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Silver Wheaton buys gold and silver production from firms that mine them as byproducts. (SILVER WHEATON)
Silver Wheaton buys gold and silver production from firms that mine them as byproducts. (SILVER WHEATON)

Precious metals

How Silver Wheaton prospers despite mining slump Add to ...

When Randy Smallwood goes hunting for a mine acquisition, he has one hard and fast rule: Bet on the asset, not the management team.

Rather than a stinging rebuke of his mining brethren, the mantra is what has helped Mr. Smallwood, a geological engineer by training, build Silver Wheaton Corp. into the world’s largest precious metals streaming company after he helped found it in 2004.

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“We look for management-proof projects,” the chief executive officer of Vancouver-based Silver Wheaton said during a recent visit to Toronto. “We want assets that will be good under any management team.”

Silver Wheaton makes its money by purchasing streams of future silver and gold production from companies that mine it as a byproduct; Silver Wheaton can then sell the precious metals into the spot market, usually at a higher price. The company invented the so-called streaming business, under which it makes a lump-sum, upfront payment and then pays the production cost for ounces on delivery from mines typically focused on copper, lead, zinc or nickel.

Long relegated to the fringes of the mining industry, streaming is now drawing mainstream attention as miners face soaring costs at the same time as debt and equity markets have slammed shut.

“This is the first time in my career that I may not be able to afford everything that is out there,” said Mr. Smallwood, whose company has access to $2.5-billion (U.S.) in debt, credit and cash on hand and is building cash flow by $250-million each quarter.

“What we’ve seen in the last six months is that people are knocking on our door,” he said on the sidelines of the Prospectors and Developers Association of Canada conference earlier this month. “It’s the same people that we’ve talked to in the past, but they are either opening the door for the first time or they are actually coming and knocking on our door and saying, ‘You know that proposal you had for us a few years ago? We wouldn’t mind refreshing it and seeing what you’ve got.’”

The contracts give Silver Wheaton access to metals streams for the life of a mine at fixed costs, even if a producer spends more money to expand the mine and reserves multiply. That’s why understanding the underlying asset is key.

“We won’t do a transaction unless we have full access to the drill hole database, the assays and all,” Mr. Smallwood said. “We do a full tear-down … because once we make the deal, there’s no going back.”

After that, the company can sit back and collect profit. With a staff head count of only 27, its $11-billion market capitalization makes it the most valuable of any listed miner on a per-employee basis.

Silver Wheaton only resumed acquisitions late last year, after a two-year hiatus that worried investors about future growth even as volatile silver prices ran far beyond analysts’ expectations.

When prices levelled off, the company roared back into the market, inking a $750-million deal last August to acquire silver production from two assets belonging to HudBay Minerals Inc.

In January, it signed a $1.9-billion agreement to buy gold from Brazilian and Canadian mines owned by Vale SA, the world’s second-largest miner.

“Silver Wheaton did a very good thing in terms of partnering up with Vale on the last deal,” said Cosmos Chiu, an analyst with CIBC World Markets. He said scarce alternatives are pushing more big miners to consider stream financing.

“I think that partnering up with one of the biggest mining companies in the world proves that the model makes sense and actually opens up quite a few more doors in terms of what not just Silver Wheaton [can do], but everyone else … as well,” said Mr. Chiu, with an “outperform” rating on the company’s stock.

Silver Wheaton has more than 20 other deals on its books, including a 2009 contract to acquire 9 million ounces of silver per year from Pascua-Lama, the massive gold mine being built by Barrick Gold Corp. in the Andes mountains. It still takes delivery of about 3.5 million ounces per year of payable silver from San Dimas, the mine in Mexico that launched it as a company.

Mr. Smallwood says he won’t hesitate to pull the trigger again should the right opportunity arise, especially in silver, where he sees more demand and a better price dynamic.

“We’re not under pressure to do deals, but if we see opportunities we will move on them,” he said.

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