Silver Wheaton Corporation (SLW), the largest precious metal streaming company in the World, announced a binding term sheet to acquire two gold streams from Vale S.A. (VALE), the Salobo Mine in Brazil and certain Sudbury Mines in Canada for total consideration of $1.9 billion in cash plus 10 million SLW warrants with a strike price of $65 and a term of 10 years. Under the terms of the deal, Vale will deliver 25% gold stream interest of the life of mine production from company's Salobo Mine and a 70% gold stream interest from certain of its Sudbury Mines for a 20-year term.
Gold, Strategically A Good Opportunity; However, Focus Remains On Silver
Seen as a pure play on silver, the move should not be seen as company refocusing its metal priorities. "This isn't a change in focus for us. We've always been interested in broader precious metals so I still call us a silver-focused streaming company," said Randy Smallwood, President and Chief Executive Officer of Silver Wheaton. "We do focus on silver and will still focus on silver but we don't ignore the broader precious market, mainly because of the same reasons we invest in silver apply to gold.
"We're not scared to step into the gold space when there are top-quality assets and top-quality partners," Smallwood said. "It's worth stepping into the gold space when there are opportunities like this."
One-fourth Of Revenue From Gold
The company estimates revenues generated from gold over the next five years will increase from approximately 12% to a peak of approximately 25%. The gold streams are expected to add an average of 110,000 ounces of gold production per year, of ~5.9 million silver equivalent ounces at a gold/silver ratio of 53.3:1, over the next 20 years.
The company will be required to make an additional payment to Vale based on a set fee schedule ranging from $67M to $400M if the capacity at Salobo is expanded above 28Mtpa within a predetermined period of time. On the other hand, if the expansion to 24Mtpa at the mine is not accomplished by the end of 2016, SLW will be entitled to a temporary increase in its percentage of gold production.
The company announced that it has secured two new credit facilities, $1.5 billion in bridge financing facilities with a 1-year term and a revised $1 billion revolving credit facility with a 5-year term. These facilities will replace the existing US$400 million revolving credit facility. With these credit facilities and $555 million of cash as of 30th September, 2012, the company has the capacity to undertake additional accretive growth opportunities even after committing $1.9 billion in cash to Vale.
Located in Para state of Brazil, Salobo is the largest copper deposit ever found in Brazil. Operations began at the newly constructed, low-cost copper-gold mine in May 2012 with a design throughput capacity of 12Mtpa. A second phase construction, which will expand the mine to 24Mtpa of mill capacity by the end of 2015, has already begun.
SLW will file a technical report for the Salobo mine with 45 days of the announcement. The mine is expected to average attributable production of 45,000 ounces to SLW over the next three years as Vale ramps up mine's throughput capacity from 12Mtpa to 24Mtpa by the end of 2015. After the ramp up, Salobo is expected to contribute approximately 60,000 ounces of gold per year to SLW. With gold and copper grades of 0.43 g/t and 69% respectively, the Salobo mine has reserves of over 1 billion tons. Moreover, it also has substantial exploration and expansion potential.
Located in Ontario, Canada, Vale's Sudbury mines have an operating history going back to 1885. The Sudbury gold stream covers six producing mines (the Coleman, Copper Cliff, Creighton, Garson, Stobie, and Totten mines) and one development stage project (the Victor project).
The mines are expected to contribute an average of 30,000 ounces of gold per year from 2013 to 2015 to SLW before reaching approximately 50,000 ounces per year for the remainder of the 20-year stream deal.
The largest precious metals streaming company in the world just got bigger and more attractive. In this environment of macro uncertainty and uneven recovery, gold and silver are both looking at another great year in 2013, as monetary policies across the globe are expected to remain accommodative, providing further strong underpinning for the investment case for gold and silver. In addition, silver and gold prices being supportive of the investment case for SLW, the company also has a great growth potential. By 2017, annual attributable production is anticipated to increase over 80% compared to 2012 levels, growing to approximately 53 million silver equivalent ounces, including 180 thousand ounces of gold. SLW has excellent margins (operating margin: 74.15%, profit margin: 73.33%). The company has sustainable dividend, a strong balance sheet and liquidity position, and a strong upside potential.
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Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.