In the same issue we chronicle the earliest days of Franco-Nevada, the first significant precious metals royalty firm in Canada, we also cover a news item that shows that the precious metals-streaming business has also reached the big leagues as, at press time, a blockbuster cash deal had been forged between Vale and Silver Wheaton.
The Brazilian iron ore king is selling the Vancouver-based silver stream company 25% of the payable gold by-product stream from its new Salobo copper mine in Brazil’s Para state for the life-of-mine, and 70% of the payable gold by-product stream from its Sudbury nickel mines — Coleman, Copper Cliff, Creighton, Garson, Stobie, Totten and Victor — for 20 years. Production will accrue to Silver Wheaton retroactively to Jan. 1, 2013.
Vale will pocket an initial wallet-bulging cash payment of US$1.9 billion plus 10 million warrants of Silver Wheaton with a strike price of US$65 and a 10-year term, valued at US$100 million.
The Salobo part of the deal accounts for US$1.33 billion of the amount, while the Sudbury part accounts for US$570 million.
Vale will also receive future cash payments for each ounce of gold delivered under the agreement, equal to the lesser of US$400 per oz. (plus a 1% annual inflation adjustment from 2016 in the case of Salobo) and the prevailing market price.
Other cash payments totalling up to US$400 million could be due if Vale expands Salobo to more than 28 million tonnes per year before 2031.
The estimated capital expenditure is US$4.2 billion for the first two phases of Salobo’s development, which would result in a mining complex capable of delivering 200,000 tonnes per year of copper in concentrates plus gold by-product. Just over US$3 billion has already been spent.
Vale reports that Salobo I is ramping up as planned, while Salobo II will come on-stream in the first half of next year.
Vale’s sale is only the latest in a string of moves to tighten the company’s focus on base metals, and squeeze more productivity and efficiency out of its vast, global asset base. Vale hopes the net effect of these improvements will be improved profits and share prices, and a recapturing of market share lost during the global economic downturn.
Vale has a relatively sunnier take than most on the future of base metals demand, with Reuters reporting that the company expects long-term iron ore prices to range between US$110 and US$180 a tonne, powered by a recovery in global industrial demand, especially from its key clients in China.
Bloomberg recently reported that iron ore for immediate delivery was priced at US$148.40 per tonne, according to a price index compiled by the Steel Index, or up 71% from a three-year low of US$86.70 on Sept. 5.
For its part, Silver Wheaton cements its status as the world’s largest precious metals-streaming company. Not counting this new deal, the company was already due to have attributable production in 2013 of about 33.5 million equivalent oz. silver, including 145,000 oz. gold.
This new Vale stream will add an expected average gold production of 110,000 oz. per year over the next 20 years, or 5.9 million equivalent oz. silver, including 60,000 oz. per year from Salobo and 50,000 oz. from Sudbury. It also means that gold may account for 25% of Silver Wheaton’s revenues five years from now, up from the current 12%.
By 2017, Silver Wheaton is due to have 53 million equivalent oz. silver of attributable production, up over 80% from 2012 levels.
To close the Vale deal, Silver Wheaton still has to come up with the dough, as its cash balance doesn’t quite cover it. At the end of the third quarter it had about $555 million cash-on-hand.
The company has entered into an agreement with Scotiabank and BMO Capital Markets as co-lead underwriters for two new credit facilities: a US$1-billion, five-year revolving credit line (replacing a US$400-million one), and a US$1.5-billion bridge loan with a one-year term.
Scotiabank was also Vale’s sole financial advisor.
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