Silver Wheaton Streams Luring Largest Miners

Silver Wheaton Corp. (SLW), the world’s largest precious-metals finance firm, said the biggest miners have joined the queue of capital-hungry companies requesting funding as they seek to improve returns.

Silver Wheaton, which helps miners pay for projects in exchange for a discount on their silver and gold output, has traditionally talked to smaller miners unable to tap debt and equity markets, said Chief Executive Officer Randy Smallwood. The Vancouver-based firm has seen increased interest recently from metal producers with market values “up into the tens and hundreds of billions,” he said.

“What we’ve seen over the last four months is that even the large companies are all of a sudden receptive” to Silver Wheaton’s funding model, known as streaming, Smallwood said yesterday in an interview at Bloomberg’s Toronto office. “Doors that we’ve been knocking on for a long time, they are all of a sudden knocking on our door.” He declined to name any projects or companies.

Deals with larger miners can benefit Silver Wheaton because they tend to have lower risk, and there are more opportunities for sizable transactions, said David West, an analyst at Salman Partners Inc. in Vancouver.

“Companies more and more are looking to companies like Silver Wheaton to access funds to build their mines,” West, who rates Silver Wheaton a “top pick,” said yesterday in a telephone interview. “They have a great model.”

Outperforming Peers

Silver Wheaton, with a market value of C$12.3 billion ($12.3 billion), has outperformed both silver prices and producers of the metal. The company rose 22 percent in 2012, compared with an 8.3 percent increase in silver futures in New York. A 22-member Bloomberg index of silver companies including Silver Wheaton rose 0.6 percent last year.

Silver Wheaton fell 1 percent to C$34.71 at the close today in Toronto. Twelve analysts have a buy rating on the shares, two have holds and one has a sell, according to data compiled by Bloomberg.

Under pressure to employ capital more efficiently, producers are increasingly looking to sell so-called streams of silver produced as a byproduct at their base-metal or gold mines in the same way they’d dispose of a non-core asset, Smallwood said.

‘Step Up’

“The quality, the tenor of the projects that are being presented are definitely a step up from even what we’ve seen in the past,” the CEO said. “When I look at the opportunities that we have out there right now, I think for the first time ever I might not be able to pay for them all, there’s that many good opportunities out there.”

Smallwood, 48, who was trained as a geological engineer, said the streaming model is becoming more attractive to mining companies as it becomes better understood and accepted as a source of mining finance.

Silver Wheaton and competitors including Toronto-based Franco-Nevada Corp. (FNV) and Denver-based Royal Gold Inc. (RGLD) will probably “continue to do well” in 2013, said Cosmos Chiu, an analyst at CIBC World Markets in Toronto.

“There will still be a certain segment of investors that want a less risky way of investing in the gold and precious- metals markets” than in the miners themselves, Chiu said in a phone interview last week.

The company has capacity of “well over $1 billion” for potential deals, Smallwood said. Silver Wheaton has a $400 million revolving debt facility, he said, and had $555.1 million in cash at the end of the third quarter.

Debt, Equity

“We have a lot of capacity,” Smallwood said. The company could raise additional funds through debt or equity, he said. Silver Wheaton isn’t interested in buying streams of base-metals or energy production, he said.

Silver Wheaton was started after its precursor company, Chap Mercantile Inc., bought silver production in 2004 from Wheaton River Minerals Ltd., a Canadian gold producer that subsequently was acquired by Goldcorp Inc. (G) Smallwood was a founding member of Silver Wheaton and became CEO in April 2011.

Silver Wheaton’s only transaction last year was a streaming deal with Toronto-based HudBay Minerals Inc. (HBM) to help it fund construction of its Constancia copper mine in Peru. Silver Wheaton agreed to pay $750 million for the right to buy all the gold and silver produced at HudBay’s 777 mine until Constancia is completed or until the end of 2016, and 50 percent of the gold and all of the silver in future years. Silver Wheaton will buy all of the silver produced at Constancia once it starts up.

Pascua-Lama

One of the company’s biggest transactions to date was a September 2009 deal to buy silver from four Barrick Gold Corp. (ABX) mines, including 25 percent of the silver from the Pascua-Lama project on the Chile-Argentina border. Silver Wheaton agreed to pay Barrick $625 million over three years and will get silver at a maximum price of the inflation-adjusted equivalent of $3.90 an ounce.

Silver futures for March delivery fell 2.6 percent to settle at $31.351 an ounce in New York.

Barrick raised the cost estimate for Pascua-Lama twice last year, to as much as $8.5 billion, and said it expects to start output at the mine in the second half of 2014 instead of mid-2013. Under the streaming deal, Silver Wheaton is entitled to silver output from three of Barrick’s other mines until Pascua-Lama reaches 75 percent of design capacity.

Smallwood said he prefers deals like the Barrick and HudBay transactions that include existing production so that the risk of new-mine startup delays doesn’t affect revenue projections.

Linked Dividend

Silver Wheaton reported third-quarter earnings Nov. 5 that missed analysts’ estimates after the number of ounces sold lagged behind production because of the timing of shipments.

The fourth quarter is “going to be a lot better,” Smallwood said. That will also result in an improved dividend, because the company has linked the payments to cash flow.

Silver Wheaton is scheduled to report its fourth-quarter results on March 21. The company is projected to report profit excluding one-time items of 48 cents a share, the average of 12 analysts’ estimates compiled by Bloomberg.

While Smallwood sees future deals involving gold, he is more optimistic about silver.

“We like precious metals as a whole,” Smallwood said. “We do feel a little bit more bullish about silver.”

Silver prices will probably average $34.16 per ounce this year, according to 19 analysts’ estimates compiled by Bloomberg, compared with $31.19 in 2012. Higher precious-metals prices should benefit streaming and royalty companies, CIBC’s Chiu said.

Cash Flow

“There’s a very direct relationship between the commodity price and the free cash flow of these companies,” Chiu said.

Doing deals with big companies doesn’t eliminate all risk. Goldcorp, the second-largest gold producer after Barrick, lowered annual forecasts last year at its Penasquito mine, in which Silver Wheaton owns a silver stream, because of water shortages at the Mexican operation.

Silver Wheaton “is a buy, but it’s not a glaring buy right now” partly because of concerns about operational issues at Penasquito, said John Goldsmith, deputy head of equities with Montrusco Bolton Investments Inc. in Toronto.

Still, interest in silver streams from large miners is “great” for the company because it creates more opportunities for bigger deals, Goldsmith, who helps manage C$5.2 billion, including Silver Wheaton shares, said yesterday in a telephone interview.

Smallwood says the industry is “really suffering” from a lack of funding options.

“The mining industry is very, very hungry for capital right now and there are not a lot of sources out there,” Smallwood said.

To contact the reporter on this story: Liezel Hill in Toronto at lhill30@bloomberg.net

To contact the editor responsible for this story: Simon Casey at scasey4@bloomberg.net

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