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Introduction

In this article, I'll have a closer look at Silver Wheaton's (NYSE:SLW) latest streaming deal with Sandspring Resources (OTCPK:SSPXF) which hopes to bring its Toroparu Gold Project in Guyana into production. I will briefly explain the streaming deal, and then I will make some calculations to see if shareholders should be happy or disappointed with this streaming agreement. Then I will present my investment thesis at the end of this article.

(click to enlarge)

The streaming deal with Sandspring Resources

As per the terms of the agreement, Silver Wheaton will make up-front payments totaling $148.5M to secure a gold streaming deal whereby Silver Wheaton has the right to acquire 10% of the annual output of the Toroparu mine at a fixed cost of $400/oz (with a 1% inflation compensation added from the fourth year of operations on). Such streaming deals aren't new, but I'm surprised to see Silver Wheaton making such a move, as the company was previously extremely focused on silver and not on gold.

The first $13.5M can be immediately drawn down by Sandspring to complete the feasibility study of the Toroparu project, and the remaining $135M will be paid if Silver Wheaton chooses to go ahead with the deal. Should SLW call it a day, Sandspring can either pay back $11.5M or reduce the stream to 0.774%. This means that ultimately, only $2M is non-refundable and can be kept by Sandspring.

Calculating a valuation of the streaming agreement

Let's now move over to some calculations to determine the value of this deal for Silver Wheaton shareholders. As said, the upfront capex is $148.5M, and the cash costs are fixed at $400 (+ a correction for inflation from Y4 on).

(click to enlarge)

The Toroparu project is quite large and has a proven and probably reserve statement of 4.1 million ounces, and will produce 246,000 ounces in the first three years of operation and 223,000 ounces of gold per year for the remaining 13 years of the mine life based on the reserves. In this first calculation, I will calculate the NPV of this streaming deal, based on a gold price of $1250/oz and a discount rate of 8%. I will not deduct any taxes, as Silver Wheaton has organized this gold stream via its wholly owned subsidiary which is incorporated on the Cayman Islands.

I will allow for a three year construction period, and then I will use an attributable production of 24,600 ounces in the first three years of operation followed by 22,300 ounces in the remaining 13 years. Keep in mind this NPV calculation just includes the 4.1M ounces in the reserve categories and does not include any of the 5.9 million additional ounces in the resource categories.

Cash Flow per year

Corporate tax at 0%

after tax

Discount rate (8% per annum)

NPV8%

-148500000

0%

-148500000

-148500000

0

0%

0

1,00

0

0

0%

0

1,08

0

20900000

0%

20900000

1,17

17918381

20900000

0%

20900000

1,26

16591094

20900000

0%

20900000

1,36

15362124

18900000

0%

18900000

1,47

12863022

18800000

0%

18800000

1,59

11847189

18800000

0%

18800000

1,71

10969619

18700000

0%

18700000

1,85

10103028

18600000

0%

18600000

2,00

9304631

18600000

0%

18600000

2,16

8615399

18500000

0%

18500000

2,33

7934333

18400000

0%

18400000

2,52

7306893

18300000

0%

18300000

2,72

6728872

18300000

0%

18300000

2,94

6230437

18300000

0%

18300000

3,17

5768923

18200000

0%

18200000

3,43

5312407

18200000

0%

18200000

3,70

4918895

9,275,248

This calculation reveals that the NPV 8% of the streaming deal is just $9.3M. And as it's obvious that Silver Wheaton won't invest $148.5M for a net return of $9.3M, the SLW-management is obviously thinking about an expanded project or a higher gold price.

I'll first re-calculate everything using a gold price of $1450/oz.

Cash Flow per year

Corporate tax at 0%

after tax

Discount rate (8% per annum)

NPV8%

-148500000

0%

-148500000

-148500000

0

0%

0

1,00

0

0

0%

0

1,08

0

25900000

0%

25900000

1,17

22205075

25900000

0%

25900000

1,26

20560255

25900000

0%

25900000

1,36

19037273

23400000

0%

23400000

1,47

15925647

23300000

0%

23300000

1,59

14682952

23300000

0%

23300000

1,71

13595326

23200000

0%

23200000

1,85

12534238

23100000

0%

23100000

2,00

11555751

23100000

0%

23100000

2,16

10699770

23000000

0%

23000000

2,33

9864306

22900000

0%

22900000

2,52

9093905

22800000

0%

22800000

2,72

8383513

22800000

0%

22800000

2,94

7762512

22800000

0%

22800000

3,17

7187511

22600000

0%

22600000

3,43

6596725

22600000

0%

22600000

3,70

6108078

47,292,837

This results in a NPV of just $47.2M, which is still on the low side given the risk (investing 3 times the NPV 8% as up-front capital in a project which is just in the feasibility stage).

So if Silver Wheaton isn't speculating on the gold price, then it must be speculating on the conversion of resources into reserves to extend the mine life. In the next calculation, I will use a gold price of $1350/oz but will increase the mine life from 16 years to 29 years.

Cash Flow per year

Corporate tax at 0%

after tax

Discount rate (8% per annum)

NPV8%

-148500000

0%

-148500000

-148500000

0

0%

0

1,00

0

0

0%

0

1,08

0

25900000

0%

25900000

1,17

22205075

25900000

0%

25900000

1,26

20560255

25900000

0%

25900000

1,36

19037273

21300000

0%

21300000

1,47

14496422

21200000

0%

21200000

1,59

13359596

21200000

0%

21200000

1,71

12369996

21000000

0%

21000000

1,85

11345647

21000000

0%

21000000

2,00

10505228

21000000

0%

21000000

2,16

9727063

20800000

0%

20800000

2,33

8920763

20800000

0%

20800000

2,52

8259966

20800000

0%

20800000

2,72

7648117

20800000

0%

20800000

2,94

7081590

20600000

0%

20600000

3,17

6493979

20600000

0%

20600000

3,43

6012944

20600000

0%

20600000

3,70

5567540

20500000

0%

20500000

4,00

5130105

20500000

0%

20500000

4,32

4750097

20400000

0%

20400000

4,66

4376783

20400000

0%

20400000

5,03

4052577

20300000

0%

20300000

5,44

3733992

20200000

0%

20200000

5,87

3440369

20200000

0%

20200000

6,34

3185527

20200000

0%

20200000

6,85

2949562

20100000

0%

20100000

7,40

2717555

20100000

0%

20100000

7,99

2516255

20000000

0%

20000000

8,63

2318274

20000000

0%

20000000

9,32

2146550

20000000

0%

20000000

10,06

1987547

78,396,650

This increases the NPV of the transaction to $78.4M even though the mine life almost doubles and the used gold price increased by 8%. Based on these calculations, it looks like Silver Wheaton is betting on a much higher gold price by the time Sandspring's project enters the production phase.

Investment Thesis

In an earlier article, I concluded that Silver Wheaton was on track for a 27% production growth in the next 4 years, and the closing of this streaming deal obviously helps to grow the company's production profile.

I also recommended to write a P20 January 2015 for an option premium of $0.62 and a P 16 June 2014 at $0.64. After the recent drop in Silver Wheaton's share price, these premiums have increased to respectively $0.82 and $0.79, so this strategy is now even more attractive if you're a believer in the Silver Wheaton business model.

Source: Is Silver Wheaton's Latest Gold Stream Acquisition A Smart Deal?