Silver Wheaton Corp TSX:SLW announced the acquisition from HudBay Minerals Inc TSX:HBM of 100% of the life-of-mine silver production from its currently producing 777 Mine in Manitoba and 100% of the life-of-mine silver production from its Constancia Copper-Molybdenum-Silver Project in south Peru. Silver Wheaton has also acquired 100% of gold production from the 777 Mine until Constancia satisfies a completion test, or the end of 2016, whichever is later. Silver Wheaton’s share of gold production from 777 will then be reduced to 50% for the remainder of the mine life.
Silver Wheaton will pay Hudbay US$750 million, of which US$500 million is payable upon closing, with two further payments of US$125 million each to be made upon the satisfaction of minimum capital expenditures having been incurred at Constancia. Silver Wheaton will make ongoing payments of the lesser of US$5.90 per ounce of silver and US$400 per ounce of gold (both subject to an inflationary adjustment) or the prevailing market price per ounce of silver and gold delivered. Silver Wheaton will not share in any ongoing capital or exploration expenditures at the mines.
The Constancia completion test requires Hudbay to complete Constancia’s processing plant to at least 90% of expected throughput and recovery by December 31, 2020. If Hudbay fails in this, Silver Wheaton would be entitled to a proportionate return of the upfront cash consideration relating to Constancia. Hudbay has granted Silver Wheaton a right of first refusal on any future streaming agreement, royalty agreement, or similar transaction related to the production of silver or gold from Constancia or 777. Silver Wheaton will use cash on hand to make the US$750 million in payments. The company’s cash on hand was approximately US$997 million at the end of 1Q 2012.
We like Peru, and I think the new President of the country [Ollanta Humala] has done a very good job in terms of managing some pretty tough situations—Randy Smallwood
Silver Wheaton’s share price rose 9% in the two days after the announcement. President/CEO Randy Smallwood tells ResourceClips.com, “We’re now back in acquisition mode. The shareholders have stuck with us and have been patient and are being rewarded. And silver has had a bit of a bounce back. We’re pretty volatile from that basis, but I think people are starting to recognize that the current business environment out there is very positive for us in terms of making acquisitions and helping companies grow.
“[The HudBay deal] is the largest we’ve ever done in terms of total dollar value. Most of it is because silver is worth more than in the past. It’s the third largest in terms of metal production behind the Pascua-Lama and Peñasquito transactions, which were nine and seven million ounces silver equivalent a year, respectively. [The HudBay deal] will produce five million ounces a year for us. What’s intriguing on this one is it has a bit more gold than we’ve traditionally had. It still keeps us dominantly silver-focused, but I’m happy to have a bit of gold in the mix.”
With regard to the per-ounce payments to HudBay, Smallwood says, “This is a bit of a change. Until now all our contracts had had a $3.90 production payment for the silver. But this is the first acquisition we’ve done in over three years, and there is no doubt costs are higher. So when we looked at this one, we settled on a $5.90 production payment. Analysts looking at this from an undiscounted basis estimate we’ve paid somewhere between $15 and $16 on a discounted basis for the ounces of silver here. I think it will be better than that, mainly because the exploration success isn’t being factored in; they’re just looking at current reserves. For instance, when 777 started production in 2004, it had 14 years of reserves. [In 2012,] it’s still got 14 years of reserves. That’s pretty typical of the VMS deposits.”
Recent events in Peru have left miners wary, so Silver Wheaton’s deal with HudBay is a big vote of confidence in that country. Smallwood comments, “We like Peru, and I think the new President of the country [Ollanta Humala] has done a very good job in terms of managing some pretty tough situations. [HudBay] has got community support all the way through [at Constancia], and they put a real strong focus into it long before they commenced on the construction side. So they have the agreements on the community side; they’ve got a high degree of respect for social license. HudBay has done one of the best jobs I’ve seen in Peru, which I think has been unfairly marked as being a bit risky or riskier. I actually think things have improved under Humala. I think he’s done some really good things on some other projects where there really are challenges on the social side. We’re happy with Peru, and we’re happy to continue investing in Peru.”
Smallwood concludes, “Our business model is based on having a bank balance of zero. I would rather have ounces in the ground than cash on hand. So we continue to focus on that, but we have very stringent requirements for acquisitions: high-quality assets with high operating margins in low-risk political jurisdictions. We like exploration success because it provides us protection in case there are shortfalls in production; the growth on the exploration side usually more than offsets that. I think we can get our company to 70 million ounces a year through further strong acquisitions, and in this market there are lots of opportunities out there for us.”
Silver Wheaton Corp
Senior VP, Investor Relations
HudBay Minerals Inc
VP Investor Relations and Corporate Communications
by Kevin Michael Grace