Mining trucks sit parked on the facilities at the Pascua-Lama project facilities in northern Chile in this 2013 file photo.Jorge Saenz/The Associated Press
Randy Smallwood would be happy – eager, even – to contribute a billion dollars toward the restart of Pascua-Lama, the massive gold project in South America that Barrick Gold Corp. mothballed three years ago.
In fact, Mr. Smallwood, the chief executive officer of Silver Wheaton Corp. of Vancouver, can't help rubbing his hands – literally – at the prospect of a Pascua-Lama revival.
"It's the best half-built gold mine in the world," he says in an interview. He adds: "We're willing to work with Barrick in terms of helping them finance a restart."
For Mr. Smallwood and his company, a re-emergence of Pascua-Lama would help solve a problem: The disappearance of big deals in the so-called "streaming" sector.
Streaming companies offer cash to miners today in exchange for the rights to buy part of their production tomorrow at heavily discounted prices.
Silver Wheaton, which pioneered the strategy, focuses on acquiring "streams" of silver or gold that are produced as byproducts of mining for other metals, such as copper or lead. By doing so, the company locks in prices for precious metals that are far below current market values.
The worldwide collapse of metal prices that began after 2012 provided fertile ground for the company's deal making. Many miners, even giants such as Glencore and Vale, were hard up for cash and eager to strike an agreement.
In recent months, the big bounce in metal prices has proven to be a mixed blessing for Silver Wheaton. On the one hand, stronger prices for gold and silver have bolstered the company's cash flow and spurred its share price to more than double since the start of the year. On the other hand, higher ore prices have reduced the financial pressure on miners and dampened the desire of producers to sell future streams of output.
"Definitely, there are fewer deals available now than a year ago," Mr. Smallwood says.
The deals that are available are getting smaller, too. Where transactions once regularly exceeded $500-million (U.S.), the opportunities that are available now tend to be in the $200-million to $400-million range, he said.
"There's one possible opportunity out there over $500-million but it's early stage and nothing is going to happen for at least six to eight months."
In part, the disappearance of the mega-deal reflects the natural cycle of the streaming industry. Streaming companies aim to do most of their deal making when commodity prices are in the dumps, then sit patiently and reap the rewards as prices rise.
However, the shrinking size of the opportunities also means that more streaming companies are now capable of contending for them.
The key to making good deals in this market is sticking to strict financial criteria, Mr. Smallwood says. During the height of the last commodity cycle, between 2010 and 2012, Silver Wheaton went more than two years without signing a new streaming transaction, because miners were demanding too high a price.
"We always say that if we win every deal, we're paying too much," he says.
One Silver Wheaton deal that didn't go according to plan was signed in 2009. The streaming company agreed to advance $625-million to Barrick, primarily for 25 per cent of the silver produced at Pascua-Lama, a major gold project straddling the border between Argentina and Chile.
The deal, which also covered the silver output from three other Barrick mines, looked questionable when Barrick shuttered Pascua-Lama in 2013 because of environmental issues and spiralling development costs. Since then, the companies have amended the complicated agreement and postponed completion tests and possible repayments to reflect the troubled outlook for the project.
But now there is new hope. Barrick announced earlier this month that it had appointed a senior executive to explore a scaled-back development plan that would focus on the Argentine side of Pascua-Lama.
Mr. Smallwood says a revived mine would be a low-cost gold producer with tantalizing profit margins – and a natural for a streaming deal if Barrick wants financing support.
"We would be happy to step up and help Barrick further and do another stream," he says. That might extend to doubling down and taking another 25 per cent of the mine's silver production in exchange for a "billion dollars, plus or minus."
At full production, each 25 per cent of the mine's silver production would translate into about nine million ounces of silver a year, he estimates. "It would become one of our flagships."
Ian McGugan