A Closer Look At Silver Wheaton’s Streaming Agreement For The Rosemont Mine

SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW) is a precious metals streaming company which 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. The silver or gold obtained at a fixed price is sold at market rates. The company does not pay for any ongoing capital or exploration costs at the mines. Such a business model greatly lowers its business risk, as compared to other companies that are directly involved in mining.

In this article, we focus specifically on the company’s precious metal streaming agreement for Augusta Resource Corporation’s Rosemont mine. We will incorporate various dimensions of the streaming agreement such as the reserve base at the mine, expected output, upfront payments made by Silver Wheaton, and the per ounce cash cost paid.

See our complete analysis for Silver Wheaton

Relevant Articles
  1. Beating S&P500 BY 11% YTD, What To Expect From Travelers Stock?
  2. Up 50% Over The Last 12 Months, Is Hyatt Stock Still Attractive?
  3. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  4. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  5. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  6. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

The Rosemont Mine and Streaming Agreement

The Rosemont Copper Project is a copper-molybdenum-silver porphyry deposit located in Pima County, Arizona. Based on a positive feasibility study, Augusta Resource Corporation (Augusta) approved the project for development as an open pit mine. [1] The project is expected to begin commercial production in 2016. The mine will produce 221 million pounds of copper and 4.7 million pounds of molybdenum annually, in addition to silver and gold produced as by-products. ((Other Streams, Silver Wheaton Website))

On February 10, 2010, Silver Wheaton entered into an agreement with Augusta to acquire an amount equal to 100% of the life of mine silver and gold production from the Rosemont Copper Project. Silver Wheaton will pay Augusta a total upfront cash consideration of $230 million, payable on an installment basis, to partially fund construction of the Rosemont mine once certain milestones are achieved, including the receipt of key permits and securing the necessary financing to complete construction of the mine. [2] In addition Silver Wheaton will pay Augusta the lesser of $3.90 per ounce of silver and $450 per ounce of gold, subject to inflationary adjustments, or the prevailing market price for each ounce of precious metal purchased.

The Rosemont mine will average 2.9 million ounces of silver and 15,000 ounces of gold production attributable to Silver Wheaton over its mine life of around 20 years. [3]  As on December 31, 2013, the Rosemont mine’s proven and probable reserves stood at 80.1 million ounces of silver. ((Silver Wheaton’s 2013 40-F, SEC)) This is sufficient to support the envisaged rates of extraction over a 20 year period.

Analysis of the Agreement

As per the information available on the company website, we will assume a 20 year life for the Rosemont mine. The $230 million upfront payment for the streaming agreement translates into an average cost of roughly $11.5 million (~230/20) per year. As per the terms of the streaming agreement, the annual acquisition cost of precious metals, unadjusted for inflation, would be $18.06 million for 2.9 million ounces of silver and  15,000 ounces of gold. Thus, the average annual cost, unadjusted for inflation, would be $29.56 million. Taking current market prices of gold and silver of roughly $1,300 per ounce of gold and $20 per ounce of silver, the market value of precious metals purchased per year under the agreement is $77.5 million. Thus, Silver Wheaton would make a profit of around $48 million per year, or around 162% of the average annual cost, on its streaming agreement for the Rosemont mine.

Even if we consider an inflationary adjustment of 1% on the purchase price under the deal, there is still significant scope for a handsome profit. Taking into account an inflationary adjustment of 1% on the purchase prices under the deal, the purchase prices in the final year (year 20 in our estimate) would be roughly $544 per ounce of gold and $4.71 per ounce of silver. The company would still make a profit of around $44.2 million in the final year of production, considering today’s market prices of silver and gold. Thus, Silver Wheaton’s streaming agreement for the Rosemont mine looks like a good deal.

Demand for gold and silver over the term of the agreement will mainly be driven by major emerging economies such as China and India. With robust economic growth, rising middle class populations with growing disposable incomes, these countries will drive the jewellery, investment and industrial demand for gold and silver. In 2013, China accounted for 26% of the global private sector demand for gold. [4] Chinese private sector demand for gold is expected to grow from 1,132 tons per year in 2013 to 1,350 tons per year in 2017. ((China’s Gold Market: Progress and Prospects, World Gold Council)) Between 2009 and 2020, the global middle class will grow from 1.8 billion to 3.2 billion, with Asia’s middle classes tripling to 1.7 billion by 2020. [5] These trends will provide support to gold and silver prices and ensure the success of Silver Wheaton’s streaming agreement for the Rosemont mine.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)| Get Trefis Technology

Notes:
  1. Other Streams, Silver Wheaton Website []
  2. Silver Wheaton’s 2013 40-F, SEC []
  3. Silver Wheaton’s September 2014 Corporate Presentation, Silver Wheaton Website []
  4. China’s Gold Market: Progress and Prospects, World Gold Council []
  5. The Rise of The Global Middle Class, BBC []