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Although Silver Wheaton (NYSE:SLW) isn't the market darling it used to be, it is still king of the royalties/streamers. It has a robust growth profile even if Chile stops mining on that side of the border at Pascua-Lama. Should this happen, Barrick (NYSE:ABX) would construct a much smaller open pit on the Argentinean side; however, I am confident the currently designed operation will take place. I say this with one caveat; that Barrick has no chance of reaching initial commercial production in neither 2014 nor early-mid 2015 or mid 2016. Silver Wheaton's other advantage over the other royalty/streaming companies is that it only pays taxes on its Canadian assets, which is the norm for Canadian companies who operate both in Canada and other countries. Of course its biggest advantage over any other mining stocks is its fixed cost structure. Also, its largest "cornerstone" streaming deals have been negotiated will big proven companies including Goldcorp (NYSE:GG), Vale (NYSE:VALE), Barrick, Hudbay (NYSE:HBM), Glencore (OTCPK:GLCNF), as well a mid-size operators which have executed brilliantly including Primero (NYSE:PPP), Capstone (NASDAQ:CPST), El-Dorado (NYSE:EGO) and others.

Silver Wheaton has an impressive all in costs structure for the majority of the streams they've acquired;


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This king of the royalty/streaming companies is due to its asset base. The next closest competitor to Silver Wheaton is Franco-Nevada (NYSE:FNV), which has Cobre-Panama, Palmarejo, the Sudbury mines, Goldstrike and Tasiast as cornerstone assets. Silver Wheaton has Rosemont, Constancia, San Dimas, Pascua-Lama, Penasquito, 777, Sudbury, Yauliyacu and Salobo. To boot, all these streaming interests will augment production growth. Rosemont, Constancia and Pascua-Lama are assets which aren't online yet. San Dimas, Sudbury and Salobo are undergoing or will undergo expansions. Penasquito Is addressing its water issue and Yauliyacu is still working on fixing its concentrate problem. 777 will be partly responsible for growth in 2013 as well as some other streams.

Cornerstone Assets and Growth Drivers

San Dimas (Mexico) ~ Is one of two cornerstone assets in the silver rich country of Mexico. This agreement was amended so that Goldcorp could sell the asset to Primero. This came with some caveats, however, the first being that until the 4th anniversary following the amendment, Goldcorp will supply 1.5m oz.'s per annum and Primero will supply 3.5m oz.'s + 50% of the excess production beyond that. Starting in 2015, Goldcorp will no long supply any silver but Primero will be required to supply the first 6m oz.'s produced plus 50% of the excess beyond that. Additionally, Silver Wheaton now holds a stream which lasts for the LOM instead of 2029. Goldcorp will guarantee delivery on Primero's portion until 2029. Primero will have completed its Phase I expansion in early 2014, increasing attributable production to Silver Wheaton to 6.4-6.6m oz.'s, followed by phase II expansion, increasing attributable production above 7m oz.'s in 2016.

Penasquito (Mexico) - Despite water shortages at the mine, which have caused less than ideal production, Goldcorp has implemented a plan to resolve this issue in Q2 +/- in 2014. This will cause production to jump up greatly, increasing each year until 2021-2022 when peak silver production is projected at 36m oz.'s or 9m oz.'s attributable. This was initially forecast to be in 2019 but due to disruptions has been pushed back a couple of years. Additionally, a scoping study will take place as those who manage the mine think there is an opportunity to develop and underground mine and run both open pit and underground operations concurrently

Constancia (Peru) -Constancia is part of the Hudbay deal, expected to commence production sometime in 2015, reaching capacity in 2016. This will increase Silver Wheaton's production by 2.4m oz.s Ag for the first several years, dropping off to 2.2m oz.'s. Constancia will be in operation a minimum of 16 years, based on current reserves. Silver Wheaton and Hudbay both believe the upside potential is substantial, both optimizing total production and adding significant mine life going forward. Like 777, the ongoing per ounce purchase price of silver will be $5.90/oz. In aggregate, these two new streams will add approximately 4.8m silver equivalent ounces, bolstering the company's immediate and longer term growth profile.

Sudbury (Canada) ~ Silver Wheaton's most recent deal with Vale involved streaming deals on two of its assets, Sudbury mines and Salobo. This was the first deal ever completed by Silver Wheaton which was strictly confined to gold streams, which increased the long term exposure to gold to 20% of total revenue and 80% from silver. Located in Canada, the Sudbury mines have been in production for some time, operated by a proven operator, Vale. In exchange for $1.9B paid to Vale, Silver Wheaton will have the right but not the obligation to purchase 70% of the gold production from Sudbury and 25% of the gold production from Salobo, located in Para, Brazil. Each ounce will be sold to Silver Wheaton at $400/oz. The Sudbury stream agreement has a 20-year term sheet which began paying out on January 1, 2013. Average annual production will be 35,000 oz.'s for the first 3 years, increasing to 50,000 oz.'s thereafter.

