Resource Investor article on Silver Wheaton's new deal with Augusta Resource Corp.
resourceinvestor.com
Silver Wheaton Possibly Scores Another Coup
By Ben Abelson
21 Dec 2007 at 01:00 PM GMT-05:00
CHICAGO (ResourceInvestor.com) -- Silver Wheaton [NYSE:SLW; TSX:SLW] has followed through on management's promise to continue expanding its silver purchase agreements with the announcement Wednesday of an agreement to buy as much as 2.5 million ounces per year.
The deal, signed with Augusta Resource Corp. [TSX:AZC; AMEX:AZC], would allow Silver Wheaton to acquire between 45% and 90% of the life of mine silver production from the Rosemont Copper Project, set to begin production in 2011. Upfront payments of as much of $320 million (depending on the amount of silver purchased) are required, with no ongoing fees during production; Augusta will draw down Silver Wheaton's capital to aid in construction and project development.
This equates to a purchase price of about $7/oz silver (assuming Silver Wheaton is able to acquire 2.5 million ounces of annual silver production at $320 million over an 18-year mine life). Should the price of silver remain strong in the longer-term future, SLW will have once again scored a coup in its acquisition price. The actual price paid ranges from anywhere from $145 million to $320 million depending on the amount of silver purchased and other factors.
Given that this is one of the higher priced deals SLW has enacted (some earlier transactions had been in the $4/oz-$5/oz silver range), should silver prices fall the deal could very quickly become problematic to Silver Wheaton's bottom line.
In either event, the new agreement again secures SLW's place as one of the most leveraged silver names available to investors. The higher purchase price, however, likely reflects the increased competition that the firm is facing in the royalty-purchase markets. While Silver Wheaton is the market leader in the silver royalty space - much like Royal Gold [Nasdaq:RGLD; TSX:RGL] for the yellow precious metal - the company is finding itself facing increased competition from newer upstarts, such as Silverstone Resources [TSX-V:SST] (See RI coverage).
According to UBS analyst Tony Lesiak, SLW doesn't current have the capital needed to close on the deal by mid-2008, suggesting the firm may have to issue new debt to finance the deal. According to Lesiak, even though the price paid per ounce is comparable to the effect price paid for production at Goldcorp's massive Penasquito mine in Mexico, given the Rosemont project's 2011 start date, later timing of the cash flows, and lack of exploration upside, this current deal is only slightly accretive to SLW's NAV.
The deal is just the latest in a string of transaction news for Silver Wheaton. Earlier this month Goldcorp [NYSE:GG; TSX:G] announced a significant increase in expected production at Penasquito, leading to a 52% increase in attributable silver to SLW.
In November, Silver Wheaton also revealed that it had acquired 2.5 million shares of Mines Management [AMEX:MGN] for $10 million. Mines Management said it would use the money to help fund development of its Montana-based Montanore project, which hosts resources of 166 million ounces of silver and 1.2 billion pounds of copper. As part of that deal, SLW also gained the right of first refusal over any future silver stream sales by Mines Management. |
