Gold Wheaton: Dream team, dream concept

When the team behind Gold Wheaton first approached David Cohen about the idea of mimicking the wildly successful business model of Silver Wheaton (SLW-T, SLW-N), the former chief executive of Northern Orion Resources was “initially skeptical.”

That skepticism lasted all of about two and a half minutes, Cohen joked to investors and analysts on a recent conference call, during which he unveiled details of the new “stream” company that will purchase byproduct gold from producing base metal mines.

“It’s the same group behind Gold Wheaton that brought you Silver Wheaton and that same success is going to be duplicated in the gold space,” Cohen, the company’s new chairman and chief executive, said enthusiastically. “Investors have wanted it and asked for it for a long time and they’ve watched Silver Wheaton grow from something as a concept four years ago to an incredibly strong company.”

Silver Wheaton, which was spun off in 2004 by Wheaton River Minerals, listed on the Toronto Stock Exchange in October of that year and has seen its stock climb to as high as $19.30 per share from under $4. The company gets all of its revenue from silver it purchases through contracts with five separate mines. It has moved from an initial market capitalization of $559 million to one of about $3.3 billion today.

Gold Wheaton’s management and board of directors consists of a founder of Wheaton River, visionary mining financier Frank Giustra, FNX Mining (FNX-T, FNXMF-O) founder and executive chairman Terry Mac- Gibbon, and Francesco Aquiline, head of an investment group and owner ofthe Vancouver Canucks hockey team.

Gold Wheaton’s first $400-million cash-and-share transaction — completed at the lightning speed of just two weeks — was signed with FNX.

Under the deal, FNX will receive a $175-million cash payment for selling the platinum group metals (PGMs) contained in its ore. FNX will also receive $175 million worth of shares up front, with a further $50 million in shares, warrants or cash six months after the financing closes. FNX will hold more than a 40% equity stake in the new gold stream company.

FNX, which operates three producing mines in Sudbury, Ont. — McCreedy West, Levack and Podolsky– will sell its payable PGM production to Gold Wheaton at a gold-equivalent price of US$400 per oz.

News of the arrangement on June 13 sent shares of FNX shooting up $1.80 per share to close at $25.25 apiece on a trading volume of nearly 950,000 shares. FNX has a 52-week trading range of $21.52-39.77.

Onno Rutten, an analyst who covers FNX at UBS Securities in Toronto, said the deal could unlock about $2.11 per FNX share and has raised his 52-week target price on the stock to $34 per share, up from his previous target of $32. He rates the stock a buy.

“The value of cash on hand and the option value embedded in Gold Wheaton more than offsets the lower realized PGM revenues,” Rutten wrote in a research note to clients.

Gold Wheaton’s second transaction was signed with junior Redcorp Ventures (RDV-T, RDFVF-O), in which it will buy 100% of the life-of- mine payable gold production from Redcorp’s Tulsequah Chief mine in northwestern British Columbia and any other mines within a defined project area for a staged US$90-million upfront payment plus US$400 per oz. gold produced.

Redcorp Ventures inched up 2.5 a share on the news to close at 23 on a trading volume of 5.7 million. Over the last year, it has traded at between 13.5 and 57 a share.

Redcorp calls the arrangement a “creative solution” to financing the construction of Tulsequah. With increasing labour, material and other costs, its budget for the mine has increased by about $95 million over the original feasibility study estimate. Last summer it raised $252 million, but of that sum, about $92 million was tied up in the asset-backed commercial paper fiasco.

“For our purposes, we knew there was going to be a bit of a shortfall and with the increased costs we had to look for alternative ways to make up the cost — so we think this is a very creative solution,” says Salina Landstad, a company spokesman. “Rather than going back to the market and try- ing to raise additional funds, this is a very good alternative.”

Gold Wheaton’s first two transactions alone should result in annual production averaging about 100,000 gold-equivalent oz. for the next 10 years, management says.

The company expects to purchase roughly 30,000 oz. of gold-equivalent production this year — growing by a factor of five to about 162,000 oz. in 2010.

“That’s almost unbelievable,” Cohen noted, adding that pre-tax cash flow will come in at about $15 million this year alone. “Not bad for a company just coming out of the starting blocks.”

Gold Wheaton is taking over the stock market listing of Kadywood Capital (KDC. H), which is listed on NEX, a board that provides a new trading forum for listed companies that have fallen below the TSX Venture board’s listing standards.

Cohen — whose former company Northern Orion was taken over by Yamana Gold (YRI-T, AUY-N) last year — said the Gold Wheaton concept is simple and a “great idea” that avoids the risk and inflationary pressures of the traditional mining model.

For one thing, the startup will not be affected by soaring capital and fixed costs, skills shortages, or regulatory headaches.

“We’ve got no exposure to runaway capital costs in this business anymore,” he said.

Moreover, its timeframe for developing the business is diametrically opposed to the traditional mining model where it takes years and years before a mine is up and running.

“We’re all conditioned in the mining business to look at this long and very frustrating gestation period for a mine,” Cohen explained. “By the time you get it built, you hope to hell that metal prices remain high. Gold Wheaton is a completely different animal.”

For Gold Wheaton, the lead-time to get cash flow into its treasury is also just a matter of weeks, Cohen added.

“We’re taking away all the unknown exploration and development risk in this business,” he said. “It just doesn’t get better than this.”

As for the market outlook for the price of gold, which peaked at US$1,003 per oz. in March and is currently trading at about US$869.20 per oz., Cohen said the only direction it can go is up. “I wouldn’t be surprised if we see gold in the US$1,400-to US$1,500- per-oz. range,” he said.