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Silver Wheaton extends Pascua-Lama silver stream agreement

Two royalty companies that provided financing for Barrick’s Pascua Lama gold-silver project, may find their own ratings impacted by Barrick’s decision to delay production until 2016.

Silver Wheaton announced Monday it will extend its original silver streaming agreement with Barrick Gold’s Pascua Lama Mine.

Denver-based Royal Gold, which holds a 0.78% to 5.23% sliding scale net smelter royalty on the Chilean side of Pascua Lama, reiterated Monday that the company “is not responsible for capital costs or other costs of the project.”

Barrick has pushed back initial production at Pascua Lama from the second half of 2014 to mid-2016.

See also: Barrick’s huge Pascua-Lama gold mine start-up now delayed to mid-2016

The company’s preliminary analysis indicates an after-tax impairment charge if the range of $4.5 billion to $5.5 billion in the second quarter of this year. The company is also reviewing other assets, including goodwill, for possible “significant” impairment charges in the quarter.

In a statement Monday, Silver Wheaton said it would extend its outside completion date for the silver streaming agreement from Dec. 31, 2015, to Dec. 31. 2016. However, silver deliveries from Barrick’s currently producing mines, Lagunas Norte, Pierina, and Veladero, will still end at the end of 2015.

“As long as Barrick is still advancing construction of Pascua-Lama at the end of 2015, Silver Wheaton does not intend to cancel the silver stream,” said Randy Smallwood, Silver Wheaton CEO. “We are in regular contact with Barrick, and are confident that the right measures are being taken to achieve production at this mine. Pascua Lama is a world class gold and silver deposit and will be a world class mine once it begins production.”

Nevertheless, Silver Wheaton has revised its 2017 production forecast from 53 million ounces to 49 million ounces because of the delay at Pascua Lama. The company’s 2013 production guidance is still expected to be 33.5 million silver equivalent ounces.

In a note published Monday, Scotiabank analysts Craig Johnston and Philip Rabenok observed that Silver Wheaton could still seek to recoup some of its initial $625 million capital investment. “However, the company has stated on numerous occasions it believes Pascua Lama will be completed and it looks forward to its 9.0 million ounce annual silver stream.”

Scotiabank estimates that Barrick will continue to deliver 2 million to 3 million ounces of silver from its other three South American assets through the end of 2015. Nevertheless, Scotiabank’s net asset value for Silver Wheaton decreased from $26.32/sh to $26.08 per share “as the delay of Pascua Lama’s production is not fully offset by production from Barrick’s other operations.”

Meanwhile Scotiabank analysts Joanne van Ballegooie and James Bender observed that the Pascua-Lama announcement of the timing delay at impacts Royal Gold’s “EPS and CFPS in F2015 as now the project will start to contribute in F2017.”

“Given the delay of about two years to expected EPS and CFPS, we have adjusted our multiple to 1.35% from 1.45% and our target is reduced to $65.00 from $71.00. We maintain our Sector Perform rating,” said the analysts.

In their analysis of Barrick Gold published Monday, Ballegooie and Bender have now assumed a total capital expenditure of $10.35 billion for Pascua Lama. Scotiabank’s one-year target for Barrick has been reduced from $26.50 per share to $23, but the company’s Sector Perform rating has been maintained.

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