Sandspring jumps on Silver Wheaton’s streaming deal

Silver Wheaton (TSX: SLW; NYSE: SLW) has given a confidence boost to Sandspring Resources (TSXV: SSP; US-OTC: SSPXF) by signing its first early deposit stream agreement for the junior’s Toroparu gold project in Guyana, a week after securing a gold stream with Hudbay Minerals (TSX: HBM; NYSE: HBM).

“On the corporate development front we remain busy, as evidenced by our two recent announcements regarding Hudbay and Sandspring,” said Randy Smallwood, Silver Wheaton’s CEO, on a conference call in mid-November.

In November the world’s largest precious-metal streaming firm said it would buy half of the gold produced from Hudbay’s Constancia polymetallic project in Peru for an initial payment of US$135 million, after the junior has spent US$1.4 billion on the project. Silver Wheaton already has a silver stream from the mine.

More recently, the Vancouver-based firm announced its early deposit stream, where it would buy 10% of the life-of-mine gold production from Sandspring’s Toroparu project for a total cash consideration of US$148.5 million, plus ongoing payments of US$400 per oz. This sent Sandspring up nearly 16% to close Nov. 12 at 22¢.

But unlike its other agreements, Silver Wheaton would advance US$13.5 million of the initial payment to secure its purchase right. This would give Sandspring funds to push the project to feasibility stage, after which Silver Wheaton would decide whether to proceed with the gold stream. If it goes ahead the company will pay the remaining cash consideration. Otherwise, Sandspring will have to return US$11.5 million of the cash advance, or reduce the 10% stream to 0.774%.

Smallwood says that with the new streaming model, Silver Wheaton can lock in precious-metal streams on early projects for little upfront capital, while providing struggling development companies — with worthy assets — a non-dilutive financing to move their projects forward.

Silver Wheaton’s CEO says he’s “very comfortable” with the Toroparu project and Sandspring’s abilities to advance the relatively straightforward project to feasibility. Toroparu is slated to produce 228,000 oz. gold at by-product cash costs of US$700 per oz. over 16 years. Pre-production costs are estimated at US$464 million. The junior is also looking at developing a hydroelectric power plant near the Toroparu property to reduce power-related costs.

Commenting on Silver Wheaton’s recent gold-stream purchases, Smallwood says that because the gold price has dropped compared to other commodities, there’s a higher demand for stream financings in the gold space than in the base-metal space for silver by-product production, and this is “one of the reasons we seem to crystallize more of these gold ones than silver.”

Smallwood adds that “we are silver focused, but we are not scared to have a bit of gold in the mix.”

Q3 profits fall, despite strong output

Silver Wheaton, which pays an upfront fee for the right to buy all or part of a company’s silver and gold output, reported silver-equivalent production of 8.9 million oz. and sales of 7.8 million oz., marking a 17% and 52% increase over the year-ago period.

“While both production and sales were higher in the third quarter, the average realized silver-equivalent price was (US$21.26)  — 32% below the third quarter of 2012 — which, of course, had a direct impact on our revenue, earnings and cash flow,” Smallwood said on the conference call.

Revenue grew slightly by 3% to US$166.4 million, while cash-operating flows dropped 8% to US$118.7 million. Net earnings tumbled 36% to US$77.1 million, or US22¢ per share.

On a positive note, the company declared a quarterly dividend of US9¢ per share based on 20% of the previous four quarters’ operating cash flows.

It also reduced its net debt position by US$129 million to US$978 million in the quarter.

Silver Wheaton ended September with US$62 million in cash and equivalents, and anticipates exceeding its 2013 guidance of 33.5 million equivalent oz. silver.

Smallwood notes that “2013 is well on its way to becoming our best year ever at Silver Wheaton.”