Silver Wheaton Corporation (SLW) is an unusual company in that, despite being a large player in the gold and silver market, it does not mine or produce gold and silver itself. Instead, it is the largest precious metal streaming company in the world and holds a number of agreements in which, in return for upfront payments, it has the right to buy all or some of the silver and gold production at low fixed prices from high-quality mines in regions with political stability. Under its current agreements, the company's production for 2013 is expected to be roughly 33.5 million silver equivalent ounces, which includes 145,000 ounces of gold. By the year 2017, this is expected to grow significantly to 53 million silver equivalent ounces, which includes 180,000 ounces of gold. The company has no liability for capital or exploration costs at the mines and leaves its gold and silver position unhedged. The company's portfolio consists of precious metal streams from the Pascua-Lama project operated by Barrick Gold Corporation (ABX), the Constancia project operated by Hudbay Minerals Inc. (HBM), and the Salobo and Sudbury mines operated by Vale S.A. (VALE).
The latest transaction with Vale
In February 2013, Silver Wheaton announced that it has entered into a binding agreement with a subsidiary of Vale for an amount of gold equal to 25% of the gold production in perpetuity from its Salobo Mine in Brazil, as well as 70% of the gold production for 20 years from some of its Sudbury Mines in Canada. Under the agreement, Silver Wheaton will pay Vale upfront cash of $1.9 billion, plus 10 million Silver Wheaton warrants with a strike price of $65 and a term of 10 years. $1.33 billion is for 25% of the Salobo gold production from Salobo, while $570 million is for the 70% of Sudbury gold production. In addition, Silver Wheaton will make certain ongoing payments for each ounce of gold delivered under the agreement. According to Silver Wheaton, the benefits from the acquisition include immediate cash flow, increased exposure to gold and a partnership with a world class producer enhancing organic growth.
Funding the Vale transaction
Silver Wheaton has now put together the financial arrangements for the largest acquisition in its history. Instead of raising long-term debt through the capital markets or the issuance of fresh equity, the company has opted for a three year non-revolving loan from a group of banks. The new $1 billion facility will be used to repay apportion of the amount outstanding under a $1 billion five-year revolving credit and a $1.5 billion one-year bridge facility. After this, the company will be left with total debt of $1.06 billion and the ability to draw another $944 million. The capital markets were not used because Silver Wheaton does not have a credit rating and, given its strong cash flow, equity would have been expensive especially with the recent decline in stock prices. Low interest rates and plenty of flexibility made a bank loan the best available option.
2013 first-quarter financials
The highlights for the first quarter were as follows. Attributable silver equivalent sales for the quarter were 6.9 million ounces (6.0 million ounces of silver and 16,900 ounces of gold), an increase of 13% year over year. Revenue for the quarter was $205.8 million compared with $199.6 million in the corresponding period of the prior year, an increase of 3%. Net earnings for the quarter were $133.4 million ($0.38 per share) compared with $147.2 million ($0.42 per share) in the same period of 2012, a decline of 9%. Cash generated from operations was $165.6 million ($0.47 per share) compared to $163.8 million ($0.46 per share) for the same period of the previous year, an increase of 1%.
The future outlook
As gold and silver prices have dropped significantly over the last few months, so have the prices of gold and silver-related stocks. The drop in prices for silver and gold mean that Silver Wheaton will have lower realized silver and gold prices in the near future, which in turn will have an impact on earnings expectations and realized earnings. Bloomberg analysts are expecting revenues of $895 million for FY 2013 and $1.1 billion for FY 2014 providing sufficient operating cash flow to pay off the $1.09 billion bank loan. Consensus estimates from analysts coving the stock, expect Silver Wheaton to achieve an EPS of $1.69 per share for FY 2013 and an EPS of $2.00 per share for FY 2014. Of these future earnings, the company anticipates returning 20% back to shareholders in the form of dividends so as the company grows its bottom line shareholders can expect increasing dividend payments.
The bottom line
Silver Wheaton is currently trading at $23.72 against the analyst median target price of $40 and the minimum target price of $33. There is plenty of potential for an investment in Silver Wheaton given that its projected production growth should not only allow for increases in share price, but will also lead to an increasing dividend rate making it an extremely attractive stock, especially at its current level.