Silver Wheaton’s Name Change Reflects Opportunities In Both Gold And Silver

SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton began trading under its new name, Wheaton Precious Metals, on the New York Stock Exchange earlier this week. [1] The new name reflects the transformation of Silver Wheaton from a largely silver-focused streaming company to a more diversified company, with the revenue from its gold streaming agreements now matching that from its silver streaming agreements. The following table illustrates the changing composition of the company’s revenue over a five year period.

Change in Revenue Composition 2013-2017 1

While silver was the mainstay of Wheaton’s business five years ago, the company has recently capitalized on streaming opportunities in gold to boost the share of gold streaming in its overall revenue. We expect the share of both these precious metals in Wheaton’s revenue to remain about even going forward, which is not surprising considering that the precious metals streaming business model is equally suitable for both gold and silver. The precious metal streaming business essentially provides a source of funding to traditional mining companies, with companies such as Wheaton providing upfront payments (which account for a portion of the capital expenditure for the construction or expansion of a mine) to traditional miners, in return for rights to precious metals produced as by-products from these mines.

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Around 21% of the world’s gold production (global gold production – around 100 million ounces in 2017) is sourced as a by-product from base metal mines (such as those of copper). [2] Similarly, around 73% of the world’s silver production (global silver production – around 840 million ounces in 2017) is sourced as a by-product from base metal or gold mines. [2] The precious metals produced as by-products largely constitute the target market for the company. Wheaton’s current silver production accounts for around 4% of its target market whereas its gold production accounts for around 2% of the target market. While there are a few other players in the precious metal streaming space, even Silver Wheaton, the market leader, is currently tapping only a fraction of the potential opportunity available. Thus, there is scope for considerable growth in both the silver and gold streaming spaces.

Precious metal streaming as a source of capital is most attractive in times of downturns in the prices of base metals (which usually coincide with periods of slowing economic growth). Tapping additional sources of capital is often difficult and costly for mining companies during downturns in commodity prices, particularly as these companies are usually highly leveraged. Precious metal streaming provides an alternative channel of funding for these companies, enabling them to spend on the construction or expansion of mines while at the same time conserving their cash flows. A case in point is Wheaton’s deal with Vale for the gold produced at the company’s Salobo copper and gold mine. The original deal for 25% of the life of mine gold produced at the Salobo mine was struck in 2013, when copper prices stood at levels of around $7,000 per metric ton. However, copper prices fell considerably over the next few years, averaging less than $5,000 per ton in 2016. [3] Silver Wheaton acquired additional interests totaling 50% of the life of mine gold production from the Salobo mine over the course of 2015 and 2016, a period over which Vale was looking to lower its debt burden amid falling copper prices. [3]

Copper Prices 2012-2016

LME Copper Prices 2012-2016, Source: LME

While base metal mines (that produce either gold or silver as by-products) are suitable targets during economic downturns, gold mines producing silver as by-products are potential targets during periods of accelerating economic growth, when the investment demand for precious metals declines, often resulting in a decline in gold prices. Given the volatility in the prices of metallic commodities, the precious metal streaming business generally does find an adequate number of customers, either for silver or gold streaming agreements. Thus, Wheaton Precious Metals, the new avatar of Silver Wheaton, is well positioned to tap opportunities in both the gold and silver streaming spaces. The company’s new name certainly reflects this two-pronged growth strategy.

Have more questions about Silver Wheaton? See the links below.

Notes:

1) The purpose of these analyses is to help readers focus on a few important things. We hope such lean communication sparks thinking, and encourages readers to comment and ask questions on the comment section, or email content@trefis.com
2) Figures mentioned are approximate values to help our readers remember the key concepts more intuitively. For precise figures, please refer to our complete analysis for Silver Wheaton

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Notes:
  1. Silver Wheaton Changes Name To Wheaton Precious Metals, Wheaton Precious Metals Website []
  2. Corporate Presentation, Wheaton Precious Metals Website [] []
  3. Silver Wheaton’s 2016 40-F, SEC [] []