A New Financing Mode For Mining Enterprises: Luoyang Molybdenum Signed The First Metal Flow Agreement In China

Luoyang molybdenum industry has become the first "crab eater" in domestic water test metal flow agreement.

On July 13, Luoyang molybdenum (03993, HK) announced that it had reached a metal flow agreement with triple flag Precious Metals Corp (hereinafter referred to as triple flag) and would receive a cash advance of US $550 million. According to the metal flow agreement, during the mining production period within the agreed mining area, Luoyang molybdenum will deliver part of the sales of gold and silver products produced by North parks copper gold mine in Australia to triple flag through metal flow transaction.

Li Chaochun, executive director and chief investment officer of Luoyang molybdenum Co., Ltd., publicly said: "this transaction enables Luoyang molybdenum to reach a long-term financing agreement at a very attractive cost of capital, and also highlights the great value of gold and silver by-products of North parks mine."

It is worth noting that this is the first metal flow agreement signed by domestic mining enterprises. "This innovative financing method has higher requirements for both parties' credit endorsement. On the one hand, most of the objects of the metal flow agreement are rare and precious metal by-products of mining companies, which need stable output; on the other hand, investors are interested in the future gold and silver rise space and lock prices in advance. " On July 14, Tian Tian, investment manager of a copper smelting enterprise in Anhui, said in an interview with 21st century economic reporter that if gold and silver prices continue to rise in the future, Luoyang molybdenum and triple flag will achieve a win-win situation by locking in the source and price of goods.

The first case in China

The so-called metal flow agreement refers to an agreement between mining companies and metal flow enterprises, which integrates pre-sale and financing. Investors usually purchase a certain proportion of future production of mining companies at a fixed price lower than the market value. The pre-sale products are usually the by-products of the main business of the mining company. For example, in the Luoyang molybdenum metal flow agreement, the gold and silver in advance are the by-products of the company in Australia. The minimum cost of capital delivery in the global capital market is not lower than that of other capital flow instruments.

Data show that the metal flow business was born in Canada in 2004. At present, the total agreement amount of the global metal flow business has exceeded US $9 billion, but it is still a relatively new and underutilized financing method outside the Americas.

Prior to that, most large metal flow orders were generated in the Americas. In August 2012, INMET Mining Co., Ltd. and Franco Nevada company announced that they had reached a precious metal flow transaction worth 1 billion yuan; on June 28, 2018, Wheaton Precious Metals Co., Ltd. and cobalt 27 Capital Co., Ltd. announced that the world's first cobalt flow transaction with Brazil's freshwater Valley subsidiary had been completed, and the transaction target was vale voisey's The Bay mine has produced 42.4% and 32.6% of finished cobalt ("cobalt stream") since 1 January 2021.

In order to reduce the contract risk, both parties generally set the production line according to the actual output, and if it is completed on time during the performance of the contract, the supply will be reduced accordingly. According to the total amount of gold delivered to Pax, the total amount of gold delivered to Australia will reach US $630000.5 billion according to the total amount of gold delivered to Pax in Australia. Luoyang molybdenum will receive 10% of the spot price of gold and silver for each ounce of delivery.

Tian Tian said the stability of the by-product production of the minerals involved played a crucial role in the agreement.

According to the data, the gold mine in North Wales is developed in the middle of South Wales. In November 2013, Luoyang Molybdenum Group acquired 80% of the North Pax mine held by Rio Tinto Group. As of December 31, 2019, the basic reserves of the North parks mine include 730000 tons of copper, 950000 ounces of gold and 8.2 million ounces of silver. The mine has a life span of several decades. In addition, it also includes resources of 2.67 million tons of copper, 3.11 million ounces of gold and 28.91 million ounces of silver. The explored land area is 1060 square kilometers, and the permitted drilling depth of the mining license can reach less than 200 meters, so the exploration potential is huge.

As for the financing of medium and small-sized mining companies, it is difficult to obtain further financing due to the fluctuation of the traditional financing products. Compared with the underwriting agreement, the metal flow agreement is not only a sales contract but also a financing agreement, which can help Luoyang molybdenum company monetize its future production before the mine starts production and obtain the funds needed for the project.

Financing double-edged sword

It is worth noting that with the launch of the unlimited quantitative easing policy in the United States, the global government's large-scale stimulus plan, negative interest rate policy, deflation and stagflation of trade, and the inflow of gold ETF, the gold price continues to reach a new high. At present, the gold price stands at 1800 US dollars / oz, close to the historical high, and the short-term gold price continues the fine-tuning trend among districts.

With the trend of gold price touching the ceiling, Luoyang molybdenum signed a metal flow agreement, which may be intended to avoid the risk of future gold price fluctuations, reduce the company's financing costs, and achieve the goal of reducing costs and increasing efficiency. But at the same time, it also means that it gives up the incremental gains brought by bullish gold and silver prices.

On the other hand, as a heavy asset industry, mining industry has cyclical fluctuation risk. Mining investment is generally a long-term investment, which has the characteristics of large investment amount, long cycle, many links and many influencing factors. Therefore, there is a certain investment risk when triple flag pays us $550 million in advance before the mine is mined. If triple flag can obtain stable supply in the future, it is possible to achieve win-win results.

Futures and futures are generally traded through the resources of the mine. Luoyang molybdenum industry obtained stable cash flow through the contract, but also gave up the additional income brought by the possible rise of gold and silver price in the later period In the 21st century, the investment in the company is more specialized in the analysis of the investment in precious metals.

According to public information, triple flag is one of the most important precious metal flow and equity investment companies in the international market. It has customized financing schemes for the metal and mining industry, and currently has 40 related assets in the world.

However, Luoyang molybdenum also said in the announcement that the transaction price is the result of comprehensive consideration based on the current price and future estimated price of gold and silver. Gold and silver are by-products of the company, accounting for a very low proportion of the company's total revenue, and their price fluctuations will not have a significant impact on the company's business.