Silver Wheaton To Consolidate Grip On Industry

Silver Wheaton’s (SLW-T, SLW-N) proposed acquisition of Silverstone Resources (SST-V, SVRCF-O) will give it immediate production and cash flow from a number of low-cost mines in politically stable countries, the company’s president and chief executive, Peter Barnes, declared on a conference call in March.

“We’re adding immediate cash flow and no debt and (the deal) adds flexibility in acquiring future silver stream opportunities,” he said, noting that investors should also like the acquisition because it “drops our cash flow multiple from about 14 times to 11.8 times on a pro-forma basis in 2009, so it’s a good deal based on cash flow per share.”

Under the proposed transaction, valued at $190 million, Silverstone shareholders would receive 0.185 of a Silver Wheaton share for each Silverstone share they own.

The deal represents a premium of 18% based on the closing share prices of Silver Wheaton ($7.94) and Silverstone ($1.25) on the day prior to the announcement, and a 40% premium based on the 20-day volume-weighted average of both companies’ shares.

“For Silverstone, they’re getting a substantial premium,” Barnes noted. “They’re also getting much more liquid shares with average trading of over $80 million on a daily basis. . . (and) much better diversification in terms of geography and primary metals.”

Silverstone’s core assets are silver stream agreements with Capstone Mining’s (CS-T, CSFFF-O) Minto copper-gold-silver mine in the Yukon, and its underground Cozamin copper-silver-lead-zinc mine in Mexico’s Zacatecas state. They also include Lundin Mining’s (LUN-T, LMC-N) Neves-Corvo copper-zinc-silver mine in Portugal.

The low-cost Minto mine is one of the highest-grade open-pit copper mines in the world, according to Silver Wheaton, and has doubled output since it went into production in 2007. This year, Silver Wheaton expects Minto will produce about 290,000 oz. silver and 31,000 oz. gold. Under its agreement with Capstone, Silver Wheaton has the right to buy all of the silver and gold production from Minto for the lesser of US$3.90 per oz. silver and US$300 per oz. gold or the prevailing market price per ounce of silver or gold delivered.

“Minto is a very, very, rich deposit, probably one of the highest-grade copper open-pit deposits in the world, and perfectly fits the profile of Silver Wheaton,” Randy Smallwood, Silver Wheaton’s executive vice-president of corporate development, said on the conference call.

Capstone’s Cozamin mine has tripled output since it was commissioned in 2006 and is both a highgrade and low-cost producer. The mine is forecast to produce about 1.5 million oz. silver this year and Silverstone has the right to purchase all silver production until 2017 for the lesser of US$4 per oz. silver or the prevailing market price per ounce of silver delivered.

Silverstone also has the right to purchase 100% of the life-of-mine silver production from Lundin’s Neves-Corvo copper-zinc-silver mine in Portugal for the lesser of US$3.90 per oz. silver or the prevailing market price per oz. silver delivered. Neves-Corvo is expected to produce about 500,000 oz. silver this year.

Silverstone’s other assets include copper deposits adjacent to Neves-Corvo in Portugal — the Lombador zinc-lead-silver deposit — which Lundin is advancing towards a feasibility study and hopes to put into production in 2012.

They also include a silver stream agreement on MTO Holdings’ Aljustrel zinc-lead-silver mine (previously owned by Lundin) in Portugal, currently on care and maintenance; and a convertible debenture with Aquiline Resources (AQI-T, AQLNF-O). The debenture can be converted into an agreement to buy 12.5% of the life-of-mine silver production from a portion of Aquiline’s Navidad project in Argentina. In addition, it has the right of first refusal to buy any silver or gold streams from Capstone’s highgrade Kutcho copper-zinc project in Canada, which is moving towards production.

This year, Silver Wheaton expects to have annual silver sales of 15-17 million oz. and forecasts that number will grow to about 30 million oz. in 2013.

Last year, more than 85% of its sales stemmed from three core mines: Luismin’s operations in Mexico (Luismin is owned by Goldcorp [G-T, GG-N]), Glencore International’s Yauliyacu in Peru and Lundin’s Zinkgruvan in Sweden. Silver Wheaton also owns a silver stream from Goldcorp’s Penasquito mine in Mexico, which it describes as its “engine of growth.” When the mine moves into production in the middle of this year, it will become Mexico’s largest open-pit polymetallic mine, the company says.

Silver Wheaton agreed in 2007 to buy 25% of all the silver Penasquito will produce over the course of its mine life. When in full production, Silver Wheaton anticipates it will receive average annual silver deliveries of about 8 million oz.

News of the acquisition sent Silver Wheaton’s shares up 10¢ or 1.3% to close at $8.04 per share, while Silverstone gained 20¢ or 16% to close at $1.45 per share.

Over the last year, Silver Wheaton has traded in a band of $3.07-19.30 per share, while Silverstone has traded in a range of 34.5¢-$3.10.