Tag Archives: streaming companies

John Rubino: Now We Can Finally Start Buying The Gold Miners

By John Rubino, Feb 26, 2016

For most of the past few years it was easy to make the case that precious metals mining stocks were cheap. They’d suffered through an epic bear market, and in some cases were down 90% or more from their 2011 highs. How much more could they fall?

But through it all, Sprott Asset Management’s Rick Rule — a voice of reason in this frequently-unreasonable sector — was warning investors off of the miners, saying that “capitulation” hadn’t yet occurred and until it did there remained way too much downside risk.

Turned out he was right. The miners just kept falling through 2014 and most of 2015, while a lengthening list of once-promising juniors died quiet deaths, taking 100% of their investors’ capital along for the ride. Here’s a chart of the HUI index of gold miners priced in gold, showing that even as gold was falling the mining stocks were declining faster.

Gold vs HUI Feb 16

But the bottom, says Rule, has finally arrived. In a long interview just released by Kitco, he sounds unreservedly bullish. Some excerpts:

Given the enormous size of the US treasury market and the small size of the gold market, a small transfer of funds from Treasuries to gold — which we are seeing in the last three months — has an outsized impact on the gold market. Gold and gold equities currently occupy between 1/4 and 1/3 of 1% of the savings and investment matrix in the US, while the comparable number in 1980 was 8.

What I am arguing for is a total or partial reversion to the mean which if it occurred would take gold as a part of the savings and investment matrix from 1/4 or 1/3 of 1% up to as high as 1.5%. That relatively small gain in market share would have an absolutely dramatic impact on gold and gold stocks. Will it occur immediately? No. Might gold retest support before it continues? Yes. But I believe that we are beginning to witness a little tiny bit of disintermediation out of Treasuries in favor of gold, and I think that is extremely bullish.

Another thing to remember is that the certificated gold products, the ETFs, GLD in particular, have witnessed dishoarding. That is they have witnessed really substantial selling for 18 months. But lately there has been an absolutely incredible influx of cash into GLD. The consequence of that is that GLD has to take on gold or has to take on gold depository receipts.

Remember that for the last six or seven years the paper market has driven the physicals market and the paper market itself has been driven by the ETFs. ETF demand is positive now rather than negative, so the ETFs are stocking rather than destocking gold. I am inclined to believe that the paper markets will now take gold up the same way the paper markets took gold up in 2009 and 2010 rather than taking gold markets down.

The gold mining industry had a very close brush with capital inadequacy and the increase in demand for gold equities is going to be met by an absolute rush of bought deals among the seniors and intermediates. I think the offer that you saw the other day of Franco Nevada is indicative of what you are going to see. [So] no hurry on the big and intermediate miners. Longer term (a year or year and a half), gold miners at all levels I think will be relatively attractive.

I expect the mining industry to avoid making disastrous mistakes for at least two or three years. The consequence of an increasing gold price and increasing free cash flow per share that is not wasted for two or three years should be an increased cash flow on a per share basis. I suspect that an increasing gold price and increasing corporate performance will have a very good impact on gold equities.

Remember that when gold moves, the first thing that moves is gold itself. Listeners underinvested in gold need to address that and begin to buy.

The second place that you go is, of course, the high-quality senior producers with balance sheet flexibility that can generate free cash and growing revenues. It is important that you do not buy the waterfront; that instead you buy the best issuers. I would draw your attention to names like Franco Nevada, Goldcorp, Randgold; companies that have a history of operational efficiency, capital discipline, good balance sheets, and relatively low costs. One then can apply the same discipline in the intermediate size producers which generally come up after the big producers.

Of course, the most spectacular moves are always going to be in the speculative stocks. I suspect that we will not see a move, a real move, in the speculative stocks for as much as nine months. Of course, extra caution is required buying the speculative names. But for those listeners who have been in the game as long as some of your listeners have, who have paid the tuition, who pay attention to the numbers with regards to the juniors rather than the narratives, I think this will be a spectacular market. It is really important to understand the depth and severity of the bear market and what that means for the bull market.

