(By Mani)
Silver Wheaton Corp. (NYSE:
SLW) (TSX:SLW) is creating a precious metals stream through its deal with Hudbay Minerals, Inc. (NYSE:HBM) (TSX:HBM). Silver Wheaton has agreed to buy 100 percent of the life-of-mine (LOM) silver production from the 777 mine, located in Canada, and the Constancia project, located in Southern Peru.
The company will also acquire 100 percent of the LOM gold production from the 777 mine until either Constancia satisfies a completion test or the end of 2016, whichever is later. Once this marker has been reached, Silver Wheaton will continue to purchase 50 percent of all gold production from 777 for the remainder of the mine life.
Silver Wheaton will pay HudBay $750 million, including $500 million upon close of the acquisition expected in the third quarter of 2012 and two further payments of $125 million each to be made upon satisfaction of minimum capital expenditures at Constancia.
One interesting component of this deal is the relatively substantial contribution from gold, which represents 80 percent of the total revenue contribution until the end of 2016, and 40 percent thereafter.
On an NAV basis, gold represents about 45 percent of the HudBay stream, making it the stream with the highest gold contribution in the Silver Wheaton portfolio.
"We wouldn't read too much into it in terms of future potential for further gold streams down the road for Silver Wheaton, but it does show that the company is not opposed to the idea," CIBC analyst Cosmos Chiu wrote in a note to clients.
Indeed, the analyst believes that the gold streaming business is a lot more competitive, with other key players, including Franco-Nevada Corp. (NYSE:FNV) (TSX:FNV) and Royal Gold (NASDAQ:RGLD) (TSX:RGL.TO), seeking opportunities.
The stream will contribute approximately 4.9 million silver equivalent ounces, with the 777 mine doing much of the heavy lifting in the years to 2016, and the Constancia stream kicking in thereafter.
Moreover, this is current CEO Randy Smallwood's first stream acquisition and provides a good first impression.
"First, we believe Mr. Smallwood showed impressive discipline by waiting for a more reasonable silver price before striking a deal on a stream acquisition. Indeed, he didn't rush into any streaming deals when silver prices were north of $40/oz. despite pressure to show his wares as CEO," Chiu said.
In addition, the structure of the deal is beneficial to Silver Wheaton, by giving the company immediate silver sales through the 777 mine, with upside from the Constancia project. In terms of the acquisition metrics, Silver Wheaton is paying 0.9 times price/net asset value and, as a result, the deal is accretive by about 2 percent.
"On a total cost basis, Silver Wheaton is paying $18.50 per ounce of silver (or equivalent), or a discount of ~40% to the current, comparable to past acquisitions," the analyst added.
Meanwhile, the completion test for Constancia requires 90 percent of expected throughput and recovery by the end of 2020. In the event the completion test is not met, Silver Wheaton will be refunded a proportionate amount of upfront cash consideration related to Constancia.
Silver Wheaton will also make ongoing payments of the lesser of $5.90 per ounce of silver and $400 per ounce of gold, or prevailing metal prices. These ongoing payments are subject to an inflationary adjustment.
"In terms of valuation, at a silver price assumption of $25/oz. silver and $1,500/oz. gold, we believe the total net asset value (NAV) of the HudBay stream is $852 million. We note that, from an asset perspective, slightly more than half of the NAV is generated at the 777 mine; on the other hand, from a commodity perspective, slightly more than half of the NAV is generated from silver," Chiu noted.
Silver Wheaton is one of the largest publicly traded silver companies in the world as well as the largest publicly traded precious metal royalty/streaming company. It provides direct leverage to silver without exposing investors to the operating and capital cost risks associated with its producing peers.
The company has a unique business model, which shields the company from inflationary pressures such as energy, labour and local currencies and capital cost inflation, key factors, which have weighed on the performance of its operating peers.
Unlike many of its precious metal peers, Silver Wheaton does not own or operate any mines, but instead, has agreements in place to purchase physical silver/gold from producing mines and development stage projects at a relatively fixed price.
The company is well positioned to return a greater portion of capital to investors while maintaining a strong balance sheet due to its relatively fixed and low cost operating structure, fixed and declining capital outlays.