Streaming finance agreements

Introduction

Streaming agreements, although not new to the mining sector, are increasingly relied on by mining companies as a primary source of financing. As always, in parallel with the increase in popularity of particular transactions, a corresponding increase in disputes between counterparties is seen. This article explores the nature of streaming agreements, the types of disputes that can arise and how contracting parties can take steps at the outset to put themselves in the best position to mitigate disputes risk.

Streaming agreements

Under a typical mine streaming agreement, the owner or seller, as they are often described in the streaming agreement, agrees to sell a portion of the future production of a mine in exchange for an upfront payment and a significantly discounted purchase price upon delivery of the mineral. Streaming agreements tend to be long term and can last the entire life of a mining project.

Streaming agreements are an attractive form of financing for owners because they provide a form of non-equity financing that injects cash into a project. The upfront payment (deposit) paid by the buyer is typically applied by the mining company towards the construction or redevelopment of the mining project. For buyers, streams are attractive because they provide potential upside on increases in commodity prices and secure long-term supply of minerals. The buyer also receives the benefits from production and exploration growth without having any ongoing capital-expenditure obligations.

The core terms of streaming agreements include the deposit (i.e. the upfront payment to the seller, which in some instances may be staged, milestone-related installments); the price to be paid for the mineral on delivery (typically a percentage of market price, but can also be a fixed price); and the delivery terms for the mineral, which can also take the form of a tradable credit. The buyer often takes security over the seller’s assets to secure performance and will look to take control over the company and the mine in a default scenario. Buyers frequently enter into heavily negotiated inter-creditor agreements with other lenders to establish each party’s rights to the seller’s assets in a default scenario.

Each streaming agreement is unique and complex and can have significant implications for the parties, especially with respect to tax. Specialized advice is required on terms and conditions to carefully consider the consequences and implications of the various commitments.

Considerations relating to disputes involving streaming agreements

Streaming agreements generally give rise to complicated, high value, high-stakes, multi-jurisdictional disputes. Unlike other forms of financing, international arbitration is often chosen as the dispute resolution mechanism for such disputes. A key reason for this is because streaming disputes benefit from being resolved by sophisticated and specialized arbitrators chosen by the parties for their familiarity with the issues that underpin the dispute, such as technical problems at the mine site, the application of pricing formulae, or the quality of minerals delivered under the stream. Another advantage is that arbitration allows parties the freedom to tailor the arbitration procedure to meet the specifics of the dispute and the commercial needs of the parties. Furthermore, as buyers and sellers are often in different jurisdictions (and not infrequently involve difficult or emerging markets), contracting parties are attracted to the benefits of resolving disputes in a neutral forum (outside state courts) and one which offers procedural safeguards that may not be available in domestic courts. Last but not least, the ease of enforcement of arbitration awards globally under the New York Convention is another fundamental advantage over litigation, which does not have any equivalent global regime for enforcement of foreign court judgments.

A carefully tailored arbitration clause at the outset is critical to setting in place the key components of the arbitral process, which will ensure efficient and effective dispute resolution proceedings once a dispute arises.

The suite of security documents that accompany streaming agreements, including the instruments that create security interests and any inter-creditor agreement that establishes creditors’ rights, also often include arbitration clauses. In some circumstances, creditors may refer questions of interpretation of the security instruments to arbitration. However, in practice, creditors may wish to waive their right to arbitrate and instead consent to have disputes over establishing security rights resolved before a court in the context of insolvency proceedings. Depending on the circumstances, this could be more efficient in time and costs as all concerned parties are together in one proceeding. Considerations of this type must also be addressed at the drafting stage and reflected in a properly tailored dispute resolution clause.

Investor-state disputes

Another serious consideration for buyers under streaming agreements is the potential of a total loss of the mining project due to an unlawful expropriation or other taking by a host government. In such cases, the seller will be forced to default under the streaming agreement, the project will be lost, and often the only asset of the seller upon which the buyer may derive any value as a creditor is the legal claim the seller has against the government. After executing on its security in insolvency proceedings, the buyer/creditor may find itself owning the seller or may have the right to any monetary damages amounts collected by the seller following an arbitration. Therefore, at the outset, the value of the buyer’s security interest in the seller depends, at least in part, on the seller’s ability to seek a remedy against the host government. In many instances, there is no remedy available under domestic law or under the contract, alternatively, where such remedies are in theory available they are not enforceable in practice due, for example, to state control of or interference with domestic judicial processes. Potentially, however, in such circumstances the affected party may have additional alternative remedies against the host government – outside the contractual regime – under an investment treaty, enforceable via investor-state arbitration.

Prospective buyers under streaming agreements should therefore investigate at the outset of the transaction (as part of their due diligence) whether the seller has structured its investment to take advantage of treaty protection. Likewise, prospective buyers should investigate if the company has a form of stabilization agreement that provides for protections against state conduct as well as international arbitration with the government under the terms of a contract. If carefully implemented, such provisions provide a backstop remedy to an otherwise total loss. However, buyers should be aware that steps prior to the initial investment, or indeed the project, are often necessary in order to take advantage of these rights later when a dispute arises.

Conclusion

Streaming agreements are multifaceted agreements that can give rise to complicated high-value disputes. International arbitration can provide an effective dispute resolution mechanism if the parties tailor the procedure to their needs. Specialized disputes counsel should be consulted at an early stage to avoid problems at the time a dispute arises. The value of a streaming investor’s security can be influenced by how the seller has structured its investment and whether the seller has investment treaty protection or the ability to assert rights under a stabilization regime. Such protection allows buyers to seek a remedy in the event of total loss of the mining project due to unlawful government action in the host state. A buyer/creditor should carefully assess the existence and strength of a claim, and exploring various options for seeking recovery before proceeding.