As world-class deposits become harder to find and end users increasingly demand ethically-sourced products, both governments and the private sector are creating new strategies to assure access to minerals in the long term. Some do so through offtake contracts, others through metal streaming deals. With everyone wanting a piece of the pie, what are the new options available for miners?
Although the streaming model is now well-know in the industry, it was only introduced for Durango’s San Dimas mine in 2004 by Silver Wheaton, now Wheaton Precious Metals and one of the most successful silver streamers in the world. The concept is based on long-term supply agreements, which benefits both parties as the miners do not need to worry about finding a buyer for their product, and the streaming company can obtain the metals at a below-market value. Of course, there is also a great deal of risk involved for both parties given the price of metals can change drastically, but this also brings a great deal of reward.
The San Dimas mine was recently acquired by First Majestic Silver, and the streaming deal was re-negotiated:
- Wheaton Precious Metals will obtain 25 percent of gold production plus an additional amount of gold equal to 25 percent of silver production converted to gold at a fixed gold to silver exchange ratio of 70:1 from San Dimas, with provisions to adjust the gold to silver ratio if the average gold to silver ratio moves above or below 90:1 or 50:1, respectively, for a period of six months
- For each ounce of gold delivered, Wheaton International will pay to First Majestic a production payment equal to the lesser of US$600/oz, subject to a 1 percent annual inflationary adjustment, and the prevailing market price
Another way to secure long-term sources of supply is through offtake agreements, and now these are appearing more and more between miners and technology companies, cutting out the middle man: the metals trader. A successful example is the partnership between Avino Silver & Gold Mines and Samsung C&T. The agreement gives Samsung exclusive access to Avino mine concentrates until Dec. 31, 2021 and includes a US$10 million advanced prepayment for concentrates to Avino.
Azure Minerals is equally starting to catch the attention of the industry. The Sara Alicia project has the potential to become the highest-grade cobalt exploration project in the world. “It is especially appealing given the increased demand for cobalt, so a German investment bank and an investment fund from New York have invested in Azure because of this project,” states Tony Rovira. “We are convinced that cobalt is going to experience high demand over the next couple of years. The price rose from US$30,000/t in early 2017 to more than US$90,000/t in early 2018, an indicator of the expectations for this metal.”
The star metal of the moment is lithium, and Mexico holds potentially the world’s largest deposit. Although this project has taken many years to get off the ground, it is now in the development stage and companies are already scrambling to secure offtake agreements for the coveted metal. The Sonora Lithium mine, owned by Bacanora Lithium, already has agreements with Japanese company Hanwa and investment fund BlackRock. Not only this, but the Sovereign Wealth Fund of The Sultanate of Oman (SGRF) also signed an offtake agreement for 13,000t/y of lithium carbonate, including a conditional commitment to invest US$65 million in the company.
A more traditional model, this is the ideal option for junior exploration companies that find a promising deposit, but either do not have the funds, expertise or the desire to take the mine through the development process. The exploration company holds the mineral rights and explores until it has found evidence of a valuable asset. It then promotes the project to larger explorers or operators. An agreement is reached with the larger company committing a certain level of investment in exchange for the rights to the mine should a discovery be made. The smaller company normally retains a production interest.
Junior explorer Kootenay Silver and operator Pan American Silver have come to this kind of agreement over the Promontorio-La Negra asset in the Cajeme municipality of Sonora. Through the agreement, Pan American has four years to earn 75 percent of the project and must invest US$8 million and pay Kootenay another US$8 million. “After four years, Pan American must supply all the money for any further expenditures occurred on the property but is allowed to recover these expenditures from 75 percent of our share of production if it is successful in building a mine,” explains Kootenay President and CEO James McDonald. “This is good for us because it mitigates the financial and technical risk faced by Kootenay.”