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The simplest solution is quite often the best.
When it comes to addressing the mining industry's insatiable thirst for capital to fund mine construction projects, the silver stream flows with elegant simplicity.
Silver Wheaton's (NYSE: SLW ) signature formula for locking in future cash flows has just been applied to one of the world's largest silver deposits, marking a pivotal amplification of the company's operational scale. Barrick Gold (NYSE: ABX ) expects to spend at least $2.8 billion developing the world-class Pascua Lama gold mine on the border between Chile and Argentina, and Silver Wheaton is delighted to chip in $625 million to the cause. After issuing shares to satisfy the first payment of $212.5 million, Silver Wheaton expects to make three future payments of $137.5 million each from free cash flow.
In return, Silver Wheaton will receive 100% of silver production from three of Barrick's existing gold mines through 2013, and 25% of silver production for the entire (estimated) 25-year life of the Pascua Lama mine. With the addition of these streams, Silver Wheaton now anticipates five-year sales growth of 250% from 2008 levels, reaching annual production of 40 million ounces by 2013. Goldcorp's (NYSE: GG ) Penasquito mine will drive near-term growth, while Pascua Lama fills in the mid-term pipeline.
Using average annual production data as a guide, the interim production from the Lagunas Norte, Pierina, and Veladero mines will furnish Silver Wheaton with about 10 million ounces of silver. Silver Wheaton's attributable share of Pascua Lama's mineable silver amounts to about 200 million ounces, for which the usual $3.90 will be paid per ounce (subject to minor inflation adjustments). All told, I calculate an all-in cost basis for the silver acquired through this deal of below $7 per ounce, which compares very favorably to the all-in cost of $10.10 per ounce reported last quarter by rival Pan American Silver (Nasdaq: PAAS ) .
My pain is your gain
Since I first selected Silver Wheaton for my Motley Fool CAPS portfolio back in 2006, the shares have traversed a huge trading range to end up essentially flat. Meanwhile, the company's total attributable silver reserves have doubled in 2009 alone, and the long-term outlook for silver prices has only gathered strength, I continue to discern deep value in these shares despite the steady recovery from an eye-popping low of $2.51 per share.
My early CAPS picks for silver miners like Coeur d'Alene Mines (NYSE: CDE ) and Helca Mining (NYSE: HL ) have thus far been train wrecks, but I remain steadfast in anticipating substantially higher silver prices and a resurgence in this downtrodden sector. Join CAPS today and make my pain your gain.