Salobo (Brazil) ~ the real meat of this deal was for the Salobo stream, Silver Wheaton's first asset in Brazil. Not only does this increase the geographical diversity of its assets but it also gives Silver Wheaton is longest lived streaming asset. Based on current reserves, Salobo has a 63.33 year mine life, during which time it will sell Silver Wheaton 45,000 oz.'s through 2015, at which time production will increase and Vale will sell 70,000 oz.'s from Salobo. Futhermore, there is plenty of room to further increase mill throughput thereby increasing attributable production to Silver Wheaton. As with the Sudbury stream, each oz. of gold will be sold at $400/oz. In aggregate these two streams increase the average mine life per stream, immediately increase production as well as providing growth starting in 2016, further increases Silver Wheaton's geographical diversity, increases reserves by a more than 4m oz.'s and increases Silver Wheaton's exposure to gold.

777 (Canada) - 777 is one of two streams recently acquired from Hudbay Minerals in Silver Wheaton's first deal in over 2 years. 777 is unique in the sense that it more than triples the company's exposure to gold, at least until the Rosemont stream comes online. Silver Wheaton is entitled to purchase all the mines gold and silver production until Constancia meets certain development requirements or 2016, whatever is longer. Once either development requirements are met or 2016, Silver Wheaton's Gold but not silver stream will off to 50% from 100%. As part of this 750 million dollar deal, Silver Wheaton will be entitled to purchase each ounce of gold at $400/Oz. and each ounce of silver at $5.90/Oz. For at least the first full 4 years after the deal closes, Silver Wheaton's production will increase by 65,000 - 70,000 Oz.'s Au and 800,000 Ag. Once the stream falls to 50%, Silver Wheaton's long term attributable production in the longer term will increase by 32,500 - 35,000 Oz.'s Au and 800,000 Oz.'s Ag or 2.4m-2.5m silver equivalent Oz's. This will, however, be augmented by the second stream in the deal, Constancia. The 777 mine has a very long history of replacing reserves, making the current 9 year life a conservative estimate.

Pascua-Lama (Chile) - Silver Wheaton acquired 25% of the life of mine production from yet another one of the world's largest silver deposits, further diversifying its asset base via exposure to Chile and to a smaller degree, Argentina. Pascua-Lama, was set to reach commercial production in Q2 2014, however, due to delays, we are forecasting late 2015 - mid 2016. It is projected to reach feasibility levels in late 2016, producing an average of 800,000-850,000 Au and 34-36m Ag annually. Pascua-Lama hosts 671 million ounces of contained silver within Barrick's reported proven and probable gold reserves, with an additional 166 million ounces of contained silver within Barrick's reported measured and indicated gold resources, currently supporting a minimum mine life of 25 years. This, however, like many of Silver Wheaton's other assets is unlikely to be depleted when the 25 years comes due unless further mining and mill optimization measures are implemented, drastically increasing the projects internal rate of return, NPV and attributable annual production.

Rosemont (NYSE:USA) - The Arizona mine along with Pascua-Lama, Keno Hill, Navidad, Constancia and potential acquisitions going forward will be the company's primary long term growth drivers. Once in production, Rosemont will increase Silver Wheaton's attributable production by 2.9m oz. of silver and up to 15,000 oz. of gold for over 20 years based on current reserves. While the timeline for commercial production is still unknown, it should begin initial production by 2015, reaching capacity or near capacity in 2016 or earlier. Once online, Rosemont will be the key to propelling Silver Wheaton's attributable gold production to or past 200,000 oz.

While this robust growth may be satisfactory for more mediocre companies, the same can't be said for Silver Wheaton. The company recently re-arranged its credit facilities, replacing its 1.5B bridge loan with a 3-Year non revolving credit facility of $1B. This leaves Silver Wheaton will roughly $600-650m in available capacity to pursue additional deals. We arrived at this number by adding up cash on hand (75m 1 quarter OCF (100m) + available debt ($950m) less financing obligations (2 $125m payments to Hudbay & a $230m payment to Augusta). Silver Wheaton can of course complete a larger deal than this by making milestone payments instead of one upfront payment or it can issue equity simultaneously for financing purposes (although in our discussions with Silver Wheaton, it would only do so if it found a large, very accretive deal).

VALUATION


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Source: The King Of The Royalty And Streaming Companies