Why Has Silver Wheaton Not Announced New Streaming Deals In A While?

Silver Wheaton (NYSE:SLW) is the world’s largest precious metals streaming company. It is one of the largest producers of silver, despite not owning a single mine. ^[1] The company 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 companies that are directly involved in mining.

Since the inception of the precious metals streaming model by Silver Wheaton in 2004, these agreements have become an important source of financing for mining companies. However, Silver Wheaton has struck only one precious metal streaming deal since the announcement of its streaming deals with Vale in February 2013. In this article, we will look at this issue in greater depth. We will look at various aspects such as the target market, the company’s competitors and the state of its finances.

See our complete analysis for Silver Wheaton

Target Market and Commodity Pricing Environment

Over 70% of mined silver is produced as a by-product from base metal or gold mines. ^[2] Precious metal streaming deals are attractive sources of funding for mining companies, especially in subdued pricing environments, such as those persisting at the moment. Copper prices are low due to a persisting oversupply situation and weak demand. ((Copper Miners Forecast Years Of Surplus, The Financial Times)) Gold prices are weak due to the strengthening of the U.S. and world economies, a strong U.S. Dollar  and expectations of an impending interest rate hike by the Fed. ^[3] Due to the subdued pricing environments, sentiment is negative regarding the mining sector in general. Equity valuations are subdued, which makes issuing stock less desirable. Debt is hard to come by for mining companies, most of which have highly leveraged balance sheets, and are looking to deleverage.

Under such conditions, streaming deals are an attractive source of funding for mining companies. This is especially the case for gold and copper producers, or diversified mining companies that produce these metals, as these are the major counterparties for Silver Wheaton’s precious metal streaming deals. Currently, Silver Wheaton accounts for only around 4% of the silver produced by its potential target market of gold and base metal mines. Though, this is expected to rise to 6% by 2018 through a rise in production from streaming deals already in place, there is clearly significant growth potential in the silver streaming space for the market leader, Silver Wheaton. ^[2]

Competitors

Silver Wheaton spent roughly $2 billion to acquire precious metal streams from Vale’s Sudbury and Salobo mines. Since then, the company has entered into only a solitary $148.5 million streaming agreement with Sandspring Resources in November 2013. ^[4]

Franco-Nevada Corporation and Royal Gold Inc. are the second and third largest precious metal streaming companies by enterprise value and Silver Wheaton’s main competitors. ^[2] Over the same period in which Silver Wheaton signed one streaming deal, Franco-Nevada has entered into ten streaming agreements for a total consideration of roughly $350 million, in addition to the recent $648 million streaming agreement with Lundin Mining for the Candelaria copper mine. ^{[5] [6] [7]} Over the period from March 2013 to the present, Royal Gold has entered into four streaming agreements for a total consideration of around $130 million. ^[8]

Silver Wheaton’s main competitors have been more active over the past year and a half in terms of the number of precious metal streaming deals signed. However, most of these deals are much smaller in terms of cash consideration and the potential precious metal output. Silver Wheaton has been selective in choosing projects, emphasizing on low-cost mining assets. Around 85% of the mining assets under the company’s streaming agreements belonged to the first quartile of the cost curve for by-products, indicating low costs of production. ^[2]

Finances

At the end of Q2, the company had $1 billion of bank debt on its books with scheduled repayments between 2015 and 2017. In addition to repayment of debt and interest, considering the outstanding payments to fund capital expenditure under the company’s streaming agreements, the company has obligations of roughly $1.6 billion up to 2017. ((Silver Wheaton’s Q2 2014 Earnings Report, SEC)) The company generated $534 million in cash flows from operations in 2013. ^[9] The company reported $139.2 million in cash and cash equivalents at the end of Q2. In addition it had access to a $1 billion undrawn revolving credit facility. ((Silver Wheaton’s Q2 2014 Earnings Report, SEC)) Considering the company’s cash balances, operating cash flows and access to the revolving line of credit, it should have enough to pay off its obligations in the coming years and still have resources available to invest in new precious metal streams. However, in order to fund large precious metal streaming deals such as the $2 billion deal with Vale in 2013, the company will have to take on additional debt.

The Road Ahead

Considering the conducive commodity pricing environment for streaming agreements, demonstrated by the flurry of activity by its competitors, and the state of its finances, Silver Wheaton is in a favorable position for the acquisition of additional streaming deals. The company’s management has indicated this in its Q2 earnings conference call. It has also indicated that the company is pursuing potential new deals. ^[10] It could just be a matter of time before Silver Wheaton announces the acquisition of a new precious metal stream. Perhaps the company is waiting for the right opportunity.

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1. Silver Wheaton Pioneers Payment Streams for Miners, Financial Times [↩]
2. Silver Wheaton’s September Corporate Presentation, Silver Wheaton Website [↩] [↩] [↩] [↩]
3. Federal Reserve to debate new language on interest rates, Financial Times [↩]
4. Silver Wheaton’s Q2 2014 Earnings Report, SEC [↩]
5. Franco-Nevada’s 2013 Annual Report, Franco Nevada Website [↩]
6. Franco-Nevada’s Q2 2014 Report, Franco Nevada Website [↩]
7. Franco-Nevada to Acquire a Gold & Silver Stream on Candelaria from Lundin Mining for US$648 million, Yahoo Finance [↩]
8. Royal Gold’s FY 2014 Annual Report, Royal Gold Website [↩]
9. Silver Wheaton’s 2013 40-F, SEC [↩]
10. Silver Wheaton’s Q2 2014 Earnings Call Transcript, Seeking Alpha [↩]