Wheaton buys gold and palladium stream from Sibanye-Stillwater

Less than a month after paying US$390 million in cash for a cobalt stream from Vale’s (NYSE: VALE) Voisey’s Bay mine on the north coast of Labrador, Wheaton Precious Metals (TSX: WPM; NYSE: WPM) is making headlines again, with the US$500-million purchase of a gold and palladium stream from Sibanye-Stillwater’s (NYSE: SBGL) platinum group metal assets in the Beartooth Mountains of south-central Montana.

The PGM assets include two producing underground mines — Stillwater and East Boulder — along with 12 km of undeveloped mineralization in between that is associated with the J-M Reef deposit. In addition, the Blitz project at the Stillwater mine — which started ore production last year — is expected to drive growth, with full production by 2021–2022.

The Stillwater mine has operated since 1986 and produces 676,000 tonnes per year of platinum and palladium in concentrate, while East Boulder, open since 2002, produces 580,000 tonnes platinum and palladium concentrate each year.

Under the deal, Wheaton will make payments equal to 18% of the spot gold price and spot palladium price until the US$500-million cash payment lowers to zero, and 22% of the spot gold and palladium price thereafter.

Stillwater’s assets will contribute production and cash flow for decades to come, Randy Smallwood, Wheaton’s president and CEO, told analysts and investors on a conference call.

“Stillwater represented an attractive opportunity to acquire both gold and palladium from one of the lowest-cost, highest-margin platinum group metal mines in the world, and unlike the vast majority of PGM mines, Stillwater is located in a very low political risk jurisdiction,” Smallwood said. “While palladium is a new precious metal to our streaming interests, we believe it has strong fundamentals on both the supply and demand bases.”

Wheaton estimates the annual stream from all of the Stillwater assets starting in 2019 will average 14,500 oz. gold and 29,000 oz. palladium — about 37,000 equivalent oz. gold a year. (It forecasts 14,700 oz. gold and 24,000 oz. palladium as the 20-year annual average.)

“This stream adds decades of gold and palladium production, as the existing mine plan has 24 years based on reserves, along with significant inferred mineral resources, as well as what I would describe as incredible exploration potential that could extend its life well beyond that.

“It’s the lowest-risk exploration potential I have seen for a very long time in this industry,” Smallwood continued, noting that mineralization traces continuously for more than 32 kilometres.

“It’s wide open in depth and wide open at both ends, and this asset will be delivering metal for a very long time.”

Wheaton is funding the acquisition from its revolving-credit facility and says its US$600 million of operating cash flow a year will lower debt quickly, even at current commodity prices.

Commenting on Wheaton’s recent foray into cobalt and now palladium, Smallwood said Wheaton will remain a precious metals-focused company.

“The Voisey’s Bay cobalt stream represented a very unique opportunity — it’s not really a cobalt stream, it’s a Voisey’s Bay cobalt stream — and I differentiate that from so much of the other cobalt production around the world,” he said. “Palladium we do consider a precious metal, along with platinum, and we’ve spent plenty of time looking at PGM assets. This is the first one that met our criteria for political risk and economics.

“My preference is silver — I still think silver has got the best upside potential, but we’re more than happy to stay focused on the precious metals, and we will not go into the base metals space. We will not go into the oil and gas space.”

The addition of the Stillwater-Blitz and East Boulder mines bring Wheaton’s operating mines to 20, and development projects to nine.

“Wheaton Precious Metals continues to grow the business at a time when few are in the mining industry,” Cosmos Chiu, a mining analyst at CIBC, said in a research note.