Streaming and royalty arrangements

How do streaming arrangements work?

A streaming company pays the miner an upfront deposit, often to fund construction. In return it has the right to buy a fixed percentage of a metal produced by the mine, for the life of the mine or until a set quantity is delivered, paying an ongoing price per ounce that is far below the market price, such as a fixed amount or a percentage of spot. The streamer bears the risk that the mine produces less than expected and typically has no right to be repaid in cash if production stops, unless the miner defaults or the mine is abandoned.

Why do most miners use IFRS 15?

When the miner settles the stream by delivering metal it produces, the arrangement is a contract to sell its own output. The deposit is consideration received in advance for future deliveries, a contract liability. Because the metal will be delivered over many years, the contract usually has a significant financing component: the miner recognises interest expense on the liability, and that interest increases the revenue recognised as metal is delivered. Where the ongoing price depends on spot prices, or the quantity on the mine's output, part of the consideration is variable.

Streaming arrangements: a gold stream example

A copper miner receives a deposit of US$ 200 million for the right to buy gold produced as a by-product, expected to total 1,000,000 ounces over ten years, at 400 dollars an ounce. Ignoring the financing component for now, each ounce delivered draws down 200 dollars of the deposit. In year 1, 100,000 ounces are delivered.

With the financing component, the liability also grows each year by interest at the rate implicit in the arrangement, charged to finance costs, and the deposit drawn down per ounce rises accordingly, so total revenue over the stream's life equals the deposit, the interest on it and the cash price paid. Analysts often compare the effective revenue per ounce with the spot price to see how much value the miner gave up for its funding.

What happens when reserves or the mine plan change?

The rate at which the deposit is drawn down depends on the expected total deliveries. When the reserve estimate or the mine plan changes, the miner updates the expected deliveries and recognises a cumulative catch-up adjustment to revenue, so that the revenue recognised to date reflects the new estimate. A large increase in reserves therefore reduces revenue in the year of the change, and a decrease increases it, which can surprise readers.

When is a stream a financial liability?

When the miner has a contractual obligation to deliver cash or another financial asset, for example because it must pay the streamer cash if production falls short, the deposit is repayable on specified events within the miner's control, or the stream can be settled with metal bought in the market. Then all or part of the arrangement is a financial liability under IFRS 9, and may contain embedded derivatives linked to metal prices. The terms need careful reading, and the judgement is usually disclosed.

How are royalties sold for cash treated?

A miner that sells a royalty, such as a net smelter return royalty of 2% of revenue from the mine, receives cash now in exchange for paying cash to the royalty holder in future. Because the miner is obliged to deliver cash, the royalty is usually a financial liability under IFRS 9. Its payments vary with production and prices, so it is measured either at amortised cost with estimated cash flows revised through a catch-up adjustment, or at fair value through profit or loss where it qualifies, depending on its terms. A royalty paid in metal can look more like a stream.

What should be disclosed?

The nature and terms of each stream or royalty, the accounting treatment and the judgement behind it, the balance of the contract liability or financial liability, the interest recognised, the effect of changes in estimates, and how much future production is committed. See mining accounting and variable consideration.

This guide is general information. It is not tax or legal advice for your situation.