Silver Wheaton Corp. of Vancouver is paying $900-million (U.S.) to embattled Glencore PLC in exchange for rights to some of the future silver production from a Peruvian mine.
The deal highlights the increasing willingness of major miners to swap tomorrow's production in exchange for cash today.
Companies like Silver Wheaton provide upfront payments to miners in return for the rights to buy "streams" of their future output at below-market prices. Streaming companies have found ample opportunities in recent years as metals prices have slumped and commodity producers have encountered problems in raising money from traditional sources.
The deal will come as welcome news to Glencore investors, who have seen shares of the commodity trader lose more than half their value this year. The giant Swiss company has come under pressure as doubts grow about its ability to manage its massive debt load in an era of dismal commodity prices.
For its part, Silver Wheaton said the new streaming agreement will help it deliver increased dividends despite flat commodity prices.
However, the company's earnings report, released after the close of trading on Tuesday, shows some challenges ahead.
Silver Wheaton declared a loss of $95.9-million or 24 cents a share in the quarter ended Sept. 30, largely as a result of a $154-million writedown on its interest in the 777 gold and silver mine operated by HudBay Minerals Inc.
Silver Wheaton said it was informed by HudBay that a drilling program had been unsuccessful and that the mine life for 777 is unlikely to be extended beyond 2020. As a result, Silver Wheaton has reduced its estimate of future production from the mine.
The company is also embroiled in a dispute with the Canada Revenue Agency. As previously reported, the tax agency has reassessed Silver Wheaton's returns for 2005 to 2010 and says the company owes more than $200-million (Canadian) on income earned outside of Canada.
Silver Wheaton disputes the reassessment and says it intends to vigorously defend its position.
"While the low commodity price environment has had its challenges, it has also created some great opportunities," Randy Smallwood, the company's chief executive officer, said in a release. "This is clearly evidenced by the announcement of our acquisition of a silver stream on Antamina, one of the lowest-cost, largest copper mines in the world."
The company said it will pay a Glencore subsidiary $900-million (U.S.) in exchange for 33.75 per cent of the silver production from the Antamina mine in Peru until the delivery of 140 million ounces. It will also make ongoing payments of 20 per cent of the metal's spot price for every ounce delivered.
The Antamina mine is owned by Glencore, Teck Resources Corp. of Vancouver, BHP Billiton Ltd. of Australia and Mitsubishi Corp. of Japan. In October, Teck sold the rights to a stream of Antamina silver production to Franco-Nevada Corp. for $610-million.
Other streaming deals this year include Teck's agreement to supply Royal Gold Inc. with gold from a Chilean mine and Barrick Gold Corp.'s pact to supply Royal Gold with gold and silver from a mine in the Dominican Republic.