Canada buys back a little Sudbury

The upstart precious metals-streaming business has clearly reached the big leagues, with a blockbuster cash deal being forged between Vale (VALE-N) and Silver Wheaton (SLW-T, SLW-N).

The Brazilian iron ore king is selling to the Vancouver-based silver stream company 25% of the payable gold by-product stream from its new Salobo copper mine in Brazil’s Para state for the life of the mine and 70% of the payable gold by-product stream from its Sudbury nickel mines — Coleman, Copper Cliff, Creighton, Garson, Stobie, Totten and Victor — for 20 years. Production will accrue to Silver Wheaton retroactively to Jan. 1, 2013.

Vale will pocket an initial wallet-bulging cash payment of US$ 1.9 billion plus 10 million warrants of Silver Wheaton with a strike price of US$65 and a 10-year term, valued at US$100 million.

The Salobo part of the deal accounts for US$1.33 billion of the amount, while the Sudbury part accounts for US$570 million.

Vale will also receive future cash payments for each ounce of gold delivered to under the agreement, equal to the lesser of US$400 per oz (plus a 1% annual inflation adjustment from 2016 in the case of Salobo) and the prevailing market price.

Other cash payments totalling up to US$400 million could come due if Vale goes ahead and expands Solobo to more than 28 million tonnes per year before 2031.

The estimated capital expenditure is US$4.2 billion for the first two phases of Salobo development, which would result in a mining complex capable of delivering 200,000 tonnes per year of copper in concentrates plus gold by-product. Just over US$3 billion has already been spent.

Vale reports that Salobo I is ramping up as planned, while Salobo II will come on-stream in the first half of next year.

The sale by Vale is only the latest in a string of moves designed to tighten the company’s focus on base metals and squeeze more productivity and efficiency out of its vast, global asset base. The net effect of these improvements, Vale hopes, will be improved profits and share prices, and a recapturing of market share lost during the global economic downturn.

Overall, Vale has a relatively sunnier take than most on the future of base metals demand, with Reuters reporting the company expects long-term iron ore prices to range between US$110 and US$180 a tonne, powered by a recovery in global industrial demand, especially from its key clients in China.

Bloomberg recently reported that iron ore for immediate delivery was priced at US$148.40 per tonne, according to a price index compiled by The Steel Index Ltd., or up 71% from a three year-low of US$86.70 on Sept. 5.

For its part, Silver Wheaton further cements its status as the world’s largest precious metals streaming company. Not counting this new deal, the company was already due to have attributable production in 2013 of about 33.5 million silver equivalent oz., including 145,000 oz. gold.

This new Vale stream will immediately add an expected average gold production of 110,000 oz. per year over the next 20 years (or 5.9 million silver equivalent oz.) including 60,000 oz. per year from Salobo and 50,000 oz. from Sudbury. It also means that gold may account for 25% of Silver Wheaton’s revenues five years from now, up from the current 12%.

By 2017, Silver Wheaton is now due to have 53 million silver equivalent oz. of attributable production, up over 80% from 2012 levels.

To close the Vale deal, Silver Wheaton still has to come up with the capital, though, as its cash balance doesn’t quite cover it. At the end of the third quarter it had about $555 million of cash on hand.

Thus it has entered into an agreement with Scotiabank and BMO Capital Markets as co-lead underwriters for two new credit facilities: a US$1-billion, 5-year revolving credit line (replacing a US$400-million one), and a US$1.5-billion bridge loan with a 1-year term.

Scotiabank was also the sole financial advisor to Vale.