Initiating a position in Silver Wheaton (SLW) in late November of 2008 seemed like an enormous bargain based solely on my projected production growth and silver price. If I had looked into my magic eight ball to see the enormous acquisition activity, I would have sold my soul to the devil to accumulate as many shares as possible. Though SLW is already my largest equity position, the recent deal with Barrick Gold (ABX) has only made me want to buy more. So let’s go over the unique business model of Silver Wheaton. The strategic acquisitions so far in 2009 have made SLW one of the largest silver producers.
Okay, for those who don't know much about the company I will give a quick but efficient break down of their operations. First off, as one can guess by the name, its business is focused on silver. But it is not a miner but rather a silver streaming royalty company that finances miners to accomplish whatever goal they have in exchange for a portion or complete silver royalty stream now or in the future. So basically they produce an initial capital outlay or outlay to be paid in the near future in exchange for these streams, where they have agree to purchase the silver produced for an average of $3.98/oz with a maximum 1% annual inflation adjustment. But another distinguishing factor between Silver Wheaton and the aforementioned royalty companies is that the former has an agreement with the Canadian government such that they are exempt from corporate taxation as long as they either pay down their debt, reinvest profits, or pay dividends with 100% of their excess profit. So with a rough explanation of their business model, the following is the transformation the company has gone through thus far in 2009.
They are set to have 15-16m ounces in 2009, 19-22m in 2010, 24-26m oz in 2011 and 26-28m in 2012. They eliminated their more or less only competition in Silverstone which then was set to produce 18m oz, 24m, 29m and 33m from 2009-2012. Now the Barrick acquisition which is cited below has again bumped up their production numbers to 19m in 2009, 26m in 2010, 33m in 2011, and 35m in 2012 at which time the Pascua-Lama mine production will commence (a 75% completion is guaranteed an Silver Wheaton would be compensated with silver from other mines if it should be delayed) and production will then jump to somewhere between 42-44+ m oz (depending on whether proven reserves are understated) thereafter. Of course this comes with a price of a bit over 600m to be paid over the next three years. This will be paid through a combination of current unrestricted cash, shared dilution and/or accessing their 400m debt facility. Share dilution is the likely choice and one press release quoted the CEO and saying “We still have 400m of firepower in our arsenal,” suggesting another acquisition is either is in the works or they are aggressively seeking one (my bet's on Teck Cominco’s (TCK) silver mine on the Alaskan silver belt). Here are the official details
- Provides immediate cash flow.
- Silver Wheaton will receive 100% of the silver production from three of Barrick's currently producing mines, effective September 1, 2009, until the end of 2013.
- This immediately enhances Silver Wheaton's production and cash flow profile, by adding average annualized silver production of approximately 2.4 million ounces until Pascua-Lama commences production.
- Significantly increases Long Term Growth Profile.
- Silver Wheaton will receive 25% of the life of mine silver production from Barrick's Pascua-Lama project, expected to be one of the largest and lowest cost gold mines in the world.
- Pascua-Lama is a key Barrick growth asset and is the third largest silver deposit in the world, with an estimated mine life of over 25 years.
- Silver Wheaton's 25% share of the estimated average annual silver production for the first five years (2013 to 2017) is 9 million ounces, boosting overall silver sales by 30%.
- Barrick has provided a completion guarantee, requiring them to complete Pascua-Lama to at least 75% of design capacity by December 31, 2015. If Barrick does not meet completion by December 31, 2013, Silver Wheaton will continue to receive silver production in 2014 and 2015 from the currently producing mines, until Barrick satisfies the requirements of the completion guarantee.
This acquisition was brilliant as long as you believe in the silver story and rampant inflation in the not too distant future. That being said, Silver Wheaton remains in my opinion the best silver company, hands down, though many others have garnered my attention.
Disclosure: Long SLW