Silver Streaming Giant Silver Wheaton (SLW) Sees Deals Benefit From Subdued Precious Metals Space

on November 13 2013 6:13 AM
Silver ingots
Silver ingots Ilya Naymushin/Reuters

Canada’s Silver Wheaton (TSE:SLW), the world’s largest silver streamer, is seeing better deals with precious metal miners in a subdued environment of declining capital budgets, the company’s CEO tells International Business Times.

Silver Wheaton strikes deals with gold and silver mining companies for portions of their mineral output at a fixed price, which it then sells at a markup to industrial users. Silver Wheaton is the largest such precious metal streamer, expected to net itself 33.5 million silver ounces in 2013.

But the company has also expanded into streaming gold, silver’s more expensive cousin, in recent years. It struck two deals in early November within one week, heightening exposure to gold even in a year when gold prices have declined dramatically.  

“The gold guys seem to be more agreeable to moving forward,” Silver Wheaton CEO Randy Smallwood told IBTimes. “Their need for capital is just as high, but they’re not getting as much support from the equity side or the debt side, and not as much support as base metals.”

As a result, miners are more willing to give Wheaton better values on deals, said Smallwood. The company maintains partnerships with some of the world’s biggest miners, including Barrick Gold Corp. (TSE:ABX) and Brazil’s Vale SA (BVMF:VALE3).

Gold miners have abruptly cut back on capital budgets, which soared over the past decade as gold enjoyed a years-long bull run, which is set to end this year.

Still, Silver Wheaton’s profits have fallen, largely because of declining gold and silver prices. In its latest earnings report from Monday, net income fell 36 percent from a year ago, to $77 million, or $0.22 per share.

“I’m confident that we’re close to a bottom,” Smallwood told IBTimes. “That’s why we’re making acquisitions.”

Still, he declined to say when his company might return to earnings growth. He said spending cuts among producers with high per-ounce costs would eventually translate into supply pressures, which could buoy prices.

Silver opened at $21.3 per ounce on New York’s COMEX exchange on Tuesday. Gold opened at $1,281 per ounce on the same exchange, depressed recently by a surprisingly strong jobs report.

Silver Wheaton was also bruised by Barrick’s recent decision to suspend construction on its massive Chilean Pascua-Lama gold mine. The company cut its production guidance for 2017 by about 13 percent thanks to the delay, which it described as “somewhat disappointing.”

Smallwood said he wasn’t surprised by Barrick’s decision to delay construction, and said it would be better overall for both Barrick and his own company.

Silver Wheaton has already paid Barrick $625 million for 9 million ounces of silver per year for the first five years of Pascua Lama’s production, in addition to an expected 5.5 million ounces annually for the life of the mine, which is estimated at over 25 years. It has set a 2017 deadline for the start of production. Barrick will compensate Silver for delays by offering about 2 million silver ounces from three of their other mines, worth $350 million by the end of 2016, in a deal which Smallwood called fair compensation.

The U.S. Mint has sold 39.675 million silver Mint coins for the year to date, compared to 33.7 million coins in the whole of 2012. That will set a new sales record for silver, former U.S. Mint director Edmund Moy told IBTimes Tuesday. Moy, now a gold strategist with Morgan Gold, said year-end sales will likely exceed 40 million ounces.

Because there are few silver exchange-traded fund (ETF) investors, and because of shorts and an insignificant futures market in silver, undistorted physical demand for the metal can be seen in these sales figures, he said.

“Silver is the poor man’s gold,” said Moy. Gold investors may have diversified into silver, “because it’s more accessible via price. Silver, generally, is a foreshadowing of gold demand.”

Other precious metals sellers have highlighted high silver coin premiums in 2013 and robust demand amid Mint supply shortages.

“There’s an investor mindset that silver’s got a better upside potential,” Lear Capital CEO Scott Carter told IBTimes in late October. Carter, whose firm sold $400 million of physical gold and silver in one recent year, cited high and volatile gold prices alongside silver’s broad industrial uses as two features attracting smaller investors. Silver and gold usually trade at a price ratio.

Silver prices have also hit multi-year lows, CPM Group commodities trader Carlos Sanchez told IBTimes in late October. A seasonally stronger period for silver demand is starting, for both silver jewelry in the U.S. and in India and China, said Sanchez.

Indians have started buying silver, partly thanks to tight regulations on gold in 2013. Although Chinese investors have favored gold more than Indians this year, they are also buying platinum in large amounts.

Australia’s coin press has also planned to ramp up production, amid strong demand from retail investors, the Wall Street Journal reported

CORRECTION: The article originally read: "Silver Wheaton has already paid Barrick $625 million for 9 million ounces of silver per year for the first five years of Pascua Lama’s production."

It has been updated to read: "Silver Wheaton has already paid Barrick $625 million for 9 million ounces of silver per year for the first five years of Pascua Lama’s production, in addition to an expected 5.5 million ounces annually for the life of the mine, which is estimated at over 25 years."

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