Silver Wheaton Announces Changes To Two Streaming Agreements In Response To Changing Business Conditions

Silver Wheaton (NYSE:SLW) has announced an amendment to its silver streaming agreement with Barrick Gold (NYSE:ABX) and the termination of its streaming agreement with Nyrstar Mining Ltd (EBR:NYR). ^[1] The amendment to the agreement with Barrick Gold is primarily due to the issues pertaining to Barrick’s stalled Pascua-Lama gold and silver project. Barrick had announced the temporary suspension of construction activities at the Pascua-Lama project in 2013. ^[2]

In addition, Silver Wheaton also announced the premature cancellation of its streaming agreement pertaining to the Campo Morado mine with Nyrstar Mining. The termination of the streaming agreement was primarily due to a continuous reduction of ore grades at the Campo Morado mine. ^[1]

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Streaming Agreement with Barrick Gold

Barrick Gold’s Pascua-Lama project has been beset by a series of legal and regulatory complications, cost overruns, and an environment of falling gold prices, which has negatively impacted the viability of the project. Only last week, the Supreme Court of Chile declined to consider the company’s appeal against the ruling of a lower court pertaining to sanctions imposed on the Pascua-Lama project. ^[2] Chile’s environmental regulator, known as the SMA, fined Barrick $16 million in May 2013 for not complying with some of the country’s environmental requirements for its Pascua-Lama project. ^[2] As a result of the Supreme Court’s ruling, the SMA will re-evaluate the fines pertaining to the Pascua-Lama project. As a result of the uncertainty surrounding the Pascua-Lama project, Barrick has not set a firm date for resumption of construction activities. The company has stated that the resumption of construction activities at Pascua-Lama would be contingent upon an increase in gold prices and greater clarity on the legal and regulatory issues that have dogged the project. ^[3]

In light of the uncertainty surrounding the Pascua-Lama project, Silver Wheaton has amended its streaming agreement with Barrick Gold. Silver Wheaton’s streaming agreement with Barrick included the Lagunas Norte, Pierina, and Veladero mines, in addition to the Pascua-Lama project. As per the previous amendment to the agreement in October 2013, Barrick was expected to complete construction at the Pascua-Lama mine to at least 75% of design capacity by the end of 2017. ^[1] Silver Wheaton was entitled to silver production from the Lagunas Norte, Pierina, and Veladero mines to the extent of any production shortfall at Pascua-Lama, until the end of 2016. ^[1] As part of the revised agreement, Silver Wheaton is entitled to production from Barrick’s other mines until March 31, 2018. ^[1] In return, Silver Wheaton has extended the completion test deadline to June 30, 2020. ^[1] In the event that Barrick does not meet the amended completion deadline, Silver Wheaton will be entitled to a return of the upfront cash consideration of $625 million made under the terms of the agreement, less a credit for the silver delivered up to that date. As of September 30, 2014, the cash obligation owed to Silver Wheaton, should Barrick not satisfy the completion test, stood at approximately $350 million. ^[1]

The amendment of the terms of Silver Wheaton’s streaming agreement with Barrick Gold is primarily due to the potential upside from the successful completion of construction activities at the Pascua-Lama project. In its first full five years of operation, Silver Wheaton’s silver production attributable to Pascua-Lama is expected to average 9 million ounces annually. ^[3] To put this into context, the company’s expected silver and gold production is expected to total 36 million silver equivalent ounces in 2014. ^[4] Thus, Silver Wheaton would benefit tremendously from the completion of the Pascua-Lama project.

Streaming Agreement with Nyrstar Mining

Silver Wheaton has reached a settlement with Nyrstar Mining for the termination of its streaming agreement for the Campo Morado mine. Silver Wheaton will be entitled to 75% of the silver produced at the Campo Morado mine on or before December 31, 2014, as per the terms of its streaming agreement. ^[1] As per the terms of the settlement, Silver Wheaton will receive $25 million from Nyrstar before January 31, 2015. ^[5] The company will also be granted a five-year right of first refusal on any silver streaming or royalty transaction in relation to any Nyrstar group property, globally. ^[1]

The streaming agreement for the Campo Morado mine was expected to last for the life of the mine. ^[3] However, there has been a continuous deterioration of ore grades at the G9 orebody, where Nyrstar has been conducting its mining operations. The G9 orebody is nearing exhaustion and the mine will start treating the remaining ore bodies, which have lower overall grades than the G9 orebody. As a result of lower expected future production from the Campo Morado mine, Silver  Wheaton recorded an impairment charge of $31.1 million in Q3 2014 pertaining to its streaming agreement for the mine . ^[6] The company estimates the value of the recoverable silver under its streaming agreement with Nyrstar at $25 million, which is the payment due to Silver Wheaton under the terms of the settlement. ^[1] With lower expected future production, Silver Wheaton decided to terminate its streaming agreement with Nyrstar.

Silver Wheaton has made appropriate decisions in response to changing business conditions in both cases. In the case of its agreement with Barrick Gold, the company will be entitled to silver produced from Barrick’s mines for an additional 15 months, whereas it terminated its agreement with Nyrstar for appropriate compensation.

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1. Silver Wheaton Provides Updates To Barrick And Campo Morado Silver Stream Agreements, Silver Wheaton Press Release [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. Barrick says Chile court won’t hear its appeal on Pascua-Lama fine, Reuters [↩] [↩] [↩]
3. Barrick Gold’s 2013 40-F, SEC [↩] [↩] [↩]
4. Silver Wheaton’s Q3 2014 Earnings Report, SEC [↩]
5. Nyrstar reaches Campo Morado settlement with Silver Wheaton Corp, Reuters [↩]
6. ref:2 [↩]