While the silver market is slowly heating up, Silver Wheaton (SLW) took advantage of this development to sell over 30 million common shares to a syndicate of underwriters at a price of $16.6, which was lower by nearly 5.6% than the company's stock price when the deal was made public yesterday. This deal is expected to bring in SLW around $500 million to the precious metals streaming company. But how will this deal impact the company?
Good for the company, not so much for investors
This $500 million deal is expected to be used, according to the company's press release, to pay off its debt related to the $900 million silver stream acquisition of the Antamina mine in Peru. Moreover, the company gave an option for the Underwriters to purchase another 4.5 million shares at the same price. Thus, this deal could bring in SLW up to $575 million. This isn't the first time SLW did such a move: Back in March 2015, the company made a 38 million shares offering at a price of $20.55 per share for a total of $800 million. That offering was to finance the acquisition of 25% gold stream from Vale S.A.'s Salobo Mine in Brazil. Back when the offering was made, however, the company's stock was trading at $21.2 - roughly 3% higher than the offering price.
Before this recent offering, SLW used some -- around $534 million -- of its $2 billion revolving credit facility to finance its silver stream acquisition from November 2015. As a result, Silver Wheaton's debt burden, as measured by debt-to-equity, grew from 15% back in Q3 2015 to 35% as of Q4 2015. Given this recent share offering, SLW's debt burden to decline - due to lower debt and higher equity. The improved balance sheet and the decision to free up roughly $500 million in the revolving credit facility will behoove SLW by strengthening its balance sheet and providing more liquidity for future acquisitions. Since the company only has $103 million in cash and its operating cash flow back in 2015 was only $431 million, Silver Wheaton will likely need to take on more debt or offer additional shares for future purchases.
The flip side is that shareholders don't benefit from this move in the immediate term, as indicated by the drop in the share price of SLW to the offering price. But this offering will also allow the company to borrow more funds, if needed, to sign additional precious metals streaming contracts in the future.
Silver Wheaton is likely to keep finding ways to expand its portfolio in the future with additional streaming deals. And based on the company's actions over the past year, it will keep funding part of such deals with shares offerings and taking on debt. If so, the company may have to offer a bigger discount to its underwriters to make the offering more attractive. For shareholders this will mean a cut in the stock price, but it will also keep its balance sheet with little debt. This means this tradeoff may not behoove its shareholders as the discounts on the shares offered rise. For more see: Silver Wheaton Is Not Solely Impacted By Silver
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.