Last night Silver Wheaton (SLW) announced a blockbuster gold stream acquisition with Vale (NYSE:VALE). As a shareholder who believes Silver Wheaton is a premier precious metals play, I have been looking for resolution of the tax scare tactic as a catalyst for the stock. However, this latest deal leaves me extremely disappointed.
First and ironically, CEO Randy Smallwood regularly and oddly jokes the about the precious metal purity of the company by noting Silver Wheaton is "tainted with gold." Yet this transaction for gold only.
Second, Silver Wheaton paid a rich price. The transaction is a pure bet on rising gold prices. At today's gold price the purchase appears to have a negative net present value. Today's conference call should provide more detail.
Third, in the royalty and streaming business, alpha comes from exploration success on existing properties. The Sudbury Mine portion of this deal is strictly mundane financing. Further, the Salobo Mine is located in Brazil, a country which does not have an outstanding long term track record for respecting property rights.
As an investor in the precious metal bull market, my chief concern relates to the project financing. Silver Wheaton has taken great risk in buying long term assets and financing the transaction with short term debt. During the financial crisis only four years ago, Silver Wheaton was two quarters away from having to file bankruptcy due to this very risk. I am at a loss trying to understand taking the risk again. Business history is littered with the financially strong taking advantage of those in weak position.
Further, this higher risk suggests Silver Wheaton shares ought not maintain a rich valuation. If this is the best deal management can find, they ought to stop doing deals and increase the dividend. I hope to sell my shares very soon, perhaps on a stock pop this morning. Investors can look to Royal Gold (NASDAQ:RGLD) or my long term favorite Franco-Nevada (NYSE:FNV) to stay in the precious metal royalty space.
Disclosure: I am long SLW.
Additional disclosure: I intend to sell my SLW today.