Silver Wheaton Corp. (NYSE: SLW) is about to get larger. The company announced that it has entered into a binding term sheet to acquire the following from a subsidiary of Vale S.A. (NYSE: VALE): an amount of gold equal to 25% of the life of mine gold production from its Salobo Mine, located in Brazil; and 70% of the gold production, for a 20-year term, from certain of its Sudbury Mines located in Canada. Today’s move transforms Silver Wheaton’s profile to including more gold as a total of its efforts. For some size references, the market value of Silver Wheaton is $12.8 billion.
Silver Wheaton will pay Vale $1.90 billion in cash, and it will also grant 10 million Silver Wheaton warrants with a strike price of $65.00 per share with a term of 10 years. The breakdown is as follows:
- $1.33 billion will be paid for 25% of the gold production from Salobo;
- $570 million will be paid for 70% of the Sudbury gold production;
- Silver Wheaton will make ongoing payments of the lesser of $400 (subject to a 1% annual inflation adjustment from 2016 for Salobo) and the prevailing market price, for each ounce of gold delivered under the agreement.
This is expected to immediately boost Silver Wheaton’s production and cash flow profile by adding expected average gold production of 110 thousand ounces per year over the next 20 years. The company called this 5.9 million silver equivalent ounces (which includes approximately 60 thousand ounces per year from Salobo and approximately 50 thousand ounces per year from Sudbury). With gold around 1,672 per ounce, this translates to an additional $184 million per year on the gold side of the equation for another 20 years. That comes to a total of close to $3.7 billion at prevailing gold prices.
The addition of the Vale streams are projected to increase Silver Wheaton’s percentage of revenue generated from gold production from an average of 12% to a peak of around 25% over the next five years.
The company’s new production guidance for 2013 after the effects of this acquisition is 33.5 million ounces of silver equivalent production, including 145 thousand ounces of gold. In 2017, the company now expects 53 million ounces of silver equivalent production (including 180 thousand ounces of gold), which represents an increase of over 80% from 2012.
Silver Wheaton closed up 0.7% at $36.24 against a 52-week trading range of $22.94 to $41.30 and the consensus analyst target from Thomson Reuters is just over $47.00.