The Silver Wheaton success story

Vancouver – The basics of the Silver Wheaton (SLW-T) story are fairly well known – a small group from Wheaton River broke away after the Goldcorp (G-T, GG-N) merger to found a silver streaming company – but in his keynote address on the third day of the Mineral Exploration Roundup conference Silver Wheaton’s CEO Peter Barnes outlined the young company’s rapid climb to success using its impressive numbers.

In just five years Silver Wheaton has become the largest royalty and streaming company in the world, and its focus on silver has allowed producers of by-product silver to capitalize on a metal that remained undervalued for years.

The Silver Wheaton model is to give a company with a development-ready silver asset a significant chunk of cash to facilitate construction. In return, the streaming company gets the right to purchase a percentage of the mine’s silver output for a fixed amount.

Barnes pointed out the streaming agreements never include an ownership stake in the mining company, nor do they involve Silver Wheaton in decisions around mine operation. As such Barnes says his company can only do deals with companies that “have good assets and are good mine operators.”

Aside from making good partnership decisions, Silver Wheaton’s success stems from the fact that the company capitalized on a unique aspect of silver – that 70% of global silver production comes from by-product streams. The by-product nature of the precious metal meant that those who placed valuations on mining companies, from investors to banks, gave companies significantly less credit for their silver streams than those streams would have generated in a primary silver company.

The founders of Silver Wheaton – Barnes and president Randy Smallwood – realized this discrepancy provided an opportunity: moving those streams to a primary silver company could provide benefit to both the producing and purchasing companies. So Silver Wheaton was born.

The nature of streaming deals benefits mine developers, in a number of ways. For emerging base metal producers with by-product silver, the deals provide cash for a non-core asset and provide more value than the market would otherwise count. And for companies developing base metal or gold mines, a silver streaming deal provides a flexible source of financing. Unlike a debt deal with a bank, Silver Wheaton does not demand debt covenants or primary product hedging.

The limited range of responsibility also gives the company considerable stability and upside potential. Silver Wheaton is not responsible for any exploration costs or environmental liabilities and it is not exposed to currency risk, as it buys and sells silver in U.S. dollars.

The company’s success really shows in its growth profile. When it launched in 2004 Silver Wheaton’s first deal was with a $50-million agreement to buy silver from Wheaton River’s Luismin mine. Not long later Wheaton River merged with Goldcorp; soon after that Goldcorp sold Wheaton River’s 75% stake in Silver Wheaton for $1.8 billion. In short, the company’s value skyrocketed from $50 million to $1.8 billion in less than two years.

Three years later, the company boasts a market capitalization of roughly $6 billion. Barnes says 2008 was the company’s worst year ever, but 2009 was its best. In 2009 Silver Wheaton acquired Silverstone Resources, a smaller silver streaming company with three active streams, and signed a major deal with Barrick Gold.

The Barrick deal sees Silver Wheaton hand over $625 million over three years, in exchange for a current silver stream of 2.4 million oz. annually from three mines as well as 25% of the silver production from Pascua-Lama, which is expected to come on line in 2013. Just a quarter of Pascua-Lama’s silver will total 9 million oz. annually for the first five years.

With the additions of Pascua-Lama, Silver Wheaton expects its silver production to grow from 17 million ounces on 2009 to 40 million ounces in 2013, just based on deals already signed.

“It was a fabulous year for us,” says Barnes. “We couldn’t dream of having a better year than that, but we’re going to try.” Even though the company’s organic growth profile is better than solid, Barnes says the company will continue to look for additional streaming opportunities. He also wants to focus on maintaining low debt leverage, admitting that one of “our biggest mistakes” was having too much debt on the books in late 2008, as the recession hit.

“My view is that, in the mining industry, you shouldn’t be appropriately leveraged, you should be under-leveraged,” he says.

Silver Wheaton is also a tight ship, run with just 23 employees. In a bit of information he conceded was “useless, but I love it,” Barnes pointed out that his company has the highest market capitalization per employee on the New York Stock Exchange. Dividing $6 billion by 23, one finds that each employee at Silver Wheaton is responsible for almost $250 million worth of market cap.

Silver Wheaton’s share price is currently near $17. The company has a 52-week trading range of $7.26 to $18.36 and has 342 million shares outstanding.