VANCOUVER (miningweekly.com) – As the tide turns in the resource investment space, a renewed focus on project development sees many juniors looking for cash to fund their project development goals.
The world’s largest precious metals streaming firm Silver Wheaton believes it has the answer for the right junior firms: its early deposit precious metals purchase model can provide cash to take projects to the feasibility stage, in exchange for a future stream of by-product precious metals output.
“There is a lot of interest in this model,” president and CEO Randy Smallwood told Mining Weekly Online, warning, however, that Silver Wheaton is setting the bar high and few projects make the cut.
“We have some pretty high standards in terms of what we want to invest in, so we’ve looked at well over a hundred projects, and we like only about five of them, and have closed two deals out of those. There are a few others we’re still working on,” he said during the recent Prospectors and Developers Association of Canada international mining convention in Toronto.
Smallwood believes the novel model makes a lot of sense for companies at the prefeasibility stage, noting that anything one can do to minimise the dilution to shareholders “makes sense”. These are projects that are at pre-bankable feasibility stage, meaning debt financing is not an option to these project proponents, only equity, making the early deposit model attractive for these companies to advance these projects towards that bankable feasibility stage, from where, ultimately, a construction decision can be made.
“It astounds me sometimes that people have an issue with selling a future noncore precious metals stream, but they have no qualm about issuing more equity to finance their projects. Our model remains very appealing and, so, we’re still active in that space and hoping to close a few more of those,” he said.
According to Smallwood, the smaller companies are having a tough time to get going in the equity market, despite renewed market optimism. He noted a “healthy appetite” for streaming deals in the $100-million to $400-million range. “There’s a lot of competition in that space; there are a lot of new players entering the space, and so we continue to watch it closely. One of the [opportunities] we see in the space is to consolidate – there are many transactions that are well priced, and even overpriced. When companies start to make mistakes like that, it always opens opportunities for consolidation,” Smallwood said.
There are also streaming transactions in the $3-billion to $4-billion range, but Smallwood expects the company to pursue the more profitable deals worth about $1.5-billion to $2-billion.
He pointed out that there are essentially three phases to the market for a precious metals streamer such as Silver Wheaton, including the balance sheet repair phase, which he reckons the market is just coming out of now.
“It’s been a situation we saw for the past three or four years. When we come out of that, usually it’s because of a strengthening market, which we have seen especially in the base metals, but also on the precious metals side, and so that’s the time when we start feeding into project development – the growth phase – supplying funding for new builds, or project expansions, or even for mergers and acquisitions, to put companies together.
“The third phase is the high point of the cycle, when we sit back and reap the benefits of our investments,” he explained.
Silver Wheaton sees room for continued investments as the market enters the growth phase. After Hudbay Minerals’ Constancia mine, in Peru, came on stream, there had not been a lot of development opportunities out there, but, ultimately, as prices continued strengthening, it would inevitably lead to more development opportunities, Smallwood said.
Smallwood pointed out that despite the continued challenges partner Primero Mining was experiencing at its San Dimas mine, in Mexico – one of Silver Wheaton’s cornerstone assets – the benefit of having a diversified portfolio with stronger-than-expected output from other assets such as Vale’s Salobo mine, in Brazil, and Glencore’s Antamina mine, in Peru, outweighed the negatives from one underperforming asset.
“It was the first asset we’ve built our company around since 2004. Primero’s challenges are well documented and we’re working with Primero to try and get through these challenges. Since starting out with the asset, it has now become the third or fourth biggest in our portfolio, so any negatives from San Dimas do not have as much impact as one might expect,” he stated.
Meanwhile, the world-class portfolio is supported by the strong dollar.
“When I look at the dollar and see where it’s trading at, I think it’s overvalued. The challenge is off course, that there are no other currencies. I see the Euro collapsing over the long term, so it’s pretty well the only currency out there – China is not going to be competitive soon. So, this is one of our strengths right now, that all our gold and silver is priced in dollars. But the first little hiccup with the currency and we’ll see precious metals prices spike as its role as a store of value gets reinforced,” Smallwood explained.
One of Silver Wheaton’s biggest strengths is that its mining costs are fixed, as opposed to actual miners who deal with a lot of variables.
“One of the biggest things the mining industry has continually failed to deliver on is decent costs, and decent capital and operating costs. It’s a key factor that makes our model attractive from a resource investment perspective. Our risk profile is much lower than a traditional resource company, our costs are fixed and our assets base is one of the best in the world.
“What I really like to compare ourselves to is an exchange-traded fund (ETF), or bullion holdings, where we deliver so much more. We deliver leverage, organic growth and accretive acquisitions and, when you add all those up, you actually deliver so much more than an ETF or bullion holdings. And when you look at the management fees we pay – we’re at about 29 basis points in terms of general and administrative costs, when you apply it over time – and we pay a dividend, so we pay you to hold our shares; whereas bullion and ETFs cost the holder, have zero growth and zero leverage,” he said.