Salobo stream acquisition
Silver Wheaton (TO:SLW), (NYSE:SLW) has announced that it has acquired an additional 25% gold stream from Vale’s Salobo mine in Brazil for US$900m plus US$400/oz (plus 1% annual inflation from 2017) to take its total gold streaming interest in the mine to 50% for the remainder of its estimated 40-year life. The acquisition adds an estimated 70,000oz pa to SLW’s production profile for 10 years, followed by an estimated 60,000oz pa for the following 30 years. Consideration for the transaction has been funded by a US$800m equity issue via a bought deal at a price of US$20.55/share. Note that additional funding for SLW exists in the form of its revolving credit facility, which was expanded from US$1bn to US$2bn in February.
FY14 production and sales volumes released
In addition to announcing the Salobo transaction, SLW has also taken the opportunity to update investors on FY14 production and sales statistics. For the 12-month period, production amounted to 35.3Moz (vs our previous expectation of 35.6Moz), while sales reached 32.9Moz (vs Edison 34.0Moz) – suggesting that sales amounted to 90.6% of production in Q4, which is slightly above average (implying some ‘flush through’ of production into sales by counter parties), but well within the normal range.
Salobo buttresses long-term growth profile
In the wake of the additional Salobo gold stream acquisition, SLW’s management estimates that silver equivalent production will be 43.5Moz in FY15, rising to 51Moz in 2019, with gold’s contribution rising from c 23% currently to c 40%.
Valuation: Acquisition adds 13% in long-term
We have adjusted our financial forecasts to correspond to the confirmed production and sales volumes for FY14. In addition, we have recently revised our long-term gold and silver prices forecasts (see Gold – The value of gold and other metals, published in February 2015), which has also affected our long-term EPS forecasts for SLW (albeit only marginally). Current forecasts for FY15 assume average gold and silver prices of US$1,285/oz and US$19.92/oz, respectively. In the event that prices remain at current levels for the remainder of the year (US$1,208/oz and US$16.34/oz, respectively), we estimate that basic EPS will be reduced by c US$0.30/share. In the longer-term, EPS of US$1.69 in FY19 (cf US$1.50/share before the Salobo acquisition) implies a value per share of US$41.61 (C$52.10) in FY19 (vs US$36.92 previously), thereby offering investors in SLW a 24.6% internal rate of return on their investment in US dollar terms over five years.
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