BARRICK GOLD's $8.5bn Pascua Lama mega-project on Chile's border with Argentina.

BARRICK GOLD's $8.5bn Pascua Lama mega-project on Chile's border with Argentina.

Silver Wheaton Shows its Mettle in Pascua Lama Terms

Issue 45, May 2013

Barrick Gold faces further setbacks at its Pascua Lama project, after Chile’s environment regulator found 23 permit violations late last week, blocking construction. Analysts expect the ruling to delay production to 2015 adding $1bn to capital costs of $8.5bn.

Shares in Silver Wheaton have lost 20 per cent since construction was part suspended in April. In 2009 the company paid $625m for 25 per cent of all silver from the mine at the lesser of $3.90 per ounce or the market price.

“Our worst case is: we get our money back,” president Randy Smallwood told Global Mining Observer. The deal includes clauses that give Silver Wheaton recourse to silver from Barrick’s Lagunas Norte, Pierina and Veladero mines in Peru and Argentina, averaging more than 2m ounces per annum until Pascua-Lama’s completion.

The terms make delays at the mega project ounce accretive for Silver Wheaton as it gains compensatory output whilst its claim over Pascua Lama remains intact. It has a similar agreement with Hudbay Minerals, with recourse to gold from its 777 mine in Flin Flon.

In both cases, Silver Wheaton also has a put option: if Pascua Lama is 25 per cent incomplete by the end of 2015 it has a 90-day option on repayment, less the value of silver received. Based on spot prices, Smallwood says the repayment would equal $300m.

He is though confident that Barrick will overcome its difficulties at Pascua Lama, where sunk costs would be difficult to leave behind. “They have already spent in excess of $4bn, so everyday the project looks more attractive. We don’t see Barrick parking this.”

He adds that it is very unlikely that Silver Wheaton would exercise repayment. “Unless we were convinced the mine would never go into production, we would keep the stream and wait for Barrick to get it up and running.” The deposit contains 676m silver ounces.

Delays at Pascua Lama have highlighted the strength of Silver Wheaton’s terms as a capital holder, isolating the group from cost rises and development risk. Should Barrick be forced as the operator to seek fresh funding, it may even add to Smallwood’s dealflow. “We keep on trying to convince them that they should do another stream on one of their other assets to help fund this capital," he says. "Hey, they’re producing a lot of silver out of Pueblo Viejo.”

“Our worst case is: we get our money back.”

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