By Allen Sykora of Kitco News
Thursday November 10, 2016 14:33
(Kitco News) - Mining companies are picking up efforts to find and develop new projects as the prices of metals improve, says the chief executive of streaming company Silver Wheaton Corp. (TSX, NYSE: SLW).
The improving commodity-price environment has opened up more opportunities for producers to gain capital needed for these projects, yet streaming companies do provide one advantage, he continued. Streamers’ business model means they share in the risk of trying to open up a mine.
On the day after Silver Wheaton reported 19-cent-per-share third-quarter earnings and a rise in its dividend, president and chief executive officer Randy Smallwood spoke to Kitco News about trends within the industry and factors affecting his own company.
Change is underfoot in the mining industry, he said.
“A year ago, most of the opportunities we were looking at were related to balance-sheet repair,” he said. “Companies had an excess of debt and wanted to raise some capital and push that debt load down.
“What we’ve seen over the last three to six months is a bit of pickup in project development and…funding construction and stuff like that,” he said.
A challenge for the industry to meet demand in the foreseeable future, he continued, is the recent lack of exploration success. “But as commodity prices climb, we’re going to see some capital going back into that effort,” he said.
When precious metals were in a bear market last year, the CEO described conditions for streaming companies as the best ever since producers had trouble finding funding from other sources, such as bank loans, when profitability was hit. Now, third-quarter earnings to date have shown most producers are profitable again, making it easier for them to turn to bank lending or equity-related funding for their projects.
“We’d be foolish if we thought we were going to always be the most attractive option,” the CEO said.
Still, he continued, streaming companies such as Silver Wheaton can offer something to producers that others can’t.
“The fact that we share a production risk is a huge appeal,” Smallwood said.
Essentially, Silver Wheaton puts up money to be used in project development, with the payoff coming later when the streaming company receives a portion of the mine output.
“There’s no doubt the equity markets have rebounded over the course of the year, and with stronger commodity prices, banks are a little more friendly than they were a year ago in terms of doing some lending (to producers)…,” he said. “But we still see ourselves as being competitive in that space.”
Silver Wheaton Benefits From Diversification
While headed toward third-quarter net earnings of $83 million, Silver Wheaton’s silver and gold production rose year-on-year, and the company upped its outlook for 2016 gold output by 30,000 ounces to 335,000 primarily due to results so far from the Salobo and Sudbury mines. However, guidance for silver production was trimmed to 30 million ounces from 32 million due to lower-than-expected results from San Dimas and Peñasquito, partially offset by better-than-expected output from Antamina.
Smallwood highlighted the company’s large number of streaming agreements as an important factor for its bottom line, since better-than-expected output from some mines helped offset disappointments elsewhere. Silver Wheaton has streaming agreements for 22 operating mines, as well as deals on a number of projects still in the development stage.
“Mines have a habit of never meeting schedules,” Smallwood said. “Sometimes they’re late; sometimes they’re better than expected. Our portfolio is broad enough that shortfalls at some mines were more than made up by more-than-expected gold production (from others).”
The CEO expressed surprise at the apparent market reaction to one part of Silver Wheaton’s earnings report – the fact that the amount of metal produced but not yet delivered to the streaming company rose by 0.8 million silver ounces to 3.8 million, and by 18,500 gold ounces to 63,300. As of 2:13 p.m. EST, Silver Wheaton shares were down by 12.75% to $21.01 on the New York Stock Exchange.
This inventory buildup returns Silver Wheaton to more normal levels and sets the company up for the fourth quarter, Smallwood explained.
“We’ve come back to a bit of a normal (inventory) range of about two months of production,” Smallwood said. “I got the sense that the market – based on our share-price reaction – misunderstands that whole concept. It’s been a strong quarter and we’re setting ourselves up nicely.
“What’s nice about that inventory is usually around year-end, our partners squeeze that inventory down to try and improve year-end results. So we now have the capacity to have what I think will be a great fourth quarter….We’ve now got an inventory built that should come back into sales over the next three months.”
Smallwood remains constructive on the future price of gold and silver. Government deficits are likely to weigh on fiat currencies, including the prospect for higher spending in the U.S. “without proper taxation,” Smallwood said.
“You can’t just keep living on deficits,” he said. “Eventually, that will have an impact on the value of your own currency. That’s where hard assets like gold and silver will not only survive but thrive.”