Silver Wheaton turns to internal growth

VANCOUVER — Industry stalwart Silver Wheaton (TSX: SLW; NYSE: SLW) has enjoyed a meteoric rise over the past decade.

The pioneer of providing stream financing has mobilized over US$8 billion in capital in 12 years. It now holds interests in 22 operating mines and eight development projects globally, and generated US$134 million, or 31¢ per share, in operating cash flows during the second quarter. In 2005 Silver Wheaton’s annual cash flows totalled just US$30 million.

On Sept. 29 the company hosted its inaugural investor day that included a three-hour presentation focused on its growth plans and what it calls its “portfolio optionality,” which could boost annual attributable production from 56 million oz. to over 80 million oz. silver equivalent.

That growth would be driven by development-stage projects and mine expansions, including a pair of major open-pit copper projects that might be inching closer to production.

“It is most effective in the development space. Now, we haven’t seen a lot of development money as of late, and there are not many new projects being built,” president and CEO Randy Smallwood said during the presentation. “There are few new royalties ever put into place in the precious metal space or in the mining space itself these days. It’s typically streaming that has taken it over.”

Silver Wheaton received good news when Barrick Gold (TSX: ABX; NYSE: ABX) announced it was taking a fresh look at its mothballed Pascua-Lama gold project on the Chile-Argentina border.

Barrick is now studying a smaller-scale underground operation on the Argentina side of the project as a starter mine. Only about 25% of the deposit sits in Argentina, with the rest in Chile.

Barrick Gold’s Pascua-Lama gold-silver project on the Chile-Argentina border. Credit: Barrick Gold.

Silver Wheaton paid US$625 million for 25% of life-of-mine silver production at Pascua-Lama, which could result in between 3 million and 3.5 million oz. annual attributable silver production during phase-one operations under the original larger mine plan.

Pascua-Lama’s proven and probable reserves total 324.6 million tonnes grading 1.47 grams gold per tonne and 64.66 grams silver per tonne for 15.3 million contained oz. gold and 675 contained oz. silver — or 169 million contained oz. silver attributable to Silver Wheaton, with an 82% recovery rate for silver.

Meanwhile, Hudbay Minerals (TSX: HBM; NYSE: HBM) could be making inroads on permits for the large, skarn-hosted Rosemont copper-molybdenum-silver deposit, 50 km southeast of Tucson, Arizona. The company is working towards a decision from the United States Forest Service, and its more contentious 404 Water Permit.

During the investor presentation, Hudbay chief operating officer Cashel Meagher said he would “not be surprised to see [the decision]” within the next year, though he cautioned the project would likely require a copper price of US$3 per lb. to trigger a production decision. Hudbay is working to update Rosemont’s mine plan, which contemplated an 80,000-tonne-per-day operation with a 20-year mine life.

Silver Wheaton paid an upfront consideration of US$230 million for 100% life-of-mine payable gold and silver production at the project, which it could buy for US$3.90 per oz. silver and US$450 per oz. gold. Rosemont has proven and probable reserves of 667.2 million tonnes grading 0.4% copper, 0.02% molybdenum and 0.12 oz. silver for 5.9 billion lb. copper, 193 million lb. moly and 80.1 million oz. silver.

Hudbay is also working on metallurgy and assaying to determine potential gold recoveries. Rosemont could tack on 2.5 million oz. in silver production to Silver Wheaton’s annual production without taking gold content into account.

Silver Wheaton’s current flagship asset is a 75% gold stream in Vale’s (NYSE: VALE) Salobo copper-gold mine in Brazil, and the mine could have the greatest long-term upside in Silver Wheaton’s current stable of asset. Silver Wheaton has offered a one-time capital contribution of up to US$950 million to expand Salobo’s capacity above 40 million tonnes per year. The mine’s throughput was doubled to 24 million tonnes per annum in mid-2014.

Silver Wheaton estimates Salobo has a 50-year life based on reserves of 1.2 billion tonnes grading 0.7% copper and 0.35 gram gold, plus exploration potential. The transaction gives Silver Wheaton another 3.2 million oz. gold in reserves, 700,000 oz. in measured and indicated, and 400,000 oz. in inferred.

Vale’s executive director of base metals Jennifer Maki said during her presentation that Vale expects a 50% increase in processing capacity to 36 million tonnes per annum by 2021.

Scotiabank analyst Trevor Turnbull calls Salobo Silver Wheaton’s “most compelling” asset, and notes the mine accounts for 33% of his asset base calculation.

Vale’s Salobo copper-gold mine in Para state in northern Brazil, where Silver Wheaton holds a 75% gold stream. Credit: Vale.

Silver Wheaton chief operating officer Gary Brown also gave an update on a dispute with the Canadian Revenue Agency over a tax reassessment for filings between 2005 and 2010.

The company has opted to petition the case into Canadian tax courts in Canada, since it believes that is the “most expeditious way to get a resolution.”

A court date is not anticipated until 2018, with a ruling potentially a year after that.

Silver Wheaton shares have traded in a 52-week range of $14.51 to $40.80 per share, and closed at $30.64 at press time. The company has 441 million shares outstanding for a $12.2-billion market capitalization.