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Silver Wheaton stocks up on metal in deal with HudBay

Production at HudBay mine.

Brian Pieters

Silver Wheaton Corp., the world's largest silver streaming company, has announced its first acquisition in more than two years, signalling a belief that prices for its namesake metal have bottomed out.

Vancouver-based Silver Wheaton said on Wednesday it agreed to pay $750-million (U.S.) for life-of-mine silver production from two assets belonging to HudBay Minerals Inc., the 777 mine in Canada and the Constancia project in Peru.

Analysts saw the deal as good for both companies, showing Silver Wheaton is ready to start buying silver production again. It provides Toronto-based HudBay with much-needed financing for its Constancia mine in Peru at a time when debt and equity markets have been slammed shut amid global economic turbulence.

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"I think it indicates the fact that we believe it's time to make acquisitions again and we are in the bottom of a cycle again," Silver Wheaton president and chief executive officer Randy Smallwood said in an interview. "It's time to start taking the dollars in the bank account and converting them into ounces in the ground."

Mr. Smallwood said the action would not stop here, and to expect more acquisitions over the next six months as the company looks at assets producing from 500,000 ounces and upward of silver. Silver Wheaton has a strong war chest, with $500-million in cash on hand after making the first payment on the HudBay deal, and again as much under a revolver facility.

Silver prices were at $28 an ounce on Wednesday, sharply lower than levels near $40 an ounce two years ago - they even flirted briefly with $50 an ounce before a sharp pullback.

Wednesday's deal signals Mr. Smallwood's belief that silver prices have likely hit a bottom and will begin to climb. It also signals optimism about potential future production at HudBay.

HudBay plans to use the cash to finance $1.5-billion (U.S) in construction costs on the Constancia project. It said on Wednesday it had also arranged a $600-million credit facility from a syndicate of Canadian and international banks. It also had $710-million in cash on hand as of June 30, 2012.

The news will likely come as a relief to shareholders almost three months after HudBay was forced to discontinue a planned offering of $400-million due to poor market conditions.

"We've derisked the project to a large degree for Hudbay shareholders, with no effective dilution through this stream," said Mr. Smallwood. "So it sort of highlights the benefits of streaming to base metal companies and how both sides win."

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Under the terms of its deal with Silver Wheaton, Hudbay surrenders all current silver production from the flagship 777 Mine in Canada and life-of-mine silver production from the Constancia project. It will also receive all gold production from 777 until production ramps up at Constancia, after which it will be entitled to 50 per cent of gold output.

The underground 777 Mine produces mostly copper and zinc, with gold and silver byproduct. The Constancia project, located in the southeastern Andes of Peru, will be a copper mine, with molybdenum and silver byproduct.

Streams from the two projects will add 4.9 million ounces annually to Silver Wheaton's average production, bringing it to 48 million ounces of silver equivalent by 2016, from 43 million currently.

The company is on the lookout for further acquisitions, and prefers to purchase silver rather than gold streams. Mr. Smallwood said that before entering the agreement with HudBay, the company had also been looking at several other potential opportunities.

"We were busier than we've ever been on reviewing projects right now," he said, adding that he was especially keen on properties with high exploration potential. "We are staffing up on the corporate development side just because there are so many opportunities out there.

Silver Wheaton shares rose 4.6 per cent in Toronto, while Hudbay stock was down 1.3 per cent after gains immediately after the deal was announced.

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