Silver Wheaton Sees Partnership `More Attractive' After Glencore

  • Streamer comfortable spending about $500 million more on deals
  • Would consider syndication for next `$900 million deal'

Silver Wheaton Corp. is a deal or two away from giving serious thought to forming partnerships after this week’s purchase of a stream of Peruvian silver from Glencore Plc. drained $900 million from its coffers.

“It’s definitely more attractive now than it was yesterday, because we’re $900 million poorer,” Chief Executive Officer Randy Smallwood said in a telephone interview Wednesday, referring to taking on partners to help fund deals.

On Tuesday, Glencore announced it sold a share of its future silver output at the Antamina mine to Silver Wheaton in exchange for that upfront payment and 20 percent of the spot silver price for each delivered ounce.

The Vancouver-based company will use a $2 billion revolving credit to fund the deal. Given its net debt was $566 million at the end of the third quarter, and it expects cash flow to exceed $400 million in 2016 and $500 million in 2017, the company is “comfortable” investing as much as $500 million in additional streaming deals, Smallwood said.

If a larger opportunity comes along, “syndication is definitely something that we’ll be looking at,” he said.

Demand Surge

Streaming -- in which miners get upfront payments in exchange for metal that’s later sold -- has become attractive to larger producers seeking to contain debt as slumping prices squeeze margins, push up credit costs and sink share prices.

Rising demand from miners is stretching the funding capacity of streaming companies. The Glencore deal reduces the combined funding capacity of major streaming companies to $1.5 billion, compared to an estimated $4 billion at the start of the summer, Michael Siperco, an analyst with Macquarie Capital Markets, said by e-mail Wednesday.

The agreement with Glencore follows a similar deal last month by Teck Resources Ltd. to sell a stream on its stake at Antamina to Franco-Nevada Corp., Silver Wheaton’s biggest rival.

Silver Wheaton has had discussions with both pension funds and private equity firms in the past about partnering on streaming deals but has so far opted to go it alone. While such funds ideally would invest as shareholders rather than as partners, the current climate makes that difficult, Smallwood said.

“I’m not willing to issue shares at this price,” he said. The stock is down 27 percent in the past six months. “Our stock is significantly undervalued.”

Smallwood also acknowledged the possibility that a large fund could mount a takeover of the company, although he said no discussions have been held.

“If someone wants to come in and buy us, we’re a public company,” he said. “I don’t work to try to avoid or attract that. I just work to build the best company I can.”

One of the factors seen to have dampened external interest in the streaming sector in the past, is a typically modest internal rate of return. In the case of the two streams sold on Antamina for example, Josh Wolfson, an analyst with Dundee Capital Markets, estimates Silver Wheaton’s IRR to be 5 percent compared to 4.7 percent for Franco-Nevada’s stream.  

However, streamers say such estimates fail to capture the upside potential offered by a sharp increase in commodity prices or a mine’s lifespan; Smallwood says the historical rate of return for Silver Wheaton’s investments has been 24 percent. Even without such boons, the company’s internal estimates put the IRR for the Glencore stream comfortably above six percent, he said.

Wolfson said the Glencore stream also needs to be valued in the context of a government tax review. The Canada Revenue Agency wants to reassess the way Silver Wheaton is taxed on metal mined outside Canada and delivered to its foreign subsidiaries. If the rules change, the IRR on Silver Wheaton’s stream would fall to 4.1 percent, Wolfson said. “One has to assess what this deal could look like if it was fully taxed.”

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