Going mainstream – Silver Wheaton brings precious metal streaming centrefold
Across the mining industry, one of the major issues that can dictate the very success of a mining organisation is equity and capital. In 2016 and heading into 2017, as companies and businesses are forced to downsize in a bid to combat increasing debts, finding and raising capital is proving ever more difficult.
This is where Silver Wheaton comes in. Founded in 2004 with a unique and at the time, almost unheard of, business model, the company is now the largest precious metals streaming company in the world.
“We realised that there are a lot of non-core by products in copper mines and lead zinc mines, including gold and silver, and through Silver Wheaton we offer a low risk, high quality opportunity for companies to invest into the precious metals industry,” says Randy Smallwood, President and CEO of Silver Wheaton.
Through its precious metals streaming business model, Silver Wheaton enters into agreements to purchase all or a portion of the by-product silver and/or gold from high quality mines. Silver Wheaton pays the mining company an upfront payment and an additional payment as those precious metals are delivered at a pre-determined price per ounce. The company’s cash flow is generated in the difference between that additional payment and the price it sells the metal for.
This creates a lucrative situation for any mining company looking to gain capital – low risk.
“Because our costs are predictable, our risk profile is much lower than what a traditional mining company can offer. We deliver the same growth and organic opportunities of a traditional mining company, but with a low risk profile,” says Smallwood.
In the twelve years since 2004, when Smallwood pioneered the precious metals streaming business model and formed Silver Wheaton, streaming has very much become a part of the modern mining industry. The mining industry is one that lives on capital, there will never be a time where the industry does not need capital.
Streaming is not the only source of capital. Companies can generate capital by taking debt, issuing shares or by selling off non-core-assets. Streaming, falls into the latter category.
“The big advantage to streaming is that it is non-dilutive, it does not create share count. Streaming purely adds strength to your balance sheet – when Silver Wheaton invests into a mine we take on the operating risk of that mine. There are no obligations other than delivering whatever gold or silver is produced,” says Smallwood.
Over time, Smallwood has seen that companies operating in the base metals industry will often trade at a discount. This creates a significant difference in value between how the mining company values that precious metal and how Silver Wheaton values that same metal. Silver Wheaton shares that difference in value.
“In capturing that shared value, they will get more for that non-core by-product than they would if it sat in their own asset portfolio,” he says.
While streaming has, and will continue to become a more attractive form of capital, in some cases, taking on debt is the more attractive form of generating capital. Timing of acquisition and investment then, is critical to the strength of Silver Wheaton’s portfolio.
“The best time to make an acquisition in any commodity that has cyclical pricing is of course at the bottom of those cycles,” says Smallwood.
“This is also the time where equity and debt is very expensive,”
In these periods, other metal streaming companies have entered the fold and traditionally wealthy companies have converted to streaming. But Smallwood, with close to 30 years’ experience in the precious metals space, is all too aware that when commodity prices are strong this increases the cost of acquisitions, which goes against that low risk profile that Silver Wheaton prides itself on.
Turning back the clocks to 2004, when precious metal streaming was unheard of and Silver Wheaton was announcing itself on the world stage, acquiring partners and connecting with individual businesses to enter streaming agreements began as a process of “knocking on the doors.”
“I’m happy to say that over the last five years, streaming has become – if you’ll pardon the pun, mainstream,” says Smallwood.
“There is not a financial or chief financial officer out there in the industry today who isn’t aware of the streaming model.”
With the business model being much more widely accepted, and as previously noted an increase in streaming players in the market, should that worry Smallwood and Silver Wheaton?
“The ultimate compliment is when someone copies you, it really highlights the strength of the business model that we worked so hard to create 12 years ago,”
Silver Wheaton may not be the only streaming company in the modern mining industry but the company never set out to “supply all the capital that the industry requires.” With the focus on investing and acquiring high quality mines at the lowest part of the commodity cycles, Silver Wheaton can remain competitive and market leaders.
For some, having a business model that is so strong that it is replicated on a global scale could very well be the pinnacle of success, but for Silver Wheaton operating in an industry as cyclical as the mining industry and remaining successful through every point of the cycle is key.
“Mining is not an industry that is easy to forecast in and there are challenges both geological and physical that need to be navigated. Having the success and track record that we have, it is something that I am extremely proud of and it is a record we will strive to maintain and improve on,” says Smallwood.
The process of entering a streaming agreement is, as Smallwood describes, “confusing in its simplicity.” When a negotiation for agreement is underway, a rigorous process of due diligence takes place where Silver Wheaton is granted access to a full data room, which includes drill hole sampling, modelling and geological plans and mining plans. This data is reviewed and then a proposal is made before proceeding with any official streaming agreement.
Silver Wheaton’s portfolio contains mining operations and development projects from all over the world and includes agreements with Glencore, Vale, Barrick Gold, Goldcorp, and Lundin Mining to name a few.
As the precious metal space becomes more and more crowded, Silver Wheaton focuses on continuous improvement.
“Sometimes people feel that you are a stronger company because you have more assets, we disagree,” says Smallwood.
“I’ve often said that if we win every auction or bidding process then we are paying too much. We are happy in a healthy competitive environment. We strive to maintain quality and push towards keeping a high-quality portfolio - that’s our goal.”
In 12 years Silver Wheaton, has grown exponentially. Under the hands of Smallwood and a strong team committed to pushing the company forward, Silver Wheaton will only continue to grow. Smallwood believes that one day Silver Wheaton will be a historical name and one could argue that with the growth of streaming across the industry that it already is.
For Smallwood, the goal remains the same now as it was all those years ago.
“I’ve been called a treasure hunter, it’s something I absolutely love doing. I love looking at assets and seeing if there are opportunities to uncover more value, hidden value. That’s what keeps me excited,” Smallwood says.
The January 2017 issue of Mining Global is live!
Get in touch with our editor Dale Benton at [email protected]edia.com
Unmanned train to allow Vale to reopen iron ore plant
Brazilian miner Vale SA will be able to resume operations at its Timbopeba iron ore dry processing plant in up to two months thanks to the use of an unmanned train, the company said in a statement this week.
Vale - Timbopeba iro ore plant
With the train, Timbopeba will be able to operate at least at 80% of its capacity of 33,000 tonnes of iron ore “fines” per day, reports Reuters.
Vale was forced to shut down the plant in the Alegria mine complex recently after labor authorities in Minas Gerais state banned activities close to the Xingu dam due to concerns of a risk of collapse.
Vale said access by workers and vehicles continues to be suspended in the flood zone of the dam due to the ban even though it remains at emergency level 2, which means there no imminent risk of rupture.
But some workers are allowed entry under strict security precautions and they will get the unmanned train going once it has been tested, which would take between one and two months, the company said.
The unmanned train will travel automatically along 16 kilometers (10 miles) of track operated by a system that can control the speed and activate the brakes, Vale said.
Vale announces first ore at Voisey’s Bay mine extension
Vale has reached the milestone of first ore production at the Reid Brook deposit at the Voisey’s Bay mine expansion project in Northern Labrador, Canada - recognised as the safest mine in Canada.