Sometimes the thrill of anticipation can lead to disappointment, but disappointing shareholders is simply not something Silver Wheaton (NYSE: SLW ) tends to do.
Silver Wheaton's ardent community of long-term investors has waited quite some time for the company to announce a new silver stream transaction to restart the stock's legendary growth trajectory. And despite the thrill of anticipation that factored into my selection of Silver Wheaton as a top pick for 2012, investors will not be disappointed by the comfortably accretive and immediately cash-generating silver stream that the company announced this week.
Haytham Hodaly, Silver Wheaton's senior vice president for corporate development, has come through with a major strategic victory for the silver stream specialist. To acquire $750 million of the $1.5 billion that base-metal miner Hudbay Minerals (NYSE: HBM ) will expend to construct the Constancia mine in Peru, Hudbay will part with the precious component of production from its currently producing 777 zinc and copper mine in Manitoba in addition to a stream from Constancia once that mine begins producing in late 2014.
Specifically, the stream agreement gives Silver Wheaton the right to purchase 100% of the life-of-mine silver production from both 777 and Constancia for $5.90 per ounce. In addition, Hudbay will surrender 100% of gold production from the 777 mine, until at least the end of 2016, and 50% of gold production thereafter, at a sales price of $400 per ounce. Both of those sales prices are subject to minor inflation adjustments. Given the huge increase in the silver price since the company last inked a major deal, I certainly expected a revised silver purchase price from those earlier contracts. Recording an increase of only $2 per ounce from the company's previous signature benchmark purchase cost of $3.90 per ounce represents a remarkable achievement in the current (and projected) silver price environment.
The new stream transaction could hardly have come at a better time for Silver Wheaton, since a number of the company's major silver suppliers recently revealed some substantial near-term hiccups. Barrick Gold (NYSE: ABX ) recently pushed back its scheduled startup date for the massive Pascua Lama project from 2013 to 2014, and Goldcorp's (NYSE: GG ) Penasquito mine suffered a 10% dip in anticipated 2012 production as drought conditions in Mexico continue to limit throughput. Thankfully, my top gold pick, Primero Mining (NYSE: PPP ) , softened those blows recently with strong progress at its San Dimas mine in Mexico.
In the bigger picture, however, Silver Wheaton's medium-term target to reach annual production of 43 million silver-equivalent ounces has never been in danger. With the addition of these new silver and gold streams from Hudbay Minerals, Silver Wheaton's anticipated output by 2016 surges by 4.9 million silver-equivalent ounces (SEOs) to reach 48 million SEOs! Those 48 million reasons to adore Silver Wheaton meaningfully enhance the attractiveness of a stock that was already easy to love when a Fool could count only 43 million reasons to do so. My bullish CAPScall established set all the way back in 2006 has already outperformed the S&P 500 by more than 160%, and I expect that outperformance to expand dramatically as Silver Wheaton's ingenious business model carries this stock toward my long-term target of $100 per share.
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