Silver Wheaton’s ‘train wreck : bought deal is getting snubbed

Silver Wheaton acquires silver and gold “streams” from mining companies to help them finance their projects. That has been a very active business during the mining downturn, and Silver Wheaton has kept bankers busy.

Nicky Loh/BloombergSilver Wheaton acquires silver and gold “streams” from mining companies to help them finance their projects. That has been a very active business during the mining downturn, and Silver Wheaton has kept bankers busy.

The stock traded below the offer price all day Tuesday, and sources said a very large portion remains unsold. One source described the entire deal as a “train wreck.”

The bought deal, which was announced Monday night, was priced at US$20.55 a share by lead underwriter Scotiabank. The pricing was very aggressive, as it represented a 3% discount to Silver Wheaton’s closing price that day. Typically, the discount on bought deals is larger, as a reflection of the risks taken on by the underwriters, one of which is that the stock price drops. On this deal, the underwriters are also charging agents’ fees of 3.75%. – or $0.77 a share.

Amid weaker precious metal prices Tuesday, Silver Wheaton shares did fall, by 5.5%, and closed at US$20.02. On heavy volume – trading in New York and Toronto at 11.4 million shares was about 1.5 times normal – the shares hit an intraday  low of US$19.83.

Silver Wheaton is a very liquid stock, so if investors want to build a large position, they can buy it on the open market and bypass the bought deal. Deal insiders are hopeful that metal prices will rise on Wednesday and they will be able to sell more of the offering.

Investment banks lined up to be part of this bought deal, because Vancouver-based Silver Wheaton has been one of their top mining clients in recent years. Indeed there are four lines of underwriters (all with varying degrees of liability), with BMO, CIBC and RBC on the second line, BofA Merrill Lynch and TD on the third line, and Scotiabank signed on for a 25% share.

Silver Wheaton acquires silver and gold “streams” from mining companies to help them finance their projects. That has been a very active business during the mining downturn, and Silver Wheaton has kept bankers busy.

A source said there has been no serious talk so far about trying to cut the price on the offering, or reduce the size. Scotiabank does not typically lead mining offerings this big.

This is the third time in recent months where banks had trouble selling a very large mining stock offering. It shows that investor appetite for these stocks is not endless amid rough market conditions.

In late 2013, Barrick Gold Corp. did a US$3 billion bought deal, which was priced at a 5.4% discount to the market price. And in the middle of last year, Franco-Nevada Corp.’s US$500 million share offering proved to be a tough sell.

The Franco-Nevada bought deal has similarities to the current Silver Wheaton deal. Both firms are in the mining-royalty business, and in both cases, the discount to the market price was very small. It was less than 2% in the Franco transaction.

Silver Wheaton plans to use cash from the bought deal to fund its acquisition of a gold stream from Vale SA’s Salobo mine in Brazil. It is the second gold stream that Silver Wheaton is buying from this mine.

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Silver Wheaton Corporation BUY Target Price $29

Metals and Mining — Precious Metals and Minerals
SLW : TSX : C$21.51
Target: C$29.00

Silver Wheaton is uniquely positioned as the purest silver
producer. The company’s asset base consists of silver purchase
agreements with the San Dimas and Penasquito mines in Mexico,
Pascua-Lama project in Chile/Argentina, Zinkgruvan mine in
Sweden, Yauliyacu mine in Peru, Stratoni mine in Greece. Most
recent streaming deals with Hudbay minerals (silver and gold
streams at 777 and Constancia) and Vale (gold streams at
Salobo and Sudbury mines).
All amounts in C$ unless otherwise noted.

