Monday 26th September 2016

Resource Clips


Growth Without Risk

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Much of this increase will come from Peru, which presents its own set of risks and rewards. Earlier this year, protests there against projects owned by Newmont TSX:NMC, Southern Copper Corp NYE:SCCO and Bear Creek Mining Corp TSXV:BCM turned deadly. They followed the inauguration last year of President Ollanta Humala, whom the Lima stock exchange regarded originally as an anti-foreign-mining firebrand. Humala has since moved to mollify miners, but the riots reintroduced the question of stability. And so the Silver Wheaton-HudBay deal is a significant endorsement of both Constancia and Peru.

Smallwood comments, “We like Peru, and I think the new President 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.”

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 [Peru President Ollanta] 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 —Randy Smallwood

The deal also marks a new chapter for Silver Wheaton. “We’re now back in acquisition mode,” Smallwood says. “Our business model is based on having a bank balance of zero. I would rather have ounces in the ground than cash on hand.” Given the prevailing difficulty of miners raising capital without significant damage to their share structure, he expects to see streaming contracts become more common. “The European banks have traditionally been the leaders in the mining space in terms of taking on project debts. But they’re busy trying to clean up their own foundations right now. So it’s much tougher to get decent project debt, especially for the midtiers and juniors.

“Equities are undervalued, and there’s not a lot of money sitting on the sidelines. Companies just don’t want that dilution yet. On top of that, if you’re a copper, lead or zinc company and have a promising project, the silver is a byproduct. It’s not what people are investing in companies like HudBay for. So the precious metals are a non-core asset, and if you can crystallize that value to finance and improve project economics, it’s a win-win situation. HudBay shareholders win because they aren’t going to go through any serious dilution. We share the project risk, and there is a completion test in place, but that’s it.”

As regards future acquisitions, Smallwood says, “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.”

The market’s verdict on the HudBay deal was quite positive, accelerating a warming trend among investors that began in spring. Since falling to a 52-week-low of $23.11 in May, shares have risen 37%. Smallwood comments, “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.”

Analysts agree. This month, Silver Wheaton’s target price was raised by UBS (from US$37 to US$39.50), TD Securities (from US$28 to US$37) and Canaccord (from US$37.50 to US$41). SLW‘s current NYE share price is US$31.91.

Smallwood says of the future, “I hope I have many more discussions with Resource Clips about further acquisitions. I think in 2016 we’re at 48 million ounces of silver equivalent production, just with our current assets. I think we can get our company to 70 million ounces a year, and in this market there are lots of opportunities out there for us.”

At press time, Silver Wheaton had 353.9 million shares trading on the TSX at $31.58 for a market cap of $11.2 billion. The company declared a third quarterly dividend of US$0.10 August 9.

Click here to read an interview with Randy Smallwood

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