Silver Wheaton extends silver stream on Pascua-Lama

Given the unchanged prospects at Barrick Gold’s (TSX: ABX; NYSE: ABX) suspended Pascua-Lama gold-silver project in Chile and Argentina, Silver Wheaton (TSX: SLW; NYSE: SLW) has again amended its silver-stream agreement on the asset. 

Under the revised contract, the major streaming company will continue to receive all of the silver produced from Barrick’s Lagunas Norte and Pierina mines in Peru and Veladero mine in Argentina until March 2018, instead of year-end 2016. 

In return, Silver Wheaton has pushed out the completion test deadline, which requires the gold major to build Pascua-Lama to at least 75% of its design capacity by two and half years to June 30, 2020.

“The extension of the Pascua Lama silver agreement to 2020 is beneficial to both parties,” Cowen and Co. analyst Adam Graf writes in a note. “For ABX, the new agreement helps conserve cash and postpones a potential multi-million dollar payout to SLW. For SLW, the new agreement allows the company to preserve its optionality in the project.”

If the gold producer fails to meet that deadline, Silver Wheaton may end its contract. If this happens, Barrick would be required to return Silver Wheaton’s initial cash investment of US$625 million minus any silver delivered to date. At the end of September 2014, Silver Wheaton had received 12 million oz. silver from Barrick’s other mines, generating a total operating cash flow of US$275 million, and decreasing its initial investment to US$350 million.

“The change to the Pascua-Lama silver stream was expected,” BMO analyst Andrew Kaip says. He now projects first production at Pascua-Lama in the second half of 2018.  

The setbacks at the US$8.5-billion project have caused Silver Wheaton to more than once amend its 2009 streaming contract. The firm initially agreed to acquire 25% of Pascua-Lama’s life-of-mine silver production, and all of the silver produced from the Lagunas Norte, Pierina and Veladero mines through to the end of 2013. If there were any production shortfalls at Pascua-Lama, it would keep receiving silver from the other mines until year-end 2015, coinciding with the original completion test deadline.

After Pascua-Lama’s suspension in late 2013, Silver Wheaton extended the streams on the other mines by a year and the project’s 75% completion date to Dec. 31, 2017.

Barrick halted construction at Pascua-Lama in October 2013, citing slumping gold prices and regulatory and legal troubles. This was months after Chilean authorities fined the company US$16 million for environmental violations and after it took a US$5.1-billion write-down on the asset. The gold major said it would resume construction at the megaproject if conditions improved, adding it no longer expected production to start in mid-2016.

This year the uncertainties surrounding Pascua-Lama remain. On Dec. 31, Barrick noted that the Chilean Supreme Court refused to consider its appeal of a lower court decision regarding sanctions the country’s environmental regulator, SMA, imposed on Pascua-Lama.

An earlier ruling by Chile’s Environment Court found that SMA “improperly determined” the US$16 million fine for permit infractions. Barrick wanted to appeal that decision, arguing the fines were calculated based on applicable law. The Supreme Court declined to hear the appeal on procedural grounds, since the original action was against SMA. As a result, the environmental regulator has to re-evaluate the fines.

Barrick spokesperson Andy Lloyd said Silver Wheaton’s move to amend the silver stream again has noting to do with the recent court ruling, adding the “ruling has no direct implications for the timing of the project, per se.”

Separately, Silver Wheaton has agreed to cancel its silver stream on Nyrstar Mining’s Campo Morado mine in Mexico for a US$25-million cash consideration.