Wheaton Precious Metals portfolio biased to gold as organic growth pipeline lags

VANCOUVER (miningweekly.com) – Canadian streaming firm Wheaton Precious Metals (WPM) has seen the proportion of precious metals in its production profile shift, with about two-thirds weighted to gold, as several of its silver-focused organic growth projects languish behind plan.

The Vancouver-based company expects to have produced 28-million ounces of silver and 340 000 oz of gold in 2017, rising to 29-million silver ounces this year and gold remaining stable.

"About two-thirds of our corporate development pipeline is biased to gold. The gold market is bigger than the silver market, and I do see us continuing to earn into that. Most of our optionality such as on Pascua-Lama, Rosemont or Navidad; these projects are all silver-focused, so a lot of the organic stuff will come in the form of silver," president and CEO Randy Smallwood told Mining weekly Online in a recent interview.

"Any expansion at Salobo will add to the gold side and offset increased silver, but we'll probably keep to about 60% to 65% gold over silver going forward," he said.

The Pascua-Lama deal goes back to 2009 with Barrick Gold, and over the course of the next several years, WPM paid about $625-million dollars. Barrick stopped the project in 2013 after investing $5-billion in it. In addition to permitting issues, cost overruns and a sharp drop in bullion prices, it faced strong and organised opposition by the local indigenous communities.

The mine was slated to produce 800 000 oz/y to 850 000 oz/y of gold in its first five years of full capacity.

In lieu of the production payments from Pascua Lama, WPM has been receiving silver from Barrick's Lagunas Norte, Purina and Veladero mines, to the tune of $375-million worth of silver thanks to the Pascua-Lama deal. Smallwood pointed out that when the company stops receiving compensation for those streams, it will have netted $250-million on the Pascua Lama deal.

"For $250-million, we're going to patiently wait and see where it goes. You can't do an openpit in Chile and if you go underground the economics simply don't support anything. It says something about Pascua Lama – that the grades are actually high enough to what, at early stages, appears to support an underground operation," he stated, adding that the prospects of openpit operations in Chile not getting permitted is scary for many Chile-based projects.

WPM had also recently negotiated increased exposure to gold on the San Dimas silver stream with Primero Mining, which is being taken over by First Majestic Silver for $320-million.

Previously, Wheaton River got 100% of the silver from San Dimas – up to six-million ounces, before the partners split the rest for their own balance sheets. Smallwood said, "the challenge was that we were taking too much value".

"The new San Dimas deal is a 50:50 gold/silver stream, but the silver gets paid to us in gold ounces. It's what's needed there, because the mine has silver- and gold-rich areas, so we wanted equal weighting. It opens up the entire property moving forward at San Dimas. I think the new structure is a very strong structure that is the best for the mine, and for First Majestic to be successful at the mine," he said.

Smallwood said he remained preferential to silver. He thinks silver has got some better fundamentals and dynamics behind it, but noted that the problem is that he does not see any silver opportunities in the market currently. He noted that a lot of the reasons that he likes silver also apply to gold and that is one of the reasons why the company had made a shift to gold.

There are many more opportunities in gold, since there are many more copper projects, where gold is a dominant by-product, than lead/zinc opportunities, where silver is the main by-product.

EVOLVING DEAL STRUCTURES
Smallwood noted that he has seen streaming deal structures change in recent years, with an increased emphasis on going over to fixed margins to the spot price, instead of having fixed costs associated with production payments.

"I support that approach, because we have to recognise that our partners still maintain the cost burden on these assets as they deliver metal going into production. As commodity prices go up, the tax burden increases and in the current model, with the fixed production cost, they have to pay more without getting anything to offset that."

He said the company is looking at deal structures that regard the production payment as a function of the commodity prices, to better help miners offset increased tax burdens as commodity prices rise. "It also provides built-in optionality for us in a higher-price environment," he said.

WPM has started to see more development opportunities coming to market over the past 12 months, rather than 'balance sheet repair'-type transactions. Between 2013 and 2016, most of the deals the company was involved with related to people getting rid of debt.

"Most of those companies, but not all of them – there are still some opportunities on that side – but most of the focus now is on the next build. The conversation has turned to funding development projects, expansion plans or new acquisitions.

"We are seeing companies putting new money back into the ground. It's a real shift that we've seen; it's been much more development focused in the past 12 months than what we've seen for the last several years," he said.

However, he cautioned that despite a lot of talk regarding funding for the new wave of projects and expansions, he has not seen the companies "flip the switch" yet, and go forward with the projects.

"I think the market is in a bit of a holding pattern waiting for some more stability and strength to come in behind precious metals before we are going to start seeing investments into the space. On the base metals side, we also deal with the problem that there is so little money being spent on exploration projects, that to be honest, there is not the selection of projects that we've seen in the past," he noted.

WEAK PROJECT PIPELINE
Despite a few anomalous exploration successes in recent years, there have generally not been any new noteworthy prospects, he lamented.

"Many of the projects we're looking at have been around for decades and are just waiting for optimisation - they're not as strong - and the challenge now is for boards to sanction and decide on the best funding options for these," he said.

The company's solution to help the industry's weak development pipeline further along the value curve is the early deposit financing structure. The early deposit entails WPM fronting a portion of the stream upfront to help the company get to the feasibility stage. Typically they have to have done at least a scoping study or have a prefeasibility in place, to show WPM healthy margins and lay out the base design concept. "We'll value it based on that and we'll give anything based on that, up to 20%."

"This model still provides an invaluable advantage for these projects, because what we've seen is there's not a lot of support for the single-asset companies - the small juniors who need high-risk capital. It gives us early access to new development projects for very little capital upfront, as we watch these things mature and go forward," he said.

"We are seeing healthy interest in that area itself. It comes down to exposure and the optionality of having yourself spread over a number of different projects - it's going to work out well for us going forward."