The long awaited new stream appeared on August 8th when Silver Wheaton announced that they reached an agreement with Hudbay Minerals (HBM) to acquire 100% of the life of mine gold and silver from the 777 mine and 100% of the silver production from the Constancia project. The gold production will remain at 100% until the later of 2016 or a completion test to be regarding Constancia after which it will be reduced to 50% for the remainder of the mine life.
The upfront payment will be $500 million due upon closing with a payment of $125 million once $500 million in capital expenditures have been made at Constancia and a further $125 million once $1 billion in capital expenditures have been incurred.
Silver Wheaton will also make ongoing payments of the lesser of $5.90 per ounce of silver and $400 per ounce of gold or the prevailing market price with an inflationary adjustment beginning in the fourth year of 1%.
The stream should be accretive to Silver Wheaton immediately which provides a two-fold benefit. On one hand it immediately increases attributable silver and gold production energizing not just revenues and earnings but the dividend, which is based on cash generated by operating activities.
Secondly, it shows that streaming is still a viable option for companies even in this era of high precious metal prices. Many companies were reluctant to sign new silver streaming deals given the disparity in prices between past contracts and the spot price even down 50% from its high.
Many CEOs were reluctant to take a potential streaming deal before their boards for approval given the disparity and between spot and contract prices. It was hoped that the weak financing market for mines would provide a bit of an impetus to companies looking for financing.
Now that Hudbay has melted the ice more base metal producers may look to streaming as a viable alternative to raising capital required to build out mines selling a gold (GLD, DGP) and/or silver stream to finance the capital expenditures.
Recent discussions inside of the junior sector confirm that streaming is becoming a viable option to fund capital expenditures. It would not be surprising to see more small deals pop up in the near future as companies trade silver for capital without diluting shareholders.
The delays at Barrick Gold's (ABX) Pascua-Lama mine will be made up for through Silver Wheaton claiming silver production from three currently operating mines until Barrick has satisfied the completion guarantee.
Silver Wheaton remains the top choice of individual and retail investors for a number of reasons. As the largest silver streaming company they provide investors with access to a number of top quality mines across the silver sector without the risk associated with mining.
A second reason is the dividend which is set as a percentage of operating cash flow allowing for an easy and transparent calculation for investors.
A third reason is the quality of Silver Wheaton's management which has significant depth within the precious metals sector. They have a reach that is in the top tier and matched by only a handful of individuals.
Fundamentally, you may be paying up for shares of Silver Wheaton but the premium is justified by a strong management group focused on delivering shareholder value. The move of cash off the sidelines and into a new stream which will deliver immediate cash flow indicates management is moving forward with the business plan.