Investment recommendation
Silver Wheaton remains the preferred vehicle for exposure to silver
given the strong growth profile, margins, liquidity and diversification.
Further accretive streaming transactions are possible over the next 12
months, although new equity should be expected for larger transactions.
SLW is currently trading at 1.20x its forward-curve-derived NAV,
modestly above the silver producer group, but below SLW’s royalty
peers. Our NAV continues to assume a 25% permitting/development risk
discount for Pascua and Rosemont. We maintain our BUY rating.
Investment highlights
 SLW reported Q3/14 adjusted EPS of $0.20, in line with our
estimate and consensus. While attributable AgEq production was
below expectations (8.4 vs. 9.2Moz), a 1.3Moz inventory drawdown
resulted in sales beating our estimate (8.7 vs. 8.4Mozs).
 SLW wrote-down Mineral Park $37.1m following Mercator Minerals
Chapter 11 filing, and Campo Morado $31.1m given questionable
viability of the satellite resource base (metallurgy and low prices).
We have removed Mineral Park from our valuation and reduced our
Campo Morado’s valuation by 70%. Overall, these two small streams
are non-core and have limited impact on SLW’s overall profile.
SLW’s key streams remain well insulated to lower prices.
 SLW made a final $135m payment to Hudbay Minerals (HBM-T,
BUY, covered by Gary Lampard) relating to the Constancia gold
stream. While the payment was expected, SLW paid through the
issuance of 6.1m shares (dilution of 1.9%) rather than cash. The
preference for equity is understandable with the net debt to EBITDA
at 1.66x, which may not be high relative to SLW’s producing peers,
and is easily manageable, but remains high for a royalty company.
Both Franco-Nevada and Royal Gold have net cash positions.
We have revised our target price to $29.00 from $30.00. Our target
remains predicated on a 1.55x multiple to our fwd. curve derived
5%/operating NAVPS estimate of C$20.02 (previously C$20.76) less net
debt and other corporate adjustments.

Pan American Silver Corp.


PAA : TSX : C$15.75
Target: C$18.75

Pan American Silver’s key operating mines include
Huaron, Morococha and Quiruvilca in Peru, Dolores, La
Colorada and Alamo Dorado in Mexico and Manantial
Espejo in Argentina. The company maintains ownership
of the Navidad Project located in Chubut Province,
Argentina, to which we ascribe no value.
All amounts in C$ unless otherwise noted.

Metals and Mining — Precious Metals and Minerals
Investment recommendation
We reiterate our HOLD rating on shares of Pan American Silver
following results for Dolores’ PEA contemplating the addition of a
milling and pulp agglomeration circuit to the process flow sheets and the
development of an underground mine. While the company reports a
strong IRR for the project, a construction decision has been deferred for
9-12 months to proceed with additional studies and continue the
delineation of underground mineralization.
Investment highlights
 Robust economics, with initial capex estimate of $105 million,
returning an IRR of 33% at $1,300/oz gold and $22/oz silver. We
estimate the development of this project to begin mid-2015, with the
pulp agglomeration plant operational mid-17 and the underground
mine at full operation (1,500 tpd) in H1/18E. We estimate that the
development of the pulp agglomeration circuit and underground
mine is approximately 5% accretive to our company NAV.
 Annual silver production is expected to increase by 38% in the first
10 years, due largely to a 21% increase in throughput and better
recoveries (~7% for both gold and silver). While an underground
resource has not been provided, we estimate 5.25 Mtonnes (based
on 1,500 tpd for 9.5 years of operations) containing approximately
11 Moz silver and 0.3 Moz gold.
We have revised our target to C$18.75 from C$17.75 based on 1.05x our
5%/operational NAVPS estimate of C$13.85 (previously C$13.09) plus
net debt and other corporate adjustments. Our 2014 EPS estimate has
been revised to $0.28 from $0.15 following the incorporation of Q1/14
results and revised 2014 cash cost estimates.

Canaccord Precious Metals Update

 For the junior precious metal producers, we have calibrated our forecasts to our updated forward curve price deck, consistent with the deck used for the senior producers.

 Our revised price deck is summarized below. Since our last update in October 2013, the long-term forward gold price has declined 3%, from $1,439/oz to $1,391/oz. Curve pricing for major by-products copper and silver have also declined, approximately 4% and 9%, respectivel.
 On the other hand, we have seen a year-to-date recovery in junior gold equity prices as highlighted by an 18% increase in the GDXJ (surprisingly outperforming the gold price which is up only 4%). We believe this reflects renewed investor interest in the space, capital inflows into the gold sector and likely increased levels of investor risk tolerance. While we have maintained the upper end of the range of target multiples for junior producers at 1.1x, we have increased the lower end of the range from 0.4x to 0.5x, reflecting increasing levels of investor risk tolerance for equities with operational/financial challenges.
 We remain positive on bullion longer term, but see the potential for significant volatility in the gold price over the next 12 months. While we see greater upside to gold equities relative to bullion, we continue to recommend investors stay defensive and choose quality over leverage. We favour companies with quality assets, strong balance sheets and relatively lower risk profiles –
i.e., producers that could generate and grow free cash flow even in the current depressed gold price environment.
Rating changes in this report include Argonaut Gold (BUY from Hold), Endeavour Mining (BUY from Speculative Buy), Fortuna Silver (BUY from Speculative Buy), and Sandstorm Gold (BUY from Speculative Buy).

