Silver Wheaton: Major Miners are Knocking

Juniors take note — Silver Wheaton (TSX:SLW,NYSE:SLW) believes major miners are on the prowl for streaming contracts. That could make a tough financial environment even tougher.

“The mining industry is very, very hungry for capital right now and there are not a lot of sources out there,” Silver Wheaton CEO Randy Smallwood told Bloomberg.

His company is what some call an alternative source. And tough access to capital seems to be making its services more attractive.

What is a streaming company?

Silver Wheaton is the world’s largest streaming company. For those unfamiliar with the business model, that means the company makes upfront payments to miners to help them to fund their projects and fulfill their capital needs. In return, those mining companies grant Silver Wheaton the right to purchase metal at a low fixed rate of about $4 an ounce for silver and $400 an ounce for gold.

“With early-stage juniors that have strong indications of a resource, we’re willing to front them anywhere from $5 to $15 million. Instead of being an equity shareholder, we come in and give the cash up front and within 10 years we’ll put that as a credit towards the silver stream,” Smallwood told Resource Investing News last year.

Major miners finding streaming attractive

Juniors miners are not the only companies showing interest in streaming agreements. Smallwood said major miners are also making proposals for funding.

“Doors that we’ve been knocking on for a long time, they are all of a sudden knocking on our door,” he told Bloomberg.

And if those miners come with an attractive enough deal, Silver Wheaton has shown that it is willing to answer the call.

It was not that long ago that Smallwood was discussing the company’s lack of gold streams and explaining why it was not aggressively pursuing them.

“When questioned by the industry if we will branch-off to include gold streams in our portfolio, I have to say it is a case of whenever I look over the fence at the gold streaming space I find the grass is greener on my side of the fence,” Smallwood said in PricewaterhouseCoopers (PwC) interview.

He explained that there is more competition in gold streaming. Also, with only about 5 percent of annual gold production used for industrial purposes — as opposed to about half of annual silver production — there is comfort in knowing there will always be a strong core demand for silver.

However, he was not opposed to the idea of taking on some gold if a company’s silver production was not valuable enough.

Silver Wheaton to ink deal with Vale

Now, Silver Wheaton is set to add gold streams to its portfolio through a deal with Vale (NYSE:VALE), the world’s largest iron ore producer.

Under the terms of this deal, Silver Wheaton will pay $1.9 billion — in addition to other considerations — for 25 percent of the life of mine by-product gold production from Vale’s Salobo copper mine in Brazil and 70 percent of the by-product gold production from some of the Sudbury mines in Canada, one of the world’s largest nickel-producing areas.

Though the deal is still subject to the approval of Vale’s board of directors, Silver Wheaton considers it pretty much a done deal and is already calculating the benefits.

The streaming company said both its production and cash flow profiles will increase immediately. Gold production from Salobo is estimated at 60,000 ounces per year and about 50,000 ounces per year are expected from Sudbury; that amounts to a total of  5.9 million silver equivalent ounces over 20 years. The percentage of revenue generated by gold will jump from about 12 percent to 25 percent over the next five years.

Silver Wheaton has already updated its one- and five-year production guidance. In 2013, the company expects 33.5 million ounces of silver equivalent production. By 2017, attributable production is projected to grow to about 53 million silver equivalent ounces.

And according to Silver Wheaton, the sites outlined in this deal have excellent exploration and expansion potential.

Silver Wheaton’s focus

“While we will continue to believe there are a significant number of streaming opportunities in the silver space, we are also open to layering more high-quality gold streams into our portfolio,” Smallwood said in the announcement of the Vale deal.

Scotiabank and BMO Capital Markets have agreed to underwrite two new credit facilities for Silver Wheaton. The company said those credit facilities and its cash on hand will give it the ability to make the upfront payment to Vale and allow it to continue pursuing additional accretive growth opportunities.

Still, it would be prudent for junior miners to expect more competition for funding from streaming companies. It is likely that a surge in interest from major miners will raise the bar for which projects get serious consideration and actual funding. There are clearly benefits to inking contracts with major miners. As the Vale deal shows, one of them is immediate access to production.

“The quality, the tenor of the projects that are being presented are definitely a step up from even what we’ve seen in the past,” Smallwood told Bloomberg. “When I look at the opportunities that we have out there right now, I think for the first time ever I might not be able to pay for them all, there’s that many good opportunities out there.”

Securities Disclosure: I, Michelle Smith, do not possess equity interests in any of the companies mentioned in this article.