This Time The Terms Are Better For Silver Wheaton

| About: Silver Wheaton (SLW)

Summary

Silver Wheaton increased its gold stream from Vale's Salobo mine.

Silver Wheaton's gold production will increase by 70,000 toz gold per year, the total silver equivalent production will grow by more than 9%.

The terms of the streaming agreement were more favorable for Silver Wheaton this time.

The NPV(5%) is $125 million, at the current gold price.

Silver Wheaton (NYSE:SLW) announced acquisition of another gold stream from Vale's (NYSE:VALE) Salobo copper mine. Silver Wheaton acquired further 25% share on the Salobo gold production. Together with the former two Salobo gold streams, Silver Wheaton is entitled to receive 75% of the gold produced at the Salobo mine. This time, Silver Wheaton seems to be on the better side of the deal, right from the beginning.

Silver Wheaton will pay an upfront payment of $800 million and it will also decrease the strike price of the 10 million warrants issued to Vale in the past, from $65 to $43.75. In addition, Silver Wheaton will make ongoing payments of $400/toz gold. This sum will be inflation adjusted by 1%, beginning in 2019.

The terms of the transaction are more favorable, compared to March 2015, when Silver Wheaton acquired the previous Salobo gold stream. Back then, the gold price was only slightly more than $1,200/toz and the overall gold market sentiment was negative. And Silver Wheaton was willing to pay $900 million plus ongoing payments of $400/toz (plus 1% yearly inflation adjustments starting in 2017). Using the production guidance provided by Silver Wheaton (70,000 toz gold per year on average over the first 10 years and 60,000 toz gold per year on average over the first 30 years), the NPV 5% was highly negative at the $1,200/toz gold price.

Today, the situation is completely different. Not only is the gold price above the $1,350 level, but the gold market sentiment is positive and the gold price is expected to keep on growing. And Silver Wheaton was able to secure virtually the same gold stream for an upfront payment lower by $100 million. Using the same metrics, the NPV of the newest Salobo gold stream is $136 million at the current gold price. It is a much better starting position compared to the previous Salobo stream. Moreover the NPV grows quite nicely, with growing gold price.

Source: own calculations

It is also important to note that the NPV was calculated only for the next 29 years, although the Salobo mine should be in production for the next 50 years at least. According to Silver Wheaton's CEO:

We did not hesitate at the opportunity to increase our exposure to a mine with one of the lowest copper cash costs in the world, 50 years of mine life on reserves alone, and what we believe to be substantial exploration and expansion potential.

The new gold stream should boost Silver Wheaton's gold production by 70,000 toz per year. As a result, Silver Wheaton increased its 2016 production guidance by 40,000 toz gold and its 2016-2020 average annual production guidance by 70,000 toz gold. At the current metals prices of $1,350/toz gold and $20.7/toz silver, the total production should increase by 4.57 million toz of silver equivalent, or by 9.5%. The share of gold on the total production should increase from 35% to 41%.

Click to enlarge

Source: own processing

The Salobo gold stream becomes Silver Wheaton's most important asset. It should generate approximately 210,000 toz gold per year over the next 10 years, which represents 64% of Silver Wheaton's projected annual gold production and 26% of Silver Wheaton's silver equivalent production, using the current metals prices. Although such a significant exposure to a single asset may cause some problems in the future, the risk is reduced by the character of Salobo mine. It is one of the biggest and lowest cost copper mines in the World and it is operated by Vale, one of the three biggest mining companies.

Conclusion

Compared to the previous Salobo streaming contracts, this one seems to be more favorable for Silver Wheaton. The third Salobo stream was acquired cheaper than the previous two ($1.33 billion + warrants and $900 million) and The NPV (5%) is $125 million at the current gold price. The newest stream should boost SLW silver equivalent production by more than 9%. Although Silver Wheaton will have a significant exposure to the Salobo mine, the Salobo mine is one of the lowest-cost copper producers and it is operated by Vale, one of the biggest diversified mining companies which lowers the risks. As the current precious metals market sentiment is positive and the terms of the third Salobo stream are favorable, it is able to expect a positive stock market reaction.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.