Vale and Silver Wheaton announce $1.9bn gold stream deal

As Vale downsizes its steel division and reviews its nickel and silver assets, a $1.9 billion deal with Silver Wheaton will put the silver company solidly into the gold stream business.

Vale and Silver Wheaton announced Tuesday that they have entered into an agreement to sell 25% of the payable gold by-product stream from the Salobo copper mine in the Para State of Brazil for the life of the mine and 70% of the payable gold by-product stream from its Sudbury nickel mines for 20 years.

Vale will receive an initial cash payment of US$1.9 billion plus 10 million warrants of Silver Wheaton with a strike price of $65 and a 10-year term, value at $100 million. Silver Wheaton will pay $1.33 billion for the Salobo gold by-product stream, while $570 million plus Silver Wheaton warrants will be paid for the Sudbury by-product stream.

Meanwhile, Vale will also receive future cash payments for each ounce of gold delivered under the agreement, equal to the lesser of $400 per ounce and the prevailing market price.

The Brazilian miner may also receive an additional cash payment contingent on its decision to expand the capacity to process Salobo copper ores to more than 28 million metric tons annually before 2031. The additional amount would rain from $67 million to $400 million depending on timing and the size of the expansion.

Vale noted that there is no firm commitment from Vale as to quantities of gold deliveries.

“The deal unlocks substantial value from our high quality base metals operations as it values the Salobo payable gold stream at $5.32 billion plus payments of $400 per oz. upon delivery, given that no additional costs will be incurred by Vale to extract gold from copper concentrates produced by Salobo,” said Vale.

“Our base metals business is undergoing changes in order to achieve significant performance improvement and to deliver shareholder value on a sustainable basis,” the company said. “Alongside the efforts to unlock value from its operations such as the gold streaming transaction and the potential divestiture of non-core assets, Vale is pursuing lower costs and higher productivity arising from the simplification of its flowsheet, the idling of loss making operations, the feeding of smelters only with high value concentrates resulting from the optimization of mining plants and the use of technological innovation…”

The deal significantly increases Silver Wheaton’s exposure to gold from 12% of its revenue to a peak of around 25%.

Silver Wheaton said the deal “immediately increases Silver Wheaton’s production and cash flow profile by adding expected average gold production of 100,000 ounces per year over the next 20 years (5.9 million silver equivalent ounces) which includes approximately 60,000 ounces per year from Salobo and approximately 50,000 ounces per year from Sudbury.”

During an interview last month with Bloomberg, Smallwood noted “that even the large companies are all of a sudden receptive” to Silver Wheaton’s streaming model. “Doors that we’ve been knocking on for a long time, they are all of a sudden knocking on our door.”

David West, an analyst at Salman Partners in Vancouver, told Bloomberg deals with large miners can benefit Silver Wheaton because they tend to have a lower risk and offer more opportunities for sizable transactions.

With the addition of Vale’s streams, Silver Wheaton announced an updated 2013 production guidance of 33.5 million ounces of silver equivalent production including 145,000 ounces of gold.  By 2017, Silver Wheaton forecasts 53 million ounces of silver equivalent production (including 180,000 ounces of gold), representing an 80% increase from last year.

“Partnering with Vale on two new gold streams represents a significant step forward for Silver Wheaton and for the streaming model as a whole,” said Smallwood. “Not only does Silver Wheaton gain accretive gold ounces to further grow and diversify our company, but the previous metals streaming model has now been further endorsed by another of the world’s preeminent mining companies.”

“While we have traditionally focused on silver, we have never been averse to strategically adding the right gold streams to our portfolio,” he added. “The world-class nature of the Sudbury operations and the Salobo mine, with its exciting expansion and exploration potential, along with the quality of Vale as an operating partner, convinced us that these assets would be ideal additions to Silver Wheaton’s portfolio.”

“While we will continue to believe there are a significant number of streaming opportunities in the silver space, we are also open to layering more high-quality gold streams into our portfolio,” Smallwood stressed.

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