In the juniors, measured by the TSXV [Toronto Venture Exchange], is a market that fell by half and then it fell by half again and then it fell by half again. This is a market that is down by 90% in real terms which means it is precisely arithmetically 90% more attractive than it was in 2011. This is a market that can double and make up as a consequence of doubling 15% of the decline that it suffered. This is a market that has a long, long way run if you select your stock correctly.

As for the royalty and streaming companies, remember that they have no sustaining capital requirements, so their margins are incredible. They are in one sense better, pure vehicles with less operational and implementation risk. But what is much more important is the once in a generation opportunity, an arbitrage opportunity. The base metals mining industry is producing virtually every commodity that they produced at a loss right now. The need for capital in the base metals mining industry is extreme and their cost of capital is extraordinary.

Precious metals by-product streams in a base metals cash flow wrapper, a wrapper like Freeport or Vale or Vedanta or Teck, command a six or seven times cash flow multiple. But that same cash flow stream stripped out, made into a precious metals stream, in a company like Royal Gold or Franco Nevada or Silver Wheaton commands a fifteen to seventeen times multiple. The base metals mining industry needs to find $10 or $12 billion in equity for sustaining capital investments and debt pay downs, and the lowest cost of capital available to it is by selling these precious metals streams. At the same time that the sale of this stream is accretive to the base metals company, it is also accretive to the precious metals streaming company by giving them access to sustainable visible cash flows for very long periods of time on very high quality mines.

The recent success you saw in the bought deal by Franco Nevada and the upcoming, I believe, debt issuance by Franco Nevada, herald a period where as much as $10 or $12 billion worth of by-product precious metals streams passes from base metals mining companies to precious metals streaming companies which will set up the visibility of per share cash flows and per share dividends in the streaming companies almost irrespective of the precious metals price. If you get this increased quality and increased visibility of a revenue stream and you combine that with the upside in precious metals prices, both in terms of the free cash flow that these companies enjoy from the mineralization that is already economic and combine it with the optionality of mineralized material in these mines that is not economic at $1,100 but would be economic at $1,500, this has the potential to really transform the streaming business which is already very attractive in an absolute sense and particularly attractive in a relative sense against other mining companies.

I love optionality. It has treated me so well. Just to acquaint your listeners with why the subject means so much to me, I think back to the last cycle, 1998 to 2002, and, frankly, to the cycle before that, 1991 to 1992, I can think of optionality companies like Silver Standard, $0.74 to $45; Pan American Silver, $0.50 to $45; Lumina Copper, $0.65, if my memory is correct, to $160. This is not a typo. It is pretty simple. At the bottom of the cycle there are very large deposits that were drilled off with the application of tens of millions of dollars that have no net present value at the then prevailing commodity prices. These deposits are occasionally sold for some amount of money that at least resembles the net present value which is zero.

The right thing to do right now for these companies is to acquire additional ounces and do nothing else. Develop the projects later as the commodity price rises and the attractiveness of the deposits is obvious to the markets and the cost of capital goes down. I suspect – I do not know because past is never completely prologue – but I suspect that the easiest and the most dramatic upside that we will experience in this market other than the occasional discovery will be from optionality, provided that the management team really understands how to deliver the benefits of optionality to the owners of the company, the shareholders.

I was at Roundup, a technical conference in Vancouver, and there was a couple of issuers there, Kootenay Silver and Northair Mines, that announced an amalgamation. I think the combined market caps of the companies were about $8 million, and a $30,000 buy order took the price of Kootenay Silver from $0.20 to $0.32. We are in a market where, yes, the buyers are exhausted but the sellers are exhausted, too. You will see evidence of $3 and $4 million market capitalizations in companies that used to be $70 million market capitalizations getting outsized moves simply because there is a bid of some sort.

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: 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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