Investors see opportunity as miners seek alternative finance

* Royalties, streaming attract large investors

* Audley Capital's Julian Treger takes CEO job at AngloPacific

* BlackRock sees potential for more royalty investment

By Karen Rebelo and Clara Ferreira-Marques

BANGALORE/LONDON, Oct 31 (Reuters) - From fund giantBlackRock to activist shareholder Julian Treger, mininginvestors seeking predictable returns and better cash flows arestepping into mine finance.

Mine developers often face funding gaps because of ashortage of bank finance and lacklustre public markets. This hasleft alternative sources of financing - royalty deals, stakesales or debt that converts into shares - accounting for anincreasingly significant proportion.

Among the alternatives are mine royalty agreements -favoured by BlackRock and the focus of UK-listed Anglo Pacific, which Treger is now running. These deals offer cash inexchange for a share of future revenues.

"The scarcity of capital today... has created a hugeopportunity for non-traditional sources of finance," saidCatherine Raw, portfolio manager for the BlackRock World MiningTrust. "That is where we step in."

For investors, a royalty deal means regular future paymentsand the ability to benefit from a rise in commodity prices, anincrease in reserves or better production capacity. All witharguably less risk than a share investment and no exposure topitfalls like poor dividends, or cost inflation.

For miners, the advantage is a source of upfront cash withless dilution than through selling shares at depressed prices.

North American firms like Franco Nevada or SilverWheaton have long struck streaming deals, providingcash for future production in return for exposure toby-products. These deals have been for precious metals,particularly when they are produced as a by-product by bigminers focused on base metals or bulk commodities.

Royalties though were less attractive in better times, asminers sought to avoid eating into revenues from their mines andset tough terms. They are now within reach for investors.

BlackRock secured its first royalty agreement last year,with a deal that paid London Mining $110 million inexchange for 2 percent of iron ore revenues from its Marampamine in Sierra Leone. The deal became one of the World MiningTrust's biggest investments, just below its equity investment incopper miner First Quantum.

It is also finalising a more modest, $12 million deal withcopper and gold firm Avanco Resources.

"You are getting a slightly more interesting risk/rewardscenario through investing in royalties," Raw said.

And BlackRock, the world's largest asset manager, is pushingfurther into royalties. In August, it sought approval frominvestors in its one billion pound World Mining Trust toincrease its ability to invest in non-quoted investments,specifically in order to bet further on mining royalty deals.

These already make up almost 10 percent of the trustportfolio, but the portion can now be doubled.

In a further reflection of the growing interest inroyalties, Treger last week took the reins as chief executive ofAnglo Pacific, the only UK-listed royalty firm. He also took aroughly 1 percent stake in the firm, which in 2012 reported 11employees, 4 of whom are executive directors.

Treger made his name as an activist investor who playedhardball with executives at firms including British departmentstore Liberty.

"I think this is a very interesting time...because there'sobviously a shortage of capital both equity and debt in themining space," he told Reuters in an interview.

"Therefore together with a significant amount of disposalsoccurring by the majors, I think there is a real opportunity todo some very interesting transactions."

STILL GROWING

Alternative finance remains a tiny sliver of the financingused by the industry, which still relies more heavily ontraditional options like equity, debt, bank financing. Royaltiesand streaming deals - similar to royalties but more frequentlyrelating to by-products - also face competition from increasedinterest from strategic investors and private equity.

According to consultants PwC, in 2012 only 1.1 percent ofall money raised was from royalty and streaming, compared to 0.8percent in 2011 and even smaller slices before that.

But there is room for growth.

Treger - co-founder of Audley Capital and known for usinginitially small stakes to push for change, as with Western Coal,a deal that netted sale proceeds of more than $700 million -sees opportunity to refocus and scale up Anglo Pacific, whosecore asset is currently a slice of royalty receipts from RioTinto's Kestrel coal mine in Australia.

Last week, it struck a partnership deal with FlowStream, astreaming and royalty firm focused on oil and gas.

There are shortcomings, of course.

Royalty deals are not liquid - unlike shares - and cannot besold on by investors. For miners, there is an effective limit tohow much revenue they can hive off in advance, without hurtingthe ability to raise debt or equity in future.

"There is only a certain level of royalty that a project cansupport before you're using all your profit margins and you'renot returning anything to shareholders," said Dan Betts, chiefexecutive of Hummingbird Resources, which last yearstruck a $15 million royalty financing deal with Anglo Pacificto fund its Dugbe 1 gold project in Liberia.

"I think that in every project there's a balance."