, with dozens of deals spread around the world. So the failure of any one — even a big one — probably isn’t an existential threat. It is, however, a near-term problem for buyers of these stocks. But also possibly a long-term opportunity if the streaming companies get swept down in the general carnage.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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John Rubino: The Most Interesting Story In Gold

By John Rubino, Sep 25, 2015

Or: Gold Miners’ Doom Is Streaming Companies’ Boom.

The gold and silver miners are in crisis, as metal prices hover around break-even for many and capital dries up for most. Dozens of companies are one or two quarters away from running out of cash and closing down, and their executives are ready to deal.

This is, in short, the part of the cycle when the smart money sets itself up to make a fortune in the next bull market. Chief among this bunch are the streaming companies that finance developing mines in return for a share of future production.

In good times they do all right but find it hard to cut deals on favorable terms because the miners have access to cheap capital from less discerning banks and equity investors. But at the bottom of bear markets — like now — the streaming companies find themselves virtually alone in the industry in having both cash and an interest in putting it to work. Miners who need financing to survive now have nowhere else to turn, and the streaming companies are feasting. Here’s a recent Bloomberg profile of the biggest of them:

Franco-Nevada Mulls Credit as `Hokey’ Streaming Goes Mainstream

For Franco-Nevada Corp., the best time to take on debt is at the bottom of a market. The day may be approaching for the Canadian royalty and streaming company as the commodity rout boosts demand for alternative funding.“There are so many opportunities out there, we might have to dip into our credit lines,” Chief Executive Officer David Harquail said in an interview last week from his Toronto offices. “The ideal is you lever yourself up at the very bottom of the bear market and hopefully, if you’ve called it right, then you really benefit as the market turns around.”

Streaming companies like Franco-Nevada, Silver Wheaton Corp. and Royal Gold Inc. give miners upfront payments in exchange for the right to buy metals at a discount in the future. Franco-Nevada also does royalty agreements, tying portions of production to land titles.

Plunging metal prices, with copper down 24 percent and gold 11 percent in the past year, combined with surging credit costs and volatile stock markets, have made streaming attractive even for majors such as Barrick Gold Corp. and Freeport-McMoRan Inc., giving the business more credibility.

“It’s something that’s gone from being seen as kind of hokey, to where now every major company and their CFO has to consider it among their financing options,” Harquail said.

Unused Credit
With no debt, about $610 million in cash, plus $110 million in marketable equities and an unused line of credit worth about $1 billion, the company has plenty of scope for more deals. “Without going back to the equity markets, right now, we’ve got one and a half billion to play with,” Harquail said.

Two types of deals have become more common in recent years, Harquail said. Medium-sized producers are turning to royalty and streaming companies for help buying assets from larger miners. Lundin Mining Corp.’s purchase of Freeport’s Candelaria copper mine, which Franco-Nevada helped finance in exchange for a gold and silver stream, is a case in point, he said.

Also, the largest producers are now willing to sell streams on their most prized assets, Harquail said. “We’re getting the opportunity to bid on some of the best mines in the world.”

For an idea of how much things have changed in mining, consider Glencore. With a 2011 market cap of $100 billion, it could have swallowed all the streaming companies without getting indigestion. Then commodities tanked and Glencore’s stock crashed — and now it’s scrounging for the funds to keep its mines afloat:

Glencore in talks on streaming deals on Chile, Peru mines

(Reuters) – Glencore is in talks with Franco-Nevada Corp, Silver Wheaton Corp, Royal Gold, and Osisko Royalties to sell portions of the future production of three South American copper mines. One source said on Wednesday the talks could expand to include other Glencore mines.

The longer the gold/silver bear market grinds on, the more desperate the miners become and the better deals the streaming companies receive. And when prices rebound — as they will (since if they don’t the mining industry will collapse and supplies will dry up) the streaming companies will generate massive cash flow.

Here’s what this meant for the market values of the biggest streaming companies following the 2008 precious metals bear market:

Streaming companies Sept 2015 revised

Will they do this again? No. They should do a lot better because the 2008 precious metals bear market lasted less than a year, which was too little time for the proper amount of panic to take hold. This bear market has been grinding on for three years, and now the miners are out of cash and desperate, which should allow far more ounces to be bought at bargain basement prices — and far more cash to be generated on those ounces when prices start rising.

This article is written by John Rubino of Dollarcollapse.com and with his kind permission, Gecko Research has been privileged to publish his work on our website. To find out more about Dollarcollapse.com, please visit:

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