TORONTO, ONTARIO–(Marketwired – April 10, 2013) - Barrick Gold Corporation (NYSE:ABX)(TSX:ABX) (Barrick or the “company”) today announced that the company is suspending construction work on the Chilean side of the Pascua-Lama project while working to address environmental and other regulatory requirements to the satisfaction of Chilean authorities. In the interim, activities deemed necessary for environmental protection will continue as authorized.
Construction activities in Argentina, where the majority of Pascua-Lama’s critical infrastructure is located, including the process plant and tailings storage facility, are not affected.
It is too early to assess the impact, if any, on the overall capital budget and schedule of the project.
What does this mean for Silver Wheaton and Royal Gold?
April 11, 2013 at 10:39 am
Royal Gold owns a 5.23% NSR on gold production at Pascua-Lama which is expected to generate about $50 million in annual cash flow over 25 years at the current gold price (based on an average 600,000 oz/yr production profile). Using a 5% discount rate the royalty is valued at about $700 million or closer to $500 million after-tax. In other words, about 12.5% of Royal Gold’s $4 billion market valuation is at risk.
Silver Wheaton owns a 25% silver stream at a cost of ~$4 per ounce which is expected to generate about $150 million in annual cash flow over 25 years at the current silver price (based on an average 22M oz/yr production profile). Using the same 5% discount rate the royalty is valued at about $2 billion (SLW is tax-sheltered). In other words, about 20% of Silver Wheaton’s $10 billion market valuation appears to be at risk. However, based on the following disclosure in Silver Wheaton’s financials the at-risk figure is closer to $1.4 billion or roughly 14% of its market valuation:
Barrick has provided Silver Wheaton with a completion guarantee, requiring Barrick to complete Pascua-Lama to at least 75% of design capacity by December 31, 2015. During 2014 and 2015, Silver Wheaton will be entitled to the silver production from the currently producing mines to the extent of any production shortfall at Pascua-Lama, until Barrick satisfies the completion guarantee. If the requirements of the completion guarantee have not been satisfied by December 31, 2015, the agreement may be terminated by Silver Wheaton. In such an event, Silver Wheaton will be entitled to the return of the upfront cash consideration of $625 million less a credit for silver delivered up to the date of that event. [emphasis ours]
Given that Silver Wheaton is entitled to silver production from Barrick’s other mines, Royal Gold appears to be at much greater risk if there are significant production delays and/or shortfalls during the 2014-2015 period since its cash flow would fall materially below expectations.
8 months ago
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