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Despite strong growth outlook, exploration underinvestment might dent Silver Wheaton portfolio growth prospects

20th March 2015

By: Henry Lazenby

Creamer Media Deputy Editor: North America

  

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TORONTO (miningweekly.com) – Despite its strong growth outlook, a critical shortage of and chronic underinvestment in new base metals and other exploration projects in the medium term, could dent the world’s largest precious metals streaming firm Silver Wheaton’s ability to strike new streaming deals in the future.

The silver- and gold-focused finance provider was expecting to grow its 2019 attributable output by 40% over last year’s 35.3-million silver-equivalent ounces to 51-million ounces. This did not include the 13-million potential ounces from Hudbay’s Rosemont project, in Arizona, and Barrick Gold’s Pascua-Lama project, straddling the Chile, Argentina border, that could come on stream at that time.

“One of the areas that we supply capital for is new development projects and there is definitely very little development at the moment. There is no doubt that a shortage of new exploration projects coming onto the table in the medium term could dent our ability to strike new streaming deals. That will reduce our potential opportunities to add to our portfolio,” TSX- and NYSE-listed Silver Wheaton president and CEO Randy Smallwood told Mining Weekly Online in an interview.

He noted that there was at the moment extremely little activity in the settlement-side of the company’s business, while most of its corporate activity was centred around helping clients with either balance sheet repair, funding project expansions and assisting in takeovers and project acquisitions.

“Eventually, the medicine is that it would lead to higher commodity prices for us all, owing to the lack of investment on the exploration side in an industry that needs to continually reinvest in itself. When exploration investment stops happening, it bodes well for those who still have good, strong assets, like we do,” he said, noting that the moment when investment-dollars started going back into the ground, was when supply-side support would once more pick up.

SCRAMBLE FOR CAPITAL
Smallwood said as a result of the commodity super-cycle being under downward pressure, the company had been entertaining more contract negotiations, as miners scrambled for capital in the difficult market.

“This is an excellent time for our industry in terms of making sure that there are opportunities for us to grow. Companies need the capital support and that’s what we do, we supply capital,” he noted.

Smallwood explained that one of the ways companies needed Silver Wheaton’s support stemmed from not wanting to add more debt, as most of them had tight balance sheets as it was and did not want to issue dilutive shares at low current market prices.

“Another option is to sell assets and streaming is a means of selling off an asset. It’s what I call ‘portfolio optimisation’. It’s where one sits and decides what is core to a company and what one can sell in support of that core operation,” he added.

Further, Silver Wheaton had been in many discussions regarding its ‘early deposit gold stream’ financing model, such as the one struck with Sandspring Resources, in 2013, but had not been able to close any new deals since.

“One of the challenges is that there is just absolutely zero support for companies of that scale right now in the marketplace,” Smallwood advised, explaining that Silver Wheaton had to ensure that the junior companies had the appropriate financial strength to be able to survive until there was an equity market that would, once more, provide them with some support.

“This has been a tough hurdle and that’s why we have not been able to close anything. There are some promising assets out there, but you have to have a company that’s going to withstand an extended period before the capital markets wake up again and start investing in that space again,” he stated.

ACQUISITIVE STRENGTH
Silver Wheaton currently had significant balance-sheet leeway with which to strike more precious metals streaming deals.

The company had last month amended and restated its revolving credit facility, increasing the available credit from $1-billion to $2-billion and, at present, had drawn down about $800-million. These funds were used earlier this month to acquire another 25% stake in the life-of-mine gold output from Vale’s Salobo mine, in Brazil.

Combined with its nearly $500-million in free cash flow a year, 20% of which was returned to shareholders as dividends, Smallwood emphasised that Silver Wheaton had “plenty of capacity”.

He emphatically stated that the company would never consider hedging against low precious metals prices, as its shareholders had invested in it to gain the exposure to precious metals prices.

“I find that people discussing hedging often have the benefit of hindsight, which makes it look good, but I have seen a lot of companies suffering from that. I know of some companies involved in oil hedges, where they have committed to oil purchase contracts that are at substantially higher prices than where oil is right now. It’s a really risky game and it’s not something that we choose,” Smallwood noted.

Every quarter, Silver Wheaten endeavoured to improve returns versus the London Bullion Market Association average for both gold and silver spot prices. “That is mainly because most of our deliveries are very lumpy and if one were just to blindly dump metals into the market all at once, we would have a [negative] impact on the market, and we don’t want to do that,” he pointed out.

PERPLEXING PRICES
If there was any space in the long term for silver and gold prices to drop farther below what they were currently, Smallwood would be surprised, conceding that the volatile market could move prices lower at any time, but there was just not enough space there to stay below for a long time.

The gold producers were already at tight margins and would simply shutter operations until later.

Silver Wheaton on Wednesday reported a 45% drop in net earnings for the three months ended December 31, as sliding realised prices offset higher silver-equivalent output.

The Vancouver-based firm reported that net income for the period sank to $52-million, or $0.14 a share, down from $93.9-million, or $0.26 a share, in the 2013 comparable period.

Revenue dropped 16% to $140.4-million, down from $167.4-million a year earlier, despite higher silver-equivalent sales.

The company sold 8.5-million ounces, comprising 5.7-million ounces of silver and 37 900 oz of gold in the quarter under review. The average realised price fell 22% year-on-year to $16.43/oz compared with $21/oz in the same 2013 quarter.

Attributable silver-equivalent output reached nine-million ounces, comprising 6.4-million ounces of silver and 34 500 oz of gold, down 8% from the 9.7-million ounces produced in the fourth quarter of 2013.

Silver Wheaton also declared a quarterly dividend of $0.05 a common share.

Meanwhile, the company produced 35.3-million attributable silver-equivalent ounces, comprising 25.7-million ounces of silver and 142 800 oz of gold, for the year. Output was down 2% on the 35.8-million equivalent ounces produced in 2013.

“We are in great financial shape. The cash flow that we get now specifically goes towards new operations and new investments. I’m pretty excited about the position the company is in right now. It’s time to break out and get to the next level.

Edited by Tracy Hancock
Creamer Media Contributing Editor

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