Silver Wheaton Announces New Streaming Deal, Benefiting From Subdued Commodity Pricing Environment

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SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW) has announced the signing of an early deposit precious metals streaming agreement with Panoro Minerals Ltd. for the Cotabambas copper project in Peru. [1] As per the terms of the deal, Silver Wheaton will make a payment of $140 million to Panoro Minerals (which will be paid in a set of installments as the project comes closer to the commencement of production), in return for rights to purchase silver and gold by-products from the mine. The streaming deal entitles Silver Wheaton to the right to purchase 100% and 25% of the silver and gold production respectively (at a significant discount to current prices of these metals) from the Cotabambas mine until 90 million silver equivalent ounces attributable to Silver Wheaton have been produced, after which production attributable to Silver Wheaton would drop to 66.67% and 16.67% of the mine’s silver and gold production respectively for the rest of the mine’s life. The Cotabambas streaming agreement is the latest deal signed by Silver Wheaton, benefiting from the conducive prevailing environment for precious metal streaming agreements.

Subdued Commodity Pricing Environment

Most of the world’s mined silver is produced as a by-product of the mining of base metals and gold. Precious metals produced as by-products of these mining operations usually constitute the underlying commodities in Silver Wheaton’s streaming agreements. According to the company’s estimates, around 70% of the world’s mined silver is produced as a by-product from base metal and gold mines, which constitute the target market for the company. [2]

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Precious metal streaming deals become an attractive source of funding for mining companies during a downturn in commodity prices. Debt is hard to come by on favorable terms for most mining companies in an environment of weak commodity prices. In addition, most mining companies look to reduce their outstanding debt during a downturn in commodity prices. Moreover, with equity valuations subdued, issuing stock is not the most desirable way to raise capital, either. With sources of capital on favorable terms scarce during a downturn in commodity prices, precious metal streaming deals offer an alternative that can partially fulfill the funding needs of mining companies.

Copper Spot Prices, Source: LME

The chart shown above illustrates the decline in copper prices over the past twelve months. The prices of base metals such as copper and nickel have plummeted over the past year, primarily due to an economic slowdown in China and fears of weakening demand for these commodities. With the weakness in copper prices presenting an opportunity to Silver Wheaton for the acquisition of new streaming deals, the company recently signed the Cotabambas streaming agreement. In addition, the company announced two large streaming deals, with upfront payments totaling $1.8 billion with Vale and Glencore Xstrata in 2015. [3]

Gold Prices in 2015, Source: Kitco

Besides the decline in base metal prices, gold prices have also declined over the course of 2015, as illustrated by the chart shown above. Fears of an interest rate hike by the Fed kept gold prices subdued over the course of 2015. Going forward, concerns over further interest rate hikes and weakness in jewelry demand for gold (due to an economic slowdown in China) will keep gold prices subdued in 2016. With the weakness in base metal and gold prices expected to persist in 2016, conditions remain conducive for Silver Wheaton to sign more streaming agreements. We will continue to keep a close eye on developments at the company, and look out for more activity on this front.

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Notes:
  1. Silver Wheaton Announces Early Deposit Precious Metals Stream With Panoro Minerals And Announces Automatic Purchase Plan, Silver Wheaton News Release []
  2. Silver Wheaton’s January 2016 Corporate Presentation, Silver Wheaton Website []
  3. Silver Wheaton’s Q3 2015 Earnings Release, SEC []