For a company that launched into financial superstardom with an initial portfolio of mine production by-product streams that targeted silver exclusively, Silver Wheaton's (WPM 0.04%) massive new deal with global miner Vale (VALE -0.08%) punctuates a meaningful drift in the direction of gold over the past several years.
The slippery slope began when Silver Wheaton acquired smaller competitor Silverstone Resources back in 2009. Silverstone's flagship asset was a pair of life-of-mine streams covering 100% of both silver and gold production from Capstone Mining's Minto copper mine in the Yukon. Once Silver Wheaton got a little peanut butter on their chocolate -- so to speak -- and realized they still tasted great together, gold became an increasingly palatable addition to the company's delicious buffet of stream acquisitions.
But the latest Vale gold-stream transaction is substantial enough in scale to prompt the silver-focused faithful to wonder just how deep into gold Silver Wheaton is willing to go. Fortunately, I had the opportunity to speak with Silver Wheaton CEO Randy Smallwood last week, and I promptly sought his perspective on the role that gold could be seen to play in the long-term future of his company. As a long-standing Silver Wheaton shareholder myself, who retains a staunchly bullish $100 price objective for the stock, Smallwood's response left me blissfully convinced that this company will strike just the right mix between the two greatest flavors on the mining industry's menu. It's all-you-can-eat, delectable silver, with a bold but balanced seasoning in gold.
Christopher Barker: Speaking strategically about the product mix now, where you'll be approaching 24% of revenue from gold: Is there a limit to how high a proportion of revenue you are willing to target from gold? And if that proportion were to climb further, might it make sense to separate the two product streams into distinct entities?
Randy Smallwood: We don't think so. We see more opportunities in silver, and we are a little bit more bullish on silver than we are on gold in terms of overall performance. That's why we remain a silver-focused company. But we're not scared of stepping into the precious metals space. A lot of the reasons why we like silver can also be applied to gold, but there are a few things about silver that make it a little more attractive, just in the sense that it does have some pretty heavy consumption in high-efficiency electronics and such. So there is that benefit. There is way less silver in above-ground reserves, whereas most of the gold that's ever been mined is still there and available. So there are some fundamentals behind silver that make it a little bit more attractive than gold, but we're still excited with gold.
But it would surprise me if we ever got over 30% of our revenue coming from gold. We're climbing to about 24%, and I think we peak at about 25% over the next while. But that will drop off, for example, when HudBay Minerals (HBM 3.55%) completes the Constancia mine, then the 777 stream will drop from 100% of gold to 50% of gold; so we'll lose some gold there. Plus, we have a lot of silver coming online. We have Barrick Gold's (GOLD 1.68%) Pascua Lama coming onstream in 2014 and 2015, and Constancia itself coming on in the same timeframe.
And we're confident that Rosemont is going to get their permit and go into construction here. [In 2010, Silver Wheaton secured a stream for 100% of life-of-mine silver and gold production from Augusta Resource's (NYSEMKT: AZC) Rosemont copper project in Arizona.] So just by virtue of all that, it'll take our gold ratio back below 20% pretty rapidly because we've got so much going on on the silver side.
But it would surprise me if we ever went over 30% in gold. We still look at gold. And I've always said, our principal responsibility is to deliver profit and value back to our shareholders. The means by which we do that is up to us, and what we choose to do is focus on silver because we think that provides the best return on our efforts to grow the company and add value. The phrase I like to use is that we always look over the fence to see what the grass is like in the gold space. We still think the grass is greener on the silver side.
