Water Delays Continue to Keep This Mine’s Production Stream at Bay

There’s an interesting bridge to be crossed with the SLW/ABX Pascua Lama situation.

| More on:
The Motley Fool

A streaming company can be a great way to invest in gold or silver production because it shields investors from the inevitable cost overruns that result from building a new mine. Unfortunately, it can’t protect you from the delays that also inevitably come from starting up a new mine. These delays are one of the current issues facing investors of silver streamer Silver Wheaton (TSX: SLW,NYSE:SLW). The company, which has a silver
streaming agreement with Barrick Gold (TSX: ABX) on its Pascua Lama project in Chile, is simply along for the ride as Barrick works through its water issues to bring the mine online.

The good news is Barrick has now submitted a plan to be reviewed by the Chilean regulatory authorities. Under the plan, the company would construct the project’s water management system in compliance with permits by the end of next year. This would have the company producing ore from the mine by the middle of 2016.

Conundrum

The problem is that under the completion guarantee with Silver Wheaton, Barrick is required to have completed at least 75% of the design capacity by the end of 2015. Here’s where it gets really interesting, during just 2014 and 2015, Silver Wheaton is entitled to silver production from three currently producing Barrick mines until it satisfies the completion guarantee. However, if Barrick doesn’t comply by the end of 2015, Silver Wheaton can simply walk away from the agreement and get its upfront cash back, less the credit for silver already delivered.

That puts both companies in a rather interesting spot. If Silver Wheaton walks away it will lose out on that mine’s future production. Meanwhile, Barrick would need to come up with the cash to repay most of the $625 million (USD) it received upfront. Walking away is an outcome neither company wants to see.

Though that’s especially true for Silver Wheaton as Pascua Lama is a world class gold and silver deposit, which are tough to come by these days. Not only that, but the company’s contract included its ability to purchase 25% of the silver produced for the life of the mine. That could equate to substantial cash flow over the years.  Overall though, Silver Wheaton has agreements that cover 23 mines, with four of them still in development. So, even if it does decide to walk away or if there are further delays, the company will be fine.

Some of its current assets includes Primero’s (TSX: P) San Dimas mine and Goldcorp’s (TSX: G) Penasquito mine, which has had its own water issues. Today these two mines represents 20% and 17% of its forecasted production, respectively.

Silver Wheaton’s diverse portfolio is structured so that none of the mines with which it has streaming contracts account for more than 25% of its total production. So, even when Pascua-Lama does come online it would represent just 17% of Silver Wheaton’s overall production in 2017. That will help push Primero’s San Dimas down to 13% of production while Goldcorp’s Penasquito will represent just 14% of forecasted production. Again, while it’s pretty clear that Pascua-Lama is important to Silver Wheaton’s future, its contracted diversity will go a long way to secure its future.

Foolish Takeaway

This whole situation highlights one of the many risks facing investors, even when investing in what are deemed as safer plays. You just never know when your investment thesis will spring a leak. That’s why with a future that is so uncertain, it’s important have a diversified portfolio to withstand the inevitable bumps along the road.

Unfortunately, the way too many investors are looking to gain diversification is flawed. That’s because many Canadians are walking into a trap by relying on indexes. We don’t want that to happen to you, which is why The Motley Fool has prepared a Special FREE Report that can help you work around the pressure to invest in indexes. It’s called “5 Companies That Will Help With a Flawed Piece of Advice,” and you can receive a copy at no charge by simply clicking here now!

The Motley Fool’s purpose is to help the world invest, better. Click here now for your free subscription to Take Stock, The Motley Fool Canada’s free investing newsletter. Packed with stock ideas and investing advice, it is essential reading for anyone looking to build and grow their wealth in the years ahead.

Follow us on Twitter and Facebook for the latest in Foolish investing.

The original version of this post was authored by Fool.com contributor Matt DiLallo.

Fool contributor Matt DiLallo does not own any of the companies mentioned in this report.  The Motley Fool has no position in any stocks mentioned at this time.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

FREIGHT TRAIN
Investing

CNR Stock: Should You Buy Today?

Canadian National Railway has been hit in recent quarters, as economic growth has slowed, with CNR stock declining 10% in…

Read more »

Family relationship with bond and care
Dividend Stocks

TFSA Investors: 3 Cheap Canadian Stocks for Retirees

These three Canadian stocks are super cheap for retirees looking for a great buy that will last the test of…

Read more »

calculate and analyze stock
Dividend Stocks

CPP Disability Benefits: Here’s How Much You Could Get

Not everybody can get CPP disability benefits. If you want some passive income, consider investing in Royal Bank of Canada…

Read more »

growing plant shoots on stacked coins
Dividend Stocks

Boosting Your Monthly Income: TSX Stocks That Deliver

Dividend investing can boost regular or active incomes, especially select TSX stocks that pay monthly dividends.

Read more »

consider the options
Tech Stocks

Better Buy (2024 Edition): Shopify or Nvidia Stock?

Shopify (TSX:SHOP) isn't the only red-hot tech stock in town that could add to recent gains.

Read more »

Bad apple with good apples
Investing

5 Stocks You Can Confidently Invest $500 in Right Now

These stocks could significantly grow your investment over the next decade.

Read more »

Illustration of bull and bear
Tech Stocks

A Bull Market Is Coming: 3 Growth Stocks That Could Thrive

Given their high growth prospects and cheaper valuation, these three growth stocks would be an excellent buy as the market…

Read more »

Golden crown on a red velvet background
Energy Stocks

Enbridge Stock: This Dividend Aristocrat Could Gain in 2024

Enbridge (TSX:ENB) stock is looking like a great buy as management expects it to grow in 2024.

Read more »