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Silver Wheaton: Going For Gold

 February 07, 2013 09:51 AM
 


(By Mani) Silver Wheaton Corp. (NYSE: SLW) (TSE:SLW) has added more gold to its mix by agreeing to buy two Salobo and Sudbury gold streams from Vale for $1.9 billion, the largest acquisition in its history.

The latest deal would be a good buy for Silver Wheaton in the long-run as the Vale gold streams layer gives long-lived production in safe jurisdictions and increase Silver Wheaton's gold weighting above 20 percent from the current 12 percent.

Under the terms of the agreement, the company will receive 25 percent of the life-of-mine production from Salobo copper mine in Brazil and 70 percent of gold from Sudbury operations.  

[Related -Goldcorp Inc. (USA) (GG): Which Gold Stocks Should You Buy This Year?]

Silver Wheaton anticipates the streams will provide the company with 110 thousand ounces (Koz) of gold production annually over the next 20 years. On a silver equivalent basis, this represents approximately 5.5 million ounces (Mmoz).

The streams have excellent expansion and exploration potential, good depth and extensive reserve base. In 2013, Silver Wheaton forecasts 33.5 million ounces of silver equivalent production. In 2017, it sees 53 million ounces of silver equivalent production (including 180 thousand ounces of gold), which represents an increase of over 80 percent from 2012.

However, the implied returns from the transaction remain less robust relative to previous deals. Assuming spot gold ($1,675/oz), the terms of the acquisitions to be relatively light from an internal rate of return (IRR) perspective.

[Related -Sandstorm Gold Ltd. (SAND): Less Risk, More Profit From Precious Metals]

"Based on our estimates, we estimate the IRR of the Sudbury stream at 6.2% and Salobo at 3.9%. This compares to an 8.8% IRR for the HudBay streams and historical spot IRR of 10.5," RBC Capital Markets analyst Dan Rollins said in a client note.

Meanwhile, there are mixed reactions on the deal. Some investors will view the transaction positively given the boost to production profile, increase cash flows, and boost dividends, but others will be less impressed with the lower implied IRRs relative to past transactions.

Overall, the benefit to near-term cash flows outweighs the negative implications for the company's underlying value.

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 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.

Silver Wheaton trades at 1.6 times 10 percent nominal net present value (NPV) estimate of $21.69/share at spot prices. On a price-to-earnings basis, shares are trading 17 times the street's 2013 consensus earnings estimate.

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