Target prices have been revised lower for most stocks under coverage with the exception of higher target prices for NGD, AR, AUQ, DGC and PAA. Canaccord Genuity Canadian Focus List Picks include B2Gold, Primero Mining and Fortuna Silver Mines.
 Our Q4/13 estimates have been updated to reflect actual metal prices during the quarter and pre-released operating results. In general, we are expecting a sequential and y/y decline in earnings (due to lower gold and silver prices). Our Q4/13 EPS estimates are notably below consensus for NGD, AUQ, EDV and PAA.

 The Gold Investor’s Handbook “ by Jack A. Bass, B.A. LL.B.

( available from Amazon)

1oz 1984 Krugerrand Transferred from en.wikipedia1oz 1984 Krugerrand Transferred from en.wikipedia (Photo credit: Wikipedia)

1oz 1984 Krugerrand Transferred from en.wikipedia (Photo credit: Wikipedia)

Why Invest in Gold and Gold Stocks – and Why Now ?

Historically, gold has been a proven method of preserving value when a national currency was losing value. If your investments are valued in a depreciating currency, allocating a portion to gold assets is similar to a financial insurance policy. In the past year, the climb in the price of gold above $1600 per ounce is due to many factors, one being that the dollar is steadily losing value.

  • The dollar is weak and getting weaker due to national economic policies  like quantitative easing , which don’t appear to have an end.

Silver Wheaton Corporation Update Target $30

SLW : TSX : C$21.59
Target: C$30.00

Silver Wheaton is uniquely positioned as the purest silver
producer. The company’s asset base consists of silver
purchase agreements with the San Dimas and
Penasquito mines in Mexico, Pascua-Lama project in
Chile/Argentina, Zinkgruvan mine in Sweden, Yauliyacu
mine in Peru, Stratoni mine in Greece. Most recent
streaming deals with Hudbay minerals (silver and gold
streams at 777 and Constancia) and Vale (gold streams
at Salobo and Sudbury mines).
All amounts in C$ unless otherwise noted

Metals and Mining — Precious Metals and Minerals

Investment recommendation

We maintain our BUY rating on Silver Wheaton. We believe the
perceived increased risk with respect to Pascua construction and
Rosemont permitting has been largely discounted in the company’s
shares. SLW boasts a robust growth profile and continues to generate
strong free cash flow at spot gold and silver prices.
Investment highlights
 We updated our model to reinstate the stream from Mercator’s
Mineral Park mine in Arizona following the proposed merger with
Intergeo MMC, which is expected to inject cash to sustain
operations. Based on Mercator’s previous mine plan, not assuming
any changes are made following the merger, we value the Mineral
Park stream at US$108 million or 1.4% of NAV.
 We also updated our model to incorporate the new PEA for Alexco’s
Keno Hill project in the Yukon. Production re-start is now expected
approximately one year later in Q1/15. Our valuation for Keno Hill
has declined from US$116 million to US$50 million. Given the
significant financing risk surrounding the re-start, we continue to
discount the stream by 50%. Alexco is in violation of the completion
agreement based on achieving throughput of 400tpd by YE14. We
assume SLW will extend the deadline given the option value.
 Overall, our 2014 production forecast of 39.4mozs remains largely
unchanged. Our 2013 EPS and CFPS estimates remain materially
unchanged at $1.06 and $1.50, respectively.
We are maintaining our target price of C$30.00, which is predicated on
a 1.30x multiple to our forward curve derived operating NAV estimate of
C$25.29 (previously C$25.44) plus net debt and other assets.

Pan American Silver Corp. : Adjusting for Lower Gold and Silver Pricing

Pan American Silver Corporation
Pan American Silver Corporation (Photo credit: Wikipedia)

PAAS : NASDAQ : US$12.33
Target: US$13.00

Pan American Silver‘s key operating mines include Huaron, Morococha and Quiruvilca in Peru, Dolores, La Colorada and Alamo Dorado in Mexico and Manantial Espejo in Argentina. The company maintains ownership of the Navidad Project located in Chubut Province, Argentina; to which we ascribe no value.
All amounts in US$ unless otherwise noted.

