Streaming Arrangements: A Mining Project Finance Alternative

Profession:Pinheiro Neto Advogados Associados
 
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Article by Adriano Drummond Cançado Trindade and Graciema Amaral de Almeida1

The structuring of legitimate business transactions may often face obstacles in legal restrictions, which set hurdles or even prevent their implementation. This is especially the case of the so-called "atypical contracts," in which case the absence of specific legal provisions may present difficulties, particularly when these entail an international flow of currency and goods, thus triggering foreign exchange effects. However, once the regulatory issues are resolved, these innovative structures may be good alternatives to stimulate certain economic sectors.

This is the case of streaming arrangements, which are contracts for ongoing supply of mineral production under which, upon advance payment of a premium, the buyer agrees to purchase, at a fixed, discounted and predetermined price, all or part of the mineral production to be extracted by a mining company during a certain period or even throughout the life of the mine, until the mineral deposit is depleted. The mining company receives an upfront payment, which enables it to develop, construct and operate or expand the mine. This arrangement allows the mining company to capitalize on the basis of proven but still unexplored mineral reserves at a cost usually below that of loans.

Streaming transactions have become more frequent in the mining sector, as they benefit the mining company, which may avail itself of an additional fundraising mechanism to develop its mineral project and will have a practically certain purchaser for all or part of its future production (depending on the agreement). Moreover, contrary to capital investment financing, streaming arrangements enable mining companies to minimize their risk of dilutions to shareholders and avoid debt financing costs, particularly at times when credit access conditions are unfavorable.

Streaming transactions may also benefit the purchaser in a scenario of increasing commodity prices, as it will be able to freeze the price of a future mineral purchase tending to escalate, and resell such product at market price. Similarly to financial derivatives, streaming arrangements fix the mineral price, avoiding the purchaser's exposure to possible upward market price movements. Differently from hedge transactions, however, streaming transactions usually contain a provision that payment to the purchaser will not be made at a predetermined price but rather at the lowest...

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