Silver Wheaton (NYSE: SLW), Franco-Nevada Corporation (TSX:FNV), and Royal Gold (NASDAQ:RGLD) are precious-metals streaming companies. That's put them in position to prosper as miners around the world struggle. While 2015 was a big year for this trio, the future could see a slowdown. Here's why:
Mining is expensive work, with the cost of new mines and expansions showing up well before any financial benefit from new production. The primary ways to pay for growth initiatives are issuing debt, selling stock, or taking out loans from banks. Each can be less than desirable for many reasons, ranging from increased interest costs, diluting current shareholders, and, frankly, the ability to get access to capital at reasonable rates (or at all).
That's why miners often turn to streaming companies. Streaming companies such as Silver Wheaton provide miners upfront payments in exchange for the right to buy silver and gold in the future at reduced rates. For example, Silver Wheaton's costs for gold are around $400 an ounce. Royal Gold's costs are about $370 an ounce. Franco-Nevada, meanwhile, typically makes streaming deals in the $400 range, but also makes use of royalties, which have slightly different financial dynamics. At the end of the day, however, all three are getting gold at a cost that is well below current historically low gold prices.
This, however, is a win/win, because the miner gets cash without increasing its ongoing costs. And, in the case of new mines, there's really no impact until the mine starts producing. The streamers, meanwhile, lock in low-cost gold and silver that they can sell for years into the future for what, at the end of the day, will likely be a relatively low cost today.
Debt and stock is key
However, the general business model for streaming companies is to cut deals using revolving credit agreements and then tap the capital markets to pay down the revolver. So how much room is left on their revolvers will be a big indication of how much deal making can get done. After a big 2015, there's not much room left.
Silver Wheaton, for example, did a couple of big deals last year, each worth around $900 million -- that's a $1.8 billion year. Based on the company's revolving credit line at the end of the third quarter, it looks like it started 2016 with only around $500 million available. That's enough to do some deals, but not on the size of 2015's transactions. That may help explain why it inked a diminutive $160 million agreement in January, a fairly small deal by recent standards. This deal probably puts Silver Wheaton's cash balance at around $350 million or so.
Royal Gold, meanwhile, ended 2015 with around $350 million left on its revolving credit facility. That's after around $1.4 billion in deals last year. A couple of those deals were fairly large, but two were in the $100 million to $200 million range. So, it looks like Royal Gold won't be looking for big game, either, but based on its recent history it could snag a smaller deal or two.
Franco-Nevada, meanwhile, ended the third quarter with around $270 million available on its credit facility. The company's big transaction last year was an around $600 million silver streaming deal with Teck Resources in October. However, it just inked a $500 million deal with Glencore and is set to tap the capital markets to help pay for it.
It went in looking to raise enough through a stock sale to cover the deal, but has since upped that total to $800 million. That should give the company some extra firepower as we work through 2016 and means it probably has more capacity than its brethren, but still not enough for a billion dollar deal like the ones Silver Wheaton inked in 2015.
Basically, it looks like the major streaming companies are running short on cash to do the giant deals that made 2015 so exciting. So 2016 could be more about digesting recent deals than writing new ones.
The thing is, big miners continue to struggle with a moribund commodities market. So it's still a good time to make moves. That's why Franco-Nevada is in the process of raising capital after agreeing to a decent size streaming deal with Glencore.
You'll want to watch carefully to see what Silver Wheaton and Royal Gold do on the financing front. If they can free up more room, they might head back into the market for bigger deals, following along with Franco-Nevada. However, it's worth noting here that Silver Wheaton is actually looking to buy back its stock, which suggests it lacks the access to equity markets today that it would want to make a deal happen.
All of that said, if the right deal came along, the three of these companies could, together, put in a sizable bid without raising any new capital. So don't count them out, but don't go in to 2016 expecting anything nearly as exciting as 2015 on the streaming front.