Wheaton Precious Metals (NYSE: WPM) provides investors a unique way to invest in gold and silver without taking on the day-to-day risks of mining. That’s a key benefit of the precious metals streaming business model. However, this doesn’t mean you get to avoid all of the risks of mining, and Wheaton’s investment in this Barrick Gold (NYSE: ABX) mine is the perfect example of what can go wrong. Here’s a quick rundown on why Wheaton’s time might be running out on this large mine investment.
Streaming vs mining
Wheaton is a streaming and royalty company. Essentially that means it provides miners cash up front for the right to buy silver and gold at reduced rates in the future. Streaming deals are generally tied to a specific mine investment, often one in the development stage. Miners use the cash to build such mines, or to expand existing assets or pay down debt, and Wheaton gets to benefit from locked-in low prices for the gold and silver it buys, which provides it with wide margins in both good markets and bad.
Wheaton’s approach to the space, though, is slightly different than peers Royal Gold, Inc. and Franco-Nevada Corp. These two streaming companies have rather large portfolios with a significant number of smaller mine investments. Franco-Nevada, for example, has 376 investments (including around 80 in the oil and gas space), most of which are still in some stage of development or exploration. Wheaton, on the other hand, is focused on a smaller number of large investments, with just 26 portfolio investments — only nine of which are in the development stage.
An added risk
This means investors who buy Wheaton have more concentration risk because trouble with one of its streaming deals could be a larger issue due to the smaller number of investments. This is where the company’s investment in Barrick’s Pascua Lama project comes into play.
Wheaton reports that its production could increase by as much as 45% from current levels if mine developments play out as expected. It calls this “optionality.” The breakdown of that optionality is between 15 and 17 million ounces of silver and 130,000 to 165,000 ounces of gold. Pascua Lama’s contribution is nine million ounces of silver, a disproportionately large piece of the total.
The problem is that Barrick has been trying to build Pascua Lama since 2009. Political, environmental, and local resident pushback forced Barrick to pause the project, which, to complicate things further, spans the border between Chile and Argentina. At this point, the mine has essentially been mothballed as Barrick looks for ways to salvage its investment.
Wheaton’s investment in Pascua Lama dates back to 2009, when it inked a $625 million streaming deal for the mine. The agreement calls for Wheaton to get 100% of the silver produced from the mine (expected to be roughly nine million ounces annually) for the entire life of the mine. While the mine is being built, though, Wheaton gets 25% of the silver from three other mines in the region.
The original agreement has already been amended because of the mine’s troubles. At this point, Barrick has to reach 75% of design capacity at the mine by mid-2020, or the deal terminates. Getting the mine to that level of completion doesn’t look too likely at this point, since Barrick says the mine currently “does not meet Barrick’s investment criteria.” If the mine turns out to be a dud, Wheaton gets its cash back minus the value of the silver it has received so far from the other mines. If this is the ultimate result, there’s good news and bad news.
The good news is that Wheaton gets its $625 million back. The bad news is that the investment will have been, effectively, dead money for more than a decade. And perhaps more troubling, Wheaton’s optionality is a lot smaller than the streaming company is currently projecting it to be. Another takeaway for investors, though, is that even the advantaged streaming model can’t protect investors from mine development projects that never get built.
A small warning label
At this point, investors should be taking Wheaton’s optionality projections with a grain salt. One of the biggest assets on the list looks increasingly unlikely to meet the current deadlines. And while scuttling the deal won’t be a complete loss, it will be a notable hit to Wheaton’s future prospects. The streaming company is still a compelling way to invest in precious metals, but keep an eye on Pascua Lama if you own Wheaton.
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