DENVER, Colorado (miningweekly.com) – The current sideways-to-down market was providing good opportunities for the handful of precious metals streaming firms which were consistently turning a profit – albeit at lower margins – despite the continued doggedly low commodity price environment.

Precious metals streaming pioneer Silver Wheaton’s president and CEO, Randy Smallwood, on Tuesday told Mining Weekly Online that the “good times” for streaming firms resulted from the model of partnering up and helping companies being such a “win-win” solution.

“Companies are, these days, much more capital conservative and are demanding a much higher rate of return when they make investments and streaming satisfies both those objectives. These are good times for streaming companies,” he enthused, speaking on the sidelines of the invitation-only gold industry event, the Denver Gold Forum.

The metals-streaming model had been outperforming the gold producers on a per-share basis in recent years. Smallwood ascribed this phenomenon to Silver Wheaton’s risk profile being completely different than that of miners. “We simply don’t have the cost risk that is traditionally found in the mining space,” he noted.

Smallwood explained that in the flat-to-downward environment, the profits of streaming companies were much more secure than producers, because all the lower prices did was to cut into margins. “In having to deal with cost inflation and price deflation, it is tough to be a mining producer right now, but streaming companies still maintain very healthy margins,” he pointed out.

PRICE TIED

Smallwood confirmed that Silver Wheaton’s profit was directly tied to the price of precious commodities, adding that with the significant output growth expected to come on line over the next several years, it would deliver back to the profit side, irrespective of the commodity price.

“We are a great connection to silver and gold, so if the prices drop, so do our profits. I believe we are at a cyclical bottom. It is probably a good time to get into this space, as there is more space to move upwards than downwards,” he added.

Smallwood noted that there were a number of factors one could use to get comfort about current commodity prices; however, the factor he currently thought held the most weight was the cost curves of producers – the real costs to produce silver and gold.

He said the third- and fourth-quartile gold producers were struggling. “I see supply-side pressure, with the supply side getting cut off and lending support to the commodity prices. I do not see much room below what we are right now – if [the price does] drop, I don’t think it would remain there very long, just because you can’t feed into it,” Smallwood highlighted.

The other factor contributing to the low commodity prices was the comparative strength of the US dollar. As the euro continued to struggle, the US dollar appeared to be the strongest currency in the world. “However, if one looked around, all one seems to find are ‘band-aid solutions’ and no real cure in terms of fiscal mismanagement. We are strong believers in hard assets as a true store of value,” he affirmed.

TURNING POINT

After a decade pioneering the precious-metals streaming model, Smallwood said  2014 was a turning point for Silver Wheaton, with new production expected to drive output to 48-million ounces of silver equivalent by 2018.

Based on its current agreements, Silver Wheaton expected 2014 full-year output of about 36-million silver equivalent ounces, including 155 000 oz of gold.

By 2018, its yearly output was expected to rise to about 48-million silver equivalent ounces, including 250 000 oz of gold. This growth would be driven by the company’s portfolio of low-cost and long-life assets, including among others, precious metal and gold streams on Hudbay’s Constancia project, in Peru, and Vale’s Salobo mine, in Brazil, and the Sudbury mine, in Ontario.

Smallwood noted that Barrick’s Pascua Lama project had taken out nine-million ounces from the production outlook, but, he added, it was still one of the best undeveloped gold deposits in the world. “It will be a top-notch project once it is going,” he said.

Despite the setback, the company remained healthy, with the bulk of that growth coming on line in the next few years. The only other exception was HudBay’s Rosemont copper/gold project, in Arizona, which would also be delayed.

Smallwood pointed out that, despite recently joining the World Gold Council, it did not forebode that the company was about to significantly increase its position in the yellow metal. He stressed that the company would remain silver focused. “We like precious metals as a whole, including gold and silver, and the platinum-group metals, but we remain bullish on silver,” Smallwood stated.

He added that the company’s decision criteria on whether to take on a project were first based on the quality of the asset and then the precious metal involved. “If we see the right opportunity in the gold space, we [will] step into the gold space and vice versa for silver,” he confirmed.

Indeed, the quality of Silver Wheaton’s assets was what differentiated it from peers Franco Nevada and Royal Gold, with 85% of Silver Wheaton’s output currently being in the lowest-cost quartile, declining to 75% by 2018 as more sources of precious-metals streams came on line.

Silver Wheaton currently had 19 operating mines and five projects, most of them focused in the Americas. Smallwood noted that the streaming model suited both the largest and smallest miners. Some of its cornerstone assets were Primero Mining’s San Dimas gold/silver mine, in Mexico, Goldcorp’s Peñasquito gold/silver mine, also in Mexico, and Vale’s Salobo copper mine, in Peru, and Totten nickel mine, in Ontario.