TORONTO () -- Your correspondent has written about Silver Wheaton [TSX:SLW; AMEX:SLW] four times in the last nine months. In , when SLW was changing hands at C$3.50 per share, we said, "If investors want to play the silver-is-going-highest theme, perhaps the best exposure remains Silver Wheaton."
Then, , we pointed out "While the income and cash flow statements continue to be impressive, the market is questioning why it has not seen an acquisition of late." In the same article, we critiqued the company's 'stringent acquisition criteria,' and argued that the desired metrics "for purchase agreements and producing mines... would be too dilutive, as SLW shareholders would not see enough benefit now for the amount of stock that would have to be issued or the amount of money that the company would have to raise."
, when Silver Wheaton took an interest in Bear Creek [TSXv:BCM] we told readers that "SLW really doesn't add any value here in terms of either technical expertise, or a better vehicle for investors to reap the rewards of the discovery - BCM could just as easily bring it on stream itself." Therefore, it is quite probable that "Silver Wheaton is probably playing this strictly as an equity investment, and will win or lose at the end of a drill bit."
Finally, in with readers two weeks ago, your correspondent presented the rationale for four relatively well-known Mexican silver producers to get together, illustrating that "with similar production, all in the relative safety of Mexico, and an exciting growth profile, 'NewCo Silver' with a full listing on the TSX, would have a market capitalization less than 1/4 of Silver Wheaton's."
Going Forward
So why does Silver Wheaton command such a robust valuation? And why are we writing about it again? The answer to the first question is two-fold: The company's fixed-cost-base model and great sponsorship. The answer to the second question is that, despite the aforementioned, the name of the game is still production growth, and your correspondent would like to speculate on the company's next target: The La Coipa gold-silver mine in Chile.
Goldcorp, Barrick, Placer, Kinross - La Coipa
Once things are finalized between Barrick [TSX:ABX; NYSE:ABX], Goldcorp [TSX:G; NYSE:GG] and Placer Dome [TSX:PDG; NYSE:PDG] at the end of February, Goldcorp will have taken control of a 50% interest in the La Coipa silver mine, located in northern Chile. Kinross [TSX:K; NYSE:KGC] owns the other 50%.
Reserves
According to Placer Dome's website, Goldcorp will inherit proven and probable reserves of 506,000 ounces of gold and 32,480,000 ounces of silver at La Coipa.
Production
In 2005, Placer Dome's, and now Goldcorp's share of production at La Coipa, was 82,000 ounces of gold and approximately 3.1 million ounces of silver.
Cost
Though Silver Wheaton just completed a $100 million fund-raising, with the price of silver hovering around $9.50 an ounce, it may not be enough. In November 2004, with silver prices trading around $7.50 per ounce, SLW bought a similar amount of reserves - 30 million ounces of silver proven & probable, and 2/3 the production, 2 million ounces per annum, for $75 million from Lundin Mining [TSX:LUN].
What that says is that unless they use some debt, there will be more dilution in the form of either a share issuance to parent company Goldcorp, or another financing.
The Other 50%
What it also tells us is that if they wanted to buy both Goldcorp's stake, and Kinross' 50%, they would almost assuredly have to go back to the market (though it would be worth it at a multiple of 30X C/F!).
Pitfalls?
Though Resource Investor does not have a great deal of information about La Coipa, it would appear from the Placer website that cash costs per ounce of gold produced in 2005 were projected at $300 an ounce. Presumably that uses the silver as a credit, and in gold equivalent ounces the mine produces roughly 265,000 ounces per year - 100,000 of which is derived from silver.
This leads to two potential issues that could prevent a transaction with Silver Wheaton:
- How high would the cash cost be if Goldcorp (and maybe Kinross) had to sell the silver at only $3.90 per ounce to Silver Wheaton? Probably unacceptably high.
- If the silver production was sold off, would it really be worth if for Goldcorp and Kinross to hang onto a mine that delivers only 80,000 ounces of gold per year to each party at a very high cash and total operating cost? It seems unlikely.
Conclusion
There are a lot of silver production ounces up for grabs at La Coipa, and the Wheaton model is growth through accretive acquisition. The mine would be a great prize for Silver Wheaton, and that being the case, Goldcorp/Silver Wheaton's creative management will probably find a way around the issues raised above.
This is especially true in light of the fact that if SLW could take 100% of the mine's silver production at $3.90, in line with the existing model, and achieve a multiple of 30X, (which is where they would appear to be on current production), they could add $1 billion in market capitalization with this transaction (assuming current silver prices).
As there aren't that many attractive and sizeable targets out there for silver companies looking to grow quickly, this is one that the company probably wants to make good on - otherwise we will have to stick with our conclusions made in the July 2005 article linked at the top of this piece.
