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Streetwise While others retreat, Silver Wheaton hunts for deals

Silver Wheaton mining at Lusimin Operations in Mexico.

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In a world where mining companies are selling their assets and cutting jobs in order to stay solvent, Silver Wheaton Corp. stands out.

Not only is the Canadian company looking for acquisitions, it says it won't have a problem finding the cash for them.

"There are a few deals we are looking at that are in the plus-billion dollar range," said Silver Wheaton's chief executive Randy Smallwood.

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The reason Silver Wheaton can afford to buy is because the company is not in the business of physically digging up the rocks.

Silver Wheaton makes money by buying silver and gold from companies which, though they focus on extracting other materials, mine the precious metals as by-products. And it does so at a fixed cost.

First, Silver Wheaton pays the company a lump sum for the right to buy its by-products. Then it pays the cost to produce an ounce of the metal at a pre-determined price. Once it receives the precious metal, Silver Wheaton then turns around and sells it on the open market at the much higher spot prices.

That business model, known as streaming, has underpinned Silver Wheaton's success in an environment where metal prices are slumping.

"These are good times for us," said Mr. Smallwood. "The only time we want to make acquisitions is in the bottom half of the commodity price curve and we are confident we are in that bottom half," he said.

The price of gold has dropped 33 per cent to around $1,280 from the high of $1,900 reached in the fall of 2011. Likewise, silver is down 57 per cent to $21.21 from highs of $49 reached in April 2011.

That's why the company did not buy anything from March 2010 through August 2012, Mr. Smallwood explained.

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Silver Wheaton has access to at least $1-billion in credit and generates, on average, a cash flow of between $150-million to $200-million every quarter. After setting aside about 20 per cent for a shareholder dividend, the rest is there for acquisitions.

"We're in excess of $100-million per quarter that we will put back in the ground one way or the other," Mr. Smallwood said.

Since prices have weakened, Silver Wheaton has been on a spending spree of sorts.

Earlier this year, it spent $1.9-billion buying gold from mines owned by Vale SA. In September 2012, the company spent $750-million for silver from HudBay Minerals Inc.

And it recently announced plans to pay HudBay $135-million for gold from its Constancia project in Peru, as well as to spend $148.5-million purchasing future gold production from Sandspring Resources Ltd.

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