Can you provide an introduction to Wheaton Precious Metals’ core business and the history of the company?
It takes capital to build a mining company, and so in early 2004, the concept of precious metal streaming was born at Goldcorp (formerly Wheaton River) to help raise capital for investment into Goldcorp’s core business of gold mining. Silver is most commonly produced as a by-product of base metal and gold mines. As a result, by-product silver in a mining company’s portfolio generally was, and still is, not fully valued by the financial markets relative to a pure silver-focused company. This was the case with Gold corp’s portfolio in 2004 in which its San Dimas gold mine in Mexico also produced a significant amount of silver, which the market was giving little value. Furthermore, in 2004, primary silver mining companies were scarce, and thus traded at a premium to other precious metal miners. A solution was conceived to crystallise the value of by-product silver to help miners access capital by streaming silver into a separate company’s silver-focused portfolio. The idea was supported by investors, and Silver Wheaton became a publicly-traded company in late 2004. In the first ever streaming transaction, Silver Wheaton agreed to purchase the silver produced by Goldcorp’s Luismin mining operations in Mexico for an upfront payment and additional payment upon delivery of the silver. Silver Wheaton continued utilising the streaming business model for mainly by-product silver for the next 10 years until more opportunities for by-product gold started to emerge in 2013. By 2017, Silver Wheaton’s revenue was almost evenly split between silver and gold production. This prompted the name change to Wheaton Precious Metals, keeping Wheaton in the name to pay homage to its longstanding history of successful value creation.
Can you expand more on Wheaton’s streaming business model?
Streaming allows Wheaton to purchase a defined percentage of the precious metals produced by a mine for an upfront payment and an additional delivery payment when the precious metal is delivered. The delivery payment is set at a level intended to offset Wheaton’s partners’ typical cost to produce an ounce of silver, gold, and now palladium and/or cobalt. Wheaton does not own or operate mines and is therefore not exposed to sustaining or expansion capital and operating costs in respect to each stream. The company’s agreements are typically for the life of the mining operation, giving Wheaton exposure to the mine’s future expansions and exploration success, but without the cost risk.
When a company comes to you seeking finance, what stage of development do you look for?
We look at companies with projects in a later stage of exploration or early development right through to operating assets. For the earlier stage projects, Wheaton typically requires at least a prefeasibility study so that we can do our own analysis as to the potential resources present, the capital required to build the mine, and the operating cost. We focus on in- vesting in high-quality, low-cost mines and use our internal analysis to assess whether the mine or project is investable.
What are the other key investment criteria on financing a project?
Asset quality is the key criteria considered when assessing a new opportunity. Wheaton focuses on investing in high-quality, low-cost mines, specifically mines in the lowest half of the cost-curve for the primary metal being produced. For example, if we are investing into a silver stream from a lead/zinc mine, we want that mine to be on the lowest half of the global lead/zinc mine cost curve. Low-cost, high-margin mines can survive the low points in the commodity price cycle, and, equally as important, they are the mines in which our partners will look to invest capital for expansion or exploration when the price cycle turns.
Speaking of recent investment, Wheaton just acquired Vale’s Voisey’s Bay mine. Could you outline some of the thinking on this acquisition, and why it was attractive?
The cobalt stream at Voisey’s Bay was a fairly unique opportunity. Firstly, we have a very strong partnership with Vale, having done four streams with them already, and found them to be the ideal partner. Secondly, Voisey’s Bay was a great fit in our portfolio as it is a very low-cost, high-margin mine. Finally, we viewed cobalt as so much more than a simple base metal given its importance in the electric vehicle (“EV”) market, and the fact that cobalt, like silver, is primarily produced as a by-product. What also made this particular opportunity attractive was that Voisey’s Bay mine is located in Canada, and the ore is smelted in Vale’s Long Harbour facility, a brand new Hydromet nickel smelter. Together, the mine and the smelter exceed some of the highest environmental regulations globally. Outside of Voisey’s Bay, the vast majority of cobalt comes from less politically stable regions with lower environmental and social standards (primarily the Democratic Republic of Congo). So, we view our cobalt as some of the cleanest and greenest available, and plan to market it as such, which we believe should result in premium pricing.
Wheaton changed its name recently to reflect its expanded focus on gold and other precious metals. Do you view cobalt to be a precious metal?
We view cobalt as a specialty metal given its use in the burgeoning EV market, which we believe is still in its infancy. As previously mentioned, our cobalt has the added benefit of coming from a politically stable region with strong environmental regulations, while the vast majority of global cobalt production comes from less stable and less green jurisdictions, such as the DRC. As such, we believe Voisey’s Bay cobalt is precious, though not technically a precious metal.
Are there particular regions that are more appealing than others when looking at projects?
Given that almost all of our streaming contracts are for life of mine, and we like to invest into long life mines with excellent exploration potential, we are very sensitive to political risk, as is evident by the distribution of our current asset base. Most of our assets are located in the Americas and a smaller portion in Europe. That being said, we do believe there are certain jurisdictions in Africa and Asia that have a similar low-political risk profile as our current portfolio, and we have a favourable view of Australia as well.
Where do you see precious metals going in the near-term?
We tend not to even try forecasting near-term moves in the precious metals market as prices are driven so much by sentiment and the US dollar. In the cur rent market, we see daily news on global trade wars, political scandal, etc. that can push the US dollar one way or another and thus impact precious metal prices. I’m not sure how to even begin forecasting near-term moves in this type of environment. What is more important to us is the longer-term trends in the precious metals, as most of our streams are for the life of a mine, and in our current portfolio, the average reserve life is over 30 years. In the longer-term, given our concerns about inflation and the longer-term sustainability of the US dollar at current levels, I am quite bullish on hard assets, including precious metals.
Is this cobalt deal a one-off? Are you looking to broaden your portfolio to other assets like technology metals?
We remain focused on precious metals as we believe that is what our shareholders are interested in. The Voisey’s Bay stream was a unique opportunity given that cobalt is a specialty metal produced primarily as a by-product. Very little of it comes from low political risk jurisdictions, and Voisey’s Bay is a high-quality mine operated by a key existing partner of Wheaton. We would view this as more of a one-off.
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