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 between market value and the amount agreed per production volume. Because of these specific features, purchasing companies that adopt the streaming model have reported high return rates, particularly when the mine's total production exceeds initial expectations.
Naturally, streaming transactions involve certain risks, which must be assessed. One of them is the possibility of the production being none or insufficient, preventing the seller from delivering the mineral as agreed. Purchasers reduce their exposure by demanding guarantees traditionally offered to financial agents in financing transactions. Another risk is market volatility, as oscillations may affect the profit margins originally envisaged by the purchaser and ultimately render production and, consequently, streaming itself, impossible. This is a well-known risk in the mineral sector that calls for adjustments to market movements by mining and streaming companies alike.
There are still legal risks, often created by legislation that fails to properly regulate the practice of streaming. Because of the lack of proper regulation for this type of transaction, one of the major hurdles to execution of streaming arrangements between a Brazilian mining company and a foreign streaming company is the absence of a specific foreign exchange classification that would enable registration of the upfront payment made by the purchaser to the seller, as a premium, in the Central Bank of Brazil (BACEN) electronic system for Financial Transactions Registration (ROF). In recent cases, however, a BACEN precedent has been adopted, enabling the closing of foreign exchange transactions and the inflow of funds.
Other aspects that still need a more accurate regulatory framework involve taxation of the premium paid by the purchaser to the seller, given that the legal nature of this premium may generate discussions, which will have tax effects, and that the volume of the production to be sold in the future is uncertain, as mineral deposits are usually reassessed during the mining operation. Within this context, a clear definition of the possibility of the premium amount being taxed throughout performance of the agreement – and, consequently, throughout production – would contribute to making streaming more attractive to Brazilian mining companies.
Finally, because streaming agreements entail a commitment to sell all or part of the production of a mine to a purchaser, legislation should also make possible registration of this type of agreement with the National Mineral Production Department - DNPM in order to protect the rights of the purchaser and of third parties with which the mining company may trade.
Be that as it may, the credit restrictions recently faced by the mineral sector and the hike in the prices of certain minerals, such as gold, are turning streaming arrangements into a good alternative for investors that trade in gold and some other commodities on the international market, as well as for Brazilian mining companies seeking financing for their projects. Although the gaps in Brazilian regulations are not sufficient to render this type of transaction unfeasible, improved regulations would eliminate unnecessary legal risks in streaming agreements.
Footnote
1. Counsel and Associate, respectively, at Pinheiro Neto Advogados.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
