Has Gold Streaming Weakened Silver Wheaton?

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Gold and silver prices rebounded since the beginning of this year, posting a gain of around 9% and 11% respectively. In response to this gain, Silver Wheaton's (SLW) stock price appreciated by almost 21% year-to-date. Silver Wheaton enters into purchase agreements with mining companies that produce gold or silver as by-products. Silver Wheaton pays the mining company an upfront amount in return for a fixed percentage of the miner's future production. Apart from that, Silver Wheaton also makes a delivery payment when the metal is delivered. This delivery payment is made at a fixed price that is much lower than the market price. The mining company uses the upfront payment provided by Silver Wheaton to fund capital expenditures. However, Silver Wheaton isn't required to pay any ongoing capex or exploration costs at the mine. Hence, Silver Wheaton's cost structure is more stable than that of mining companies since Silver Wheaton only incurs one-time upfront payments and fixed delivery payments.

Source: Company presentation

Silver Wheaton generates majority of its revenue from silver streaming. However, the company increased its exposure to gold in 2013 by entering into a gold purchase agreement with Vale S.A. (VALE). As a result of this gold purchase agreement, Silver Wheaton's dependence on silver has reduced. In the first nine months of 2013, the company generated 77% of its revenue through silver sales compared to 90% in 2012. Under the agreement, Silver Wheaton will receive 25% of the Salobo mine's gold production throughout its life and 70% of the Sudbury mines' gold production for a 20-year period. In addition to the upfront payment of $1.9 billion, Silver Wheaton will make ongoing payments to Vale for every ounce of gold delivered. These payments will be less than $400 per gold ounce or the prevailing market price per gold ounce.

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