Looks like Silver Wheaton struck it rich with its newest
silver streaming agreement with Glencore. According to the deal, Silver
Wheaton paid Glencore $900 million for future silver production from its
share of its Antamina copper mine in Peru. Silver Wheaton receives
silver from this Glencore deal at 20% of the silver spot price.
Which means, Silver Wheaton currently pays about
$2.85 per silver ounce at the current market price of $14.26. That’s not a bad deal, especially when your cost is only
20%. I would imagine any of the primary silver mining companies would
die to produce silver at a 20% cost.
Peru’s copper Antamina mine (picture), is owned by
Glencore (33.75%), BHP Billiton (33.75%), Teck Resources (22.5%) and
Mitsubishi Corporation (10%). It produced a third of Peru’s copper
production in 2013.
According to the Bloomberg article, Glencore Raises $900 Million By Selling
Future Output:
Glencore Plc sold a share of its future silver output in
a deal that includes a $900 million upfront payment, as the trading and
mining company works to cut its $30 billion debt pile by about a third amid
tumbling commodity prices.
The deal includes Silver Wheaton Corp. paying 20 percent
of the spot price per delivered ounce, the Vancouver-based company said in a
statement Tuesday. Silver Wheaton will receive an amount equal to 34
percent of silver production at the Antamina mine in Peru until the delivery
of 140 million ounces and the equivalent of 23 percent of silver production
thereafter, Baar, Switzerland-based Glencore said in a statement.
This newest silver streaming deal with Glencore provides
Silver Wheaton with the cheapest price per ounce (based on the current market
price) compared to all its other agreements. If we look at Silver
Wheaton’s Silver & Gold Streaming Agreements below, we can see the
different prices and time spans for these different agreements:
Silver Wheaton will receive 5.1 million oz (Moz) of
silver from Glencore for the first several years at an estimated cost of
$15.3 million a year based on a $15 market price of silver. They
will sell that silver at $76.5 million, netting a cool $61 million
margin. Of course, I am making this quite simple as there are more
company costs involved, but this is how you take advantage of a company when
the chips (and prices) are down.
Now, I am not criticizing Silver Wheaton here. They
run a good business model and I would imagine the board at Glencore wasn’t
forced at gunpoint to take this agreement. However, this goes to show
how more future silver production is sold forward at a fraction of the market
price.
Furthermore, I highly doubt Glencore would have sold
their silver production from their share in the Antamina mine when the price
of copper was $3.50 and silver at $30 back in 2012. But now
that the base metal prices are in the toilet as the price of copper is
trading at $2.15, this does wonders for the balance sheets of companies with
a great deal of debt.
If we do some simple back of the envelope calculations,
this is how good of deal Silver Wheaton will get for part of the agreement
which provides 140 Moz of silver at 20% cost (based on average price of $15):
Silver Wheaton Cost = 140 Moz X $3 = $420 million
Silver Wheaton Sales = 140 Moz X $15 = $2.1 billion
Silver Wheaton Margin = 140 Moz X $12 = $1.68 billion
Of course the market price of silver will not remain at
$15 for the next 28-30 years of the agreement, however, I had to put some
sort of current value to the deal. When the price of silver revalues
higher in the future, Silver Wheaton will be laughing all the way to the
bank.
The Silver Steaming Model May Come Under Stress
In The Future
While Silver Wheaton is currently doing much better than
the primary silver mining industry, this may change in the future. Let
me explain Silver Wheaton to those who may be new to precious metal
industry. Silver Wheaton is not a mining company. They do not
extract and process any ore or produce any metal.
What they are is a company that provides capital to
another company for a share of their future silver or gold
production. They have a very small staff for the amount of sales
they generate compared to the typical mining company. Which means,
their costs are low.
However, the situation may not be as bright in the future
when global oil production begins to decline in earnest. As I have
stated in many articles and interviews, peak silver will occur first
in the base metal mining industry as demand for copper, zinc and lead
declines due to declining Global GDP on the back of falling energy
production.
This isn’t speculation.. it’s just a matter of
time. And I don’t believe we have much time on our side with the price
of oil bracing to fall into the $30 range. Peak oil will not occur
because of high oil prices, but rather due to low prices that will kill
production.
As Global GDP falls, the world will need less base
metals. This will put severe stress on the base metal mining
industry, including those silver stream agreements. While
these agreements have protective clauses if the company shuts down production
or goes bankrupt, trying to squeeze blood out of a debt ridden
turnip may become increasing difficult when the Fan hits the crapper.
This is why I believe the best assets to own besides
physical gold and silver are some of the primary silver mining
companies. I would not recommend putting a large portion of one’s
wealth in these mining stocks, but a small percentage is acceptable,
especially when silver bullion becomes impossible to acquire once the world’s
Greatest Financial Ponzi Scheme finally collapses.
