Where Silver Wheaton Saves Junior Gold Miners and Massively Profits by It

Ever since the financial markets collapsed in 2008, the landscape for financing has been upended and the difficulty of navigating through the tumult is seen no better than in the mining industry, where falling commodity prices and China's slowing economy have exacerbated the situation.

Toroparu, Guyana, South America. Source: Sandspring Resources.

Yet mining majors like Barrick Gold (NYSE: ABX  ) and Newmont Mining (NYSE: NEM  ) have a set of tools to work with that are unavailable to lesser operations particularly those of rival junior miners. Barrick was able to target some $2 billion in additional costs and capital expenditure cuts last September and previously cut its dividend by 75% to save money. Newmont lowered its capex budget all throughout 2013 and last month said it expected to reduce this year's budget by another 25%.

Junior miners, on the other hand, have a weaker capital position than their larger brethren if for no other reason than they often have no output that they can sell. Because their capital programs tend to be subject to the availability of financing, they've found themselves especially constrained leading them to dilute their shareholders with new offerings or to M&A activity, such as the just-completed acquisition of Brigus Gold by Primero Mining (NYSE: PPP  )  in a bid to create a mid-tier miner able to more effectively compete.

Yet there's another path for them, one which Silver Wheaton (NYSE: SLW  ) blazed last year that could be the salvation of the junior miners while allowing the silver streamer itself to profit handsomely.

Last November, Silver Wheaton unveiled a new business model when it entered into a gold stream agreement with Sandspring Resources that advanced to the junior miner $13.5 million in exchange for the right to purchase 10% of the life of mine gold production from Sandspring's Toroparu project in Guyana. The total value of the deal is around $149 million plus an ongoing production payment, giving the streamer access to high-quality, earlier-stage projects for relatively little upfront capital. Sandspring gets the financial resources to complete its feasibility study without diluting its shareholders or selling itself to the highest bidder.

The win-win situation solidifies Silver Wheaton's preeminent position in a market where the long-term outlook for precious metals is quite bright. While there is some greater risk involved than the typical streaming deals it does, such as those completed with major miners like Barrick. But as the situation at Pascua-Lama in Chile underscores, the bigger projects are not without risk themselves.

At Pascua-Lama, Silver Wheaton had to agree to change the terms of its agreement with the gold miner because the work there was stalled over environmental concerns. While it could have chosen to take back the up-front monies it gave to Barrick in exchange for 25% of the mine's output, it instead extended the terms and agreed to continue taking all of the output from three separate smaller mines. However, the Pascua-Lama deal could still turn into a money loser for Silver Wheaton if it doesn't become operational by 2016.

Here with Sandspring it could lose money, too, but obviously it has far less money at stake than at Pascua-Lama, where several hundred millions of dollars are at risk. And the deal provides the streamer with a road map to help other high-quality, early-stage projects get going.

According to an interview with Mining Weekly Online, Silver Wheaton's CEO says the company has three deals in the works with at least one possibly being completed this year worth in excess of $1 billion. With its own resources available totaling about $1 billion, it has sufficient capital to finance a number of deals with junior miners. 

This could be a business model for others to follow, thus saving the industry from the failures of the financial markets by forcing them into less than optimal dilutive offerings or M&A deals where at least one party is operating from a position of weakness. Silver Wheaton and its investors, though, are left sitting in front of a pot of gold that they can share among themselves.

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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On March 10, 2014, at 3:25 PM, dbtuner wrote:

    I wish they would buy back stock or increase the dividend instead. When they were buying silver streams with sub-$10 silver, it was a good idea to do deals. Now there is risk

    The gold the they recently did was at $200 higher gold.

  • Report this Comment On March 11, 2014, at 4:13 AM, Suradit wrote:

    "patrolling the means streets"

    Is that mean streets or maybe by-all-means streets?

  • Report this Comment On March 11, 2014, at 5:53 AM, TMFCop wrote:

    Suradit,

    Heh! Good catch. Got it.

    Rich

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