Brigus Gold Reports Q3 Production and Goldstream Repurchase

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Cramer failed to mention

October 10, 2012 at 9:06 am

Zurbo

In late September Cramer apparently started touting Sandstorm Gold as the next best thing and then did a high profile interview with CEO Nolan Watson this past Friday. That shine looks to be wearing off a bit and news like this can’t be helping:

Not that anyone was trying to hide the optionality of the agreement with Brigus Gold (it’s right there on Sandstorm’s beautiful website), but when you pay $56.3 million for a 12% royalty on a modest operation and the seller gets to buy half back for $36.6 million there’s clearly limited accretive value. Nevertheless this was Sandstorm’s #3 royalty helping support a $900 million market cap. But it isn’t just Sandstorm benefiting from this royalty craze, Franco-Nevada and Royal Gold are also sporting hefty valuations. Rather than swim against the tide we still think one of the better ways to play this is through the previously discussed pairs trade, long the more reasonably valued Silver Wheaton and short Royal Gold, since both are heavily exposed to a couple of the same projects. In our view the major risk to such a trade is the potential for the shared Pascua-Lama project to be delayed while unshared Mt. Milligan (Royal Gold’s most substantial royalty by far) moves full steam ahead without a glitch. However, even if we assume Pascua-Lama is worthless Silver Wheaton is actually still the better value compared to Royal Gold based on a discounted cash flow valuation of their respective royalty streams.

8 months ago

3 Responses to Brigus Gold Reports Q3 Production and Goldstream RepurchaseComment RSS Feed

1. Rob

   October 10, 2012 at 07:41 pm #1

   Pascua lama could become a company killer for barrick. That thing may never get built. My understanding is that SLW gets silver from Barrick’s other operations if PL isn’t producing by a certain time frame. Not sure about rgld’s interest.

   Tag Companies:  Royal Gold, Silver Wheaton

   Reply
   • Zurbo

     October 10, 2012 at 10:15 pm #2

     @Rob

     You make a good point. Not only do they get covered on any shortfall through 2015 but they get their $625 million back if completion guarantee not satisfied by 2015. Note that when I said “assume Pascua-Lama is worthless” I didn’t factor in for any of this which makes the long/short trade that much more compelling given that I can’t find any similar mitigating disclosures at Royal Gold:

     On September 8, 2009, the Company [Silver Wheaton] entered into an agreement with Barrick to acquire an amount equal to 25% of the life of mine silver production from its Pascua-Lama project, as well as 100% of the silver production from its Lagunas Norte, Pierina and Veladero mines (the “Barrick mines”) until the end of 2013. Silver Wheaton will make total upfront cash payments of $625 million, of which $487.5 million has been paid to date. The remaining $137.5 million is due on the third anniversary of the transaction.

     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.

     Tag Companies:  Barrick, Silver Wheaton, Royal Gold
   • Zurbo

     October 10, 2012 at 10:39 pm #3

     @Zurbo

     Should point out our model values the Pascua-Lama royalty at about $1.7 billion to Silver Wheaton using current silver prices, so it would still be a big ~$1 billion hit to the valuation if unsuccessful … after accounting for mitigation. Meanhwhile we value the Pascua-Lama royalty at about $560 million for Royal Gold and interestingly assuming no mitigation that’s actually a bigger relative impact: about 7% of SLW’s market cap vs 10% for RGLD.

     Tag Companies:  Royal Gold, Silver Wheaton