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Growth Without Risk

August 17th, 2012

Silver Wheaton Strikes Big in Peru and Manitoba with its HudBay Deal

By Kevin Michael Grace

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See here for a Resource Clips feature on Peru and mining.

For investors in gold and silver bullion, ETFs (paper bullion) and mining companies all have their risks and rewards. Randy Smallwood, President/CEO of Silver Wheaton TSX:SLW, argues that his company supplies the rewards without the risks. “I think,” he declares, “we provide the best—and I’m not just going to say silver—I think we provide the best option for exposure to precious metals.”

He explains, “We provide growth and dividends, and we provide leverage. The key is growth. Currently about 20% of the reserves that we have on our books right now have come from organic growth within the company. When you invest in bullion or ETFs it doesn’t grow—an ounce stays an ounce stays an ounce. We also provide protection on the costs. Our costs are fixed by contract; our capital costs are fixed; and our production costs are fixed.”

Silver Wheaton Strikes Big in Peru and Manitoba with its HudBay Deal

Constancia: A big vote of confidence in Peru.

Silver Wheaton is not a mining company; it is a streaming company, the largest of its kind. It signs deals with miners which sell future production of silver and gold to SLW. For years, it paid $3.90 per silver ounce. Its $750-million deal with HudBay Minerals TSX:HBM bumps that up to $5.90 per ounce.

“This is the first acquisition we’ve done in over three years, and there is no doubt costs are higher,” Smallwood says. “Analysts looking at this from an undiscounted basis estimate we’ve paid somewhere between $15 and $16 per ounce. 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 [HudBay's] 777 [Manitoba mine] 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.”

Under the terms of the deal with HudBay announced August 8, SWL acquires 100% of the life-of-mine silver production from 777 and 100% of the life-of-mine silver production from HudBay’s Constancia Copper-Molybdenum-Silver Project in south Peru. SLW has also acquired 100% of gold production (at $400 per ounce) from the 777 Mine until Constancia satisfies a completion test, or the end of 2016, whichever is later. SLW‘s share of gold production from 777 will then be reduced to 50%. SLW will not share in any ongoing capital or exploration expenditures at the mines.

I think we provide the best option for exposure to precious metals —Randy Smallwood

Smallwood reports that the HudBay deal is “the largest we’ve ever done in terms of total dollar value. 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.”

Silver Wheaton had $1.1 billion cash in hand as of June 30. “We can easily afford a billion-dollar deal now,” Smallwood says. On August 9, SLW reported 2Q net earnings of $141.4 million, $0.40 per share, on revenues of $201.4 million. (Figures for 2Q 2011 were $148.1 million, $0.42 per share, $194.8 million.) Production was 6.5 million ounces silver and 3,200 ounces gold or 6.7 million silver-equivalent ounces, up 10% from a year earlier. Sales were 6.9 million silver-equivalent ounces. Proven and probable silver reserves were 798 million ounces. Smallwood says that the HudBay deal will result in a 10.7% increase in proven and probable silver reserves.

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