Silver Wheaton (NYSE:SLW) is a silver streaming company that signs long-term purchase agreements with mining companies producing silver or gold as a by-product. It provides funds for capital expenditure upfront when a project is being developed and obtains the right to buy precious metals produced at low, fixed prices. It does not pay for any ongoing capital or exploration costs at the mines. Thus, the company’s costs are one-time and fixed, which greatly reduces its business risk.
The silver or gold obtained at a fixed price is sold at market rates, which exposes it to the daily volatility of these metals’ prices. Its gains increase when the market prices of silver and gold rise. The prices of gold and silver have plunged this year, due to a variety of factors. Governments have had less need to add to their reserves and, with Quantitative Easing, other assets have looked more attractively priced
In this article, we will focus specifically on the company’s silver streams from the Rosemont and Constancia mines. While the Rosemont mine is owned by the Augusta Resource Corporation, the Constancia mine is owned by Hudbay Minerals Inc. These two mines haven’t begun production yet. Below, we talk about the reserve base at these mines, expected output, upfront payments made by Silver Wheaton, and the per ounce cash cost to be paid once production commences. Additionally, we will examine whether these deals are likely to benefit Silver Wheaton.
The Rosemont mine is a copper-molybdenum-silver porphyry deposit located in Pima County, Arizona and owned by the Augusta Resource Corporation. It is expected to be a 75,000 ton per day low-cost open-pit mine, yielding annually an average of 221 million pounds of copper, 4.7 million pounds of molybdenum, 2.4 million ounces of silver and up to 15,000 ounces of gold over a period of 20 years. Production is expected to commence in 2014, and Silver Wheaton will be entitled to all of the silver and gold production throughout the mine’s operating life. 
The Rosemont mine has proven and probable reserves of 495.6 metric tons and it is estimated that 3.9 gm of silver is present in each metric tonne. In all, it is estimated that 62.9 million ounces of silver are present in these reserves. The process recovery rate is estimated at 80%, which means that the average percentage of silver in the concentrate recovered from the mined ore is 80%. 
Silver Wheaton has agreed to pay upfront cash payments totaling to $230 million. The money will be paid in installments, to partially fund construction of the Rosemont mine once certain milestones are achieved. These include the receipt of key permits and securing the necessary financing to complete construction of the mine. There were no updates on the status of these permits in the company’s latest quarterly report.
Silver Wheaton will buy precious metals for the lesser of $3.90 per ounce of silver and $450 per ounce of gold (both subject to an inflationary adjustment), or their prevailing market prices when delivery is made. Given that gold is trading at around $1200 per ounce and silver above $20 per ounce, market prices are unlikely to fall below contracted prices.
The Constancia mine is located in Peru. In August 2012, Silver Wheaton entered into an agreement with Hudbay to acquire 100% of the silver production from its Constancia Project. The total upfront consideration to be paid for this mine is $294.9 million. Of this, $44.9 million was paid on September 28, 2012, when the deal was closed. A further payment of $125 million is to be made once $500 million in capital expenditures have been incurred at Constancia. A final payment of $125 million will be made once $1 billion in capital expenditures have been incurred. 
The key environmental permits for Constancia have been procured, and engineering and design work is complete. First production is anticipated in 2015, and full production is expected to be achieved in 2016. As of now, an annual production of 85,000 tons of copper is expected, with molybdenum, silver and gold as by-products. The life of the mine is expected to be 15 years.
The Constancia mine has proven and probable reserves of 450 metric tons and it is estimated that 3.4 gm of silver is present in each metric tonne. In all, it is estimated that 48.8 million ounces of silver are present in these reserves. The process recovery rate for this mine is estimated at 72%.
Benefits To Silver Wheaton
In our opinion, the deals fix the price of silver at a relatively lower figure, considering the huge jump in the cost of production over the last few years. Going forward, we think it will rise further, owing to higher costs associated with labor, energy, and regulatory compliance. Silver Wheaton, however, will be insulated from these owing to its fixed-price contracts. Also, with industrial demand expected to pick up sooner or later, the market price of silver is likely to rise. This will allow streaming companies like Silver Wheaton to earn good returns. Hence, we think that Silver Wheaton has good deals in these mines. The Constancia deal includes a clause that specifies the return of cash consideration to Silver Wheaton in the event that production targets are not met, which ensures that shareholders have adequate downside protection.
Silver Wheaton forecasts 33.5 million ounces of silver equivalent production (including 145,000 ounces of gold) in 2013. In 2017, it forecasts 42.5 million ounces of silver equivalent production (including 180,000 ounces of gold). ((Silver Wheaton provides update on Pascua-Lama and extends Barrick silver stream agreements, Silver Wheaton Press Release))
We have a price estimate for Silver Wheaton of $20 which represents 5% downside to the current market price.Notes: