Silver Wheaton Corp. (USA) (SLW 4.02%) has seen its name come up several times in reference to troubled commodity giant Glencore (NASDAQOTH: GLNCY). Why? Because Glencore needs money and Silver Wheaton's whole business is about giving money to miners in exchange for silver and gold. This wouldn't be the first troubled miner the streaming company stepped in to help. But will it come to Glencore's rescue?
The value of cash
Silver Wheaton is a streaming company. What that means is it provides miners with an upfront cash payment in exchange for the right to by future silver and gold production at very low prices. For example, the average silver price for Silver Wheaton is around $4 an ounce right now. And its gold cost is around $400 an ounce. Both are well below spot prices.
The streaming model. Source: Silver Wheaton.
Why would a miner do this? The obvious answer is to get the cash. But the deeper answer is to help fund growth projects outside the capital markets or to help shore up finances without having to issue dilutive shares or by taking on more debt. Interestingly, at this point, neither stock nor debt appears to be a viable option for Glencore; It has already issued billions of dollars worth of new shares and is actively trying to trim debt, not increase it.
Silver Wheaton, meanwhile, is willing to help miners looking to grow, as well as those that need a handout. And the rumors are flying that Glencore, which has seen market watchers question its ability to survive the commodity downturn, is in talks with Silver Wheaton and streaming competitors Franco-Nevada Corporation (FNV 3.71%) and Royal Gold (RGLD 3.97%), among others. It makes a lot of sense.
Is this for real?
The first question to ask is if this could really happen. And the answer is a resounding yes. As a recent example, in early 2015 Silver Wheaton inked a $900 million deal with South America-based Vale to buy gold from one of the miner's gold operations. And Franco-Nevada inked a roughly $600 million deal to buy silver from troubled Canadian miner Teck Resources. Royal Gold, meanwhile, just closed on a similarly sized deal to buy gold and silver from Barrick Gold.
Clearly, streaming companies are happily providing money to weakened miners in exchange for gold and silver purchasing rights. That makes these companies look like opportunists, but really that's just good business. The rumor is that Glencore is looking for as much a $1 billion. That's a big chunk of change, but completely doable.
Silver Wheaton, for one, appears to have prepared for this kind of deal. Earlier this year it put a $2 billion shelf registration in place that would allow it to sell stock or debt as it needed over the next couple of years. A deal with Glencore would be a good reason to tap that financing option. In fact, Silver Wheaton could do the $1 billion and have room to spare.
A Glencore mining truck in action. Source: Glencore.
Maybe, maybe not for Silver Wheaton
The interesting thing about Silver Wheaton, however, is that it just announced a plan that allows it to buy back as much as 20 million shares of its own stock. CEO Randy Smallwood explained, "We believe that at current share price levels, Silver Wheaton shares may represent the best investment option for our shareholders."
Add Silver Wheaton's tax row with the Canadian government into the mix, too, which could cost it as much as $265 million. Although Silver Wheaton believes it doesn't owe the money, it still has to fight the fight. These two little nuggets suggest it might not be willing to make a deal, unless it's a really good deal.
Glencore clearly needs money. Streaming companies like Silver Wheaton have access to cash. It looks increasingly likely that Glencore will do something in the streaming space to assure investors that it can survive to fight another day. Will Silver Wheaton be involved? I'm sure it's looking at the possibility. But it may opt not to participate because of outside issues. That would be a boon for competitors and perhaps a bit troubling on the growth front for Silver Wheaton. However, a large stock buyback could easily make up for any lost revenues by spreading the current bottom line across fewer shares.
In the end, Silver Wheaton can easily do a billion-dollar deal all on its own. But right now it might choose not to. That won't necessarily be a bad thing for investors, assuming it starts to buy back its own stock as planned. So don't be too upset if Silver Wheaton takes a pass on a Glencore deal.
