Silver Wheaton Acquires Additional Gold Stream from Vale

The two companies signed their first agreement in 2013, and it gave Silver Wheaton an amount of gold equal to 25 percent of the life of mine at Salobo for US$1.33 billion. Now the company has acquired another 25 percent of gold production for cash consideration of US$900 million; it’s also agreed to make ongoing payments of the lesser of US$400 per ounce, subject to a 1-percent annual inflation adjustment from 2017, and the market price per ounce of gold.

The deal increases Silver Wheaton’s expected average gold production to 70,000 ounces per year for the first 10 years and 60,000 ounces per year over the first 30 years. Upon closing this acquisition, the company’s proven and probable gold reserves will increase by 3.3 million ounces. Measured and indicated gold resources will be boosted by 0.8 million ounces, and inferred gold resources are set to increase by 0.4 million ounces.

Money matters

In terms of financing this endeavour, Silver Wheaton also announced Monday that it plans to raise money through a US$800-million bought deal. The agreement was made with a syndicate of underwriters led by Scotiabank; they have agreed to purchase 38,930,000 common shares of Silver Wheaton on a bought-deal basis for US$20.55 per share. The underwriters have the option to purchase up to an additional 5,839,500 common shares priced at US$20.55 per share.

The bought-deal offering has since been criticized due to its size, with the Financial Post reporting that after its announcement Silver Wheaton’s share price traded below the offer price, with a very large portion remaining unsold. The publication describes the pricing of US$20.55 as aggressive because it is a mere 3-percent discount from the company’s closing price that day. Considering the risks associated with bought deals, the discount is usually quite a bit larger.

What’s in it for Vale?

Looking at how the deal benefits Vale, an article in Forbes suggests the agreement is part of the company’s ongoing response to an environment of low commodity prices, particularly in the iron ore space. According to the publication, Vale is looking to boost its financial flexibility and receiving an upfront cash payment from Silver Wheaton will lessen the burden on Vale to finance its capital expenditure needs, including the remaining capital expenditure for the expansion of the Salobo mine.

Considering the financial hit Vale took in 2014 due to plummeting iron ore prices, a lump sum payment of US$900 million would alleviate some of its costs for the mine expansion without taking on additional debt. The company has $9.6-billion worth of expansion capital requirements over the next two years, mostly for the expansion of its iron ore production capacity.

At end of day Thursday, Silver Wheaton’s share price was sitting at US$19.60 on the NYSE, down 1.51 percent, and at C$24.47 on the TSX, down 0.93 percent.

Securities Disclosure: I, Kristen Moran, hold no direct investment interest in any company mentioned in this article.