We are lowering our recommendation on Pan American Silver to HOLD from Buy, and our 12-month target price to US$13.00 from US$19.50
following our revised commodity price forecasts and sector outlook. Over the next 12 months, we expect challenging capital market conditions to persist and only a modest improvement in gold and silver prices.
While Pan American Silver has one of the strongest balance sheets in the sector (US$245 million in cash/ US$738 million in working capital as
of March 31, 2013), we estimate that free cash flow would be limited (representing an FCF yield of 5% in 2014E and beyond) under our revised gold and silver price forecasts.

Organic growth within the portfolio is limited (mill/pulp agglomeration circuit at Dolores and possible expansion at La Colorada – both pending completion of economic studies), and we expect that without a material improvement in the silver price and the situation in Argentina, Navidad will likely not be built.
The stock trades at 1.71x P/NAV (5% Spot gold/silver) vs. the precious metals producer group arithmetic average of 1.16x. While some characteristics should warrant a higher multiple in current market conditions (strong balance sheet and relatively low development risk),we view the stock as fairly valued in light of limited growth potential. As such, we are downgrading Pan American Silver to HOLD from Buy based primarily on limited implied return.
Our 5%/NAVPS estimate has declined by 48% to US$10.68/share due to a reduction in our gold/silver price forecasts ($1,350 Au/$23 Ag from
$1,750 Au/$32.50 Ag). Our 12-month target price has been lowered to US$13.00 (from US$19.50) based on 1.2x (previously 0.9x) our 5%/peak
NAVPS estimate.
Our 2014E EPS and CFPS have been revised to -US$0.02 and US$1.01, respectively, from US$1.05 and US$2.18 based on our lower as assumed gold gold/silver price forecasts.

NOTE: Most gold and Silver Stocks are covered on

Silver Eruption ?

American Platinum Eagle bullion coin
American Platinum Eagle bullion coin (Photo credit: Wikipedia)

The coming silver price eruption


Silver coins There was a degree of predictability about the knockdown in gold and silver at the US futures market (Comex) last Wednesday. The reason is that the Commercials (together the producers, processers, fabricators, bullion banks and swap dealers) have large short positions, so they have a vested interest in lower prices. This is particularly noticeable in silver, which is shown below.

Silver long-short spread

The chart is of Commercials’ shorts and longs as of Tuesday November 27. The Commercial shorts (the red line) now stand at 99,317 contracts, or 496,585,000 ounces, about two thirds of 2011’s worldwide mine production, and is the highest level of exposure since 2009. Because the longs have ticked up (the blue line), the net figure is not yet at record levels, but is only 9,212 contracts away from it.

The justification for looking at the gross short commercial position is that the shorts are mostly the bullion banks, and producers hedging future costs (whose business is channelled through the bullion banks). The

long commercials are more genuine, being manufacturers satisfying physical demand and locking in current prices to secure their margins. Swap dealers, again mostly the bullion banks, have positions both ways. The gross short position is therefore a better indicator of the futures market position of the “liquidity providers” than the net balance.

In a properly functioning market, net public demand is always long, so liquidity providers, such as market makers, or in this case the bullion banks on their own account, are always short between them in a bull market. The skill required is to make trading profits in excess of losses on the underlying position. The proviso always is that you never become so short that in an emergency you cannot cover your position. The bullion banks in the silver market are ignoring this overriding principal.

They now have a problem. Instead of having record short positions against an over-bought market, there is only moderate managed fund interest. This interest is shown in the next chart.

Silver money managers

While money managers (mostly hedge funds) have nearly doubled their longs and slashed their shorts since July, their longs are still only a little more than average: this hardly represents the overbought conditions suitable for a major bear raid.

On this evidence, the bullion banks which are short in the silver market are potentially in serious trouble, unless somewhere there is a pot of physical silver they can dip into. There isn’t, if we assume that iShares Silver Trust’s 315 million ounces is unavailable. There is no other identifiable source of silver, other perhaps than some producer supply, and there is anecdotal evidence that on every dip, cash silver migrates from

West to East, confirmed by silver being constantly in backwardation.

The odds now favour a substantial bear squeeze. And as the managed funds which lost money on their shorts in June-July sniff sweet revenge, this could rapidly escalate. At the moment, every dollar move upwards in the silver price costs the shorts nearly half a billion dollars. And there is no way it can be covered, because the cash silver simply does not exist.

When the shorts finally run for cover, the effect on the silver price is going to be spectacular.

The Gold Investor’s Handbook – click here for  investment profits and much more detail on the in’s and outs of investing in gold