Silver Wheaton's (NYSE:SLW) Q216 earnings were within 2.5% of our forecast and almost 50% better than the previous quarter (Q116). Performance was buoyed by record gold sales, driven by the continued ramp up at Salobo, a record production performance at Sudbury (which was almost 6,000oz ahead of our expectations), continued outperformance at Antamina (for a third consecutive quarter) and inventory drawdown (for a second consecutive quarter). As a result of increased precious metals’ prices, as well as the purchase of an additional gold stream at Salobo (see below), we have increased our earnings expectations for Q316, Q416 and FY16 by 60.0%, 46.7% and 27.3%, respectively.
Salobo stream acquisition (Au now 41% of revenues)
On 2 August, SLW announced it has agreed to acquire from VALE SA (NYSE:VALE) an additional amount of gold equal to 25% of the life-of-mine gold production from its Salobo mine in Brazil. We estimate total consideration for the stream (including re-negotiated warrants and cost inflation terms) to be US$820.8m, which compares with the US$900m it paid in March 2015 (when the gold price averaged US$1,179/oz) for an equivalent 25% gold stream from Salobo. The newly acquired Salobo stream will increase production attributable to Silver Wheaton by an average of 70,000oz pa for the next 10 years, followed by an estimated 60,000oz pa for the following 30 years of the mine’s estimated >50-year life.
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