Silver Wheaton Pays Glencore $900 Million For Silver At 20% Of Spot Price

Looks like Silver Wheaton struck it rich with its newest silver streaming agreement with Glencore.  According to the deal, Silver Wheaton paid Glencore $900 million for future silver production from its share of its Antamina copper mine in Peru.  Silver Wheaton receives silver from this Glencore deal at 20% of the silver spot price.

Antamina-MineWhich means, Silver Wheaton currently pays about $2.85 per silver ounce at the current market price of $14.26.  That’s not a bad deal, especially when your cost is only 20%.  I would imagine any of the primary silver mining companies would die to produce silver at a 20% cost.

Peru’s copper Antamina mine (picture), is owned by Glencore (33.75%), BHP Billiton (33.75%), Teck Resources (22.5%) and Mitsubishi Corporation (10%).  It produced a third of Peru’s copper production in 2013.

According to the Bloomberg article, Glencore Raises $900 Million By Selling Future Output:

Glencore Plc sold a share of its future silver output in a deal that includes a $900 million upfront payment, as the trading and mining company works to cut its $30 billion debt pile by about a third amid tumbling commodity prices.

The deal includes Silver Wheaton Corp. paying 20 percent of the spot price per delivered ounce, the Vancouver-based company said in a statement Tuesday.  Silver Wheaton will receive an amount equal to 34 percent of silver production at the Antamina mine in Peru until the delivery of 140 million ounces and the equivalent of 23 percent of silver production thereafter, Baar, Switzerland-based Glencore said in a statement.

This newest silver streaming deal with Glencore provides Silver Wheaton with the cheapest price per ounce (based on the current market price) compared to all its other agreements.  If we look at Silver Wheaton’s Silver & Gold Streaming Agreements below, we can see the different prices and time spans for these different agreements:

Silver-Wheaton-Streaming-Agreements

Silver Wheaton will receive 5.1 million oz (Moz) of silver from Glencore for the first several years at an estimated cost of $15.3 million a year based on a $15 market price of silver.  They will sell that silver at $76.5 million, netting a cool $61 million margin.  Of course, I am making this quite simple as there are more company costs involved, but this is how you take advantage of a company when the chips (and prices) are down.

Now, I am not criticizing Silver Wheaton here.  They run a good business model and I would imagine the board at Glencore wasn’t forced at gunpoint to take this agreement.  However, this goes to show how more future silver production is sold forward at a fraction of the market price.

Furthermore, I highly doubt Glencore would have sold their silver production from their share in the Antamina mine when the price of copper was $3.50 and silver at $30 back in 2012.  But now that the base metal prices are in the toilet as the price of copper is trading at $2.15, this does wonders for the balance sheets of companies with a great deal of debt.

If we do some simple back of the envelope calculations, this is how good of deal Silver Wheaton will get for part of the agreement which provides 140 Moz of silver at 20% cost (based on average price of $15):

Silver Wheaton Cost = 140 Moz X $3 = $420 million

Silver Wheaton Sales = 140 Moz X $15 = $2.1 billion

Silver Wheaton Margin = 140 Moz X $12 = $1.68 billion

Of course the market price of silver will not remain at $15 for the next 28-30 years of the agreement, however, I had to put some sort of current value to the deal.  When the price of silver revalues higher in the future, Silver Wheaton will be laughing all the way to the bank.

The Silver Streaming Model May Come Under Stress In The Future

While Silver Wheaton is currently doing much better than the primary silver mining industry, this may change in the future.  Let me explain Silver Wheaton to those who may be new to precious metal industry.  Silver Wheaton is not a mining company.  They do not extract and process any ore or produce any metal.

What they are is a company that provides capital to another company for a share of their future silver or gold production.   They have a very small staff for the amount of sales they generate compared to the typical mining company.  Which means, their costs are low.

However, the situation may not be as bright in the future when global oil production begins to decline in earnest.  As I have stated in many articles and interviews, peak silver will occur first in the base metal mining industry as demand for copper, zinc and lead declines due to declining Global GDP on the back of falling energy production.

This isn’t speculation.. it’s just a matter of time.  And I don’t believe we have much time on our side with the price of oil bracing to fall into the $30 range.  Peak oil will not occur because of high oil prices, but rather due to low prices that will kill production.

As Global GDP falls, the world will need less base metals.  This will put severe stress on the base metal mining industry, including those silver stream agreements.  While these agreements have protective clauses if the company shuts down production or goes bankrupt,  trying to squeeze blood out of a debt ridden turnip may become increasing difficult when the Fan hits the crapper.

This is why I believe the best assets to own besides physical gold and silver are some of the primary silver mining companies.  I would not recommend putting a large portion of one’s wealth in these mining stocks, but a small percentage is acceptable, especially when silver bullion becomes impossible to acquire once the world’s Greatest Financial Ponzi Scheme finally collapses.

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19 Comments on "Silver Wheaton Pays Glencore $900 Million For Silver At 20% Of Spot Price"

  1. Well, they still have to get it out of the ground don’t they?!?!

  2. You know what they say – “There are no free lunches – If it seems to good of a deal then it is no deal at all”.

    The time has come to back up the truck. When silver breaks $13.??/oz. buy all that you can.

    The crash of the paper ponzi scheme is not far behind.

    But for cash and stash.

    SteveW

    • The paper ponzi schemers have been around for at least 1,000 years, and they aren’t going away anytime soon. They create all money in the western would via debt when they issue “loans.” They have all western governments and most municipalities buried in debt that will never be repaid…only rolled over. They own most of the politicians, the mainstream media, hollywood, academia, mainstream religion, the judicial systems, the BAR associations, the medical and dental associations, and so on and so forth. Even if there was a run on one of their paper schemes, they would be bailed out just like during the 2008 housing/credit crisis. Look what happened when their paper banking system failed in the early 1930’s: Rather than bringing the counterfeiting liars to trial, the corrupt politicians bailed out the bankers and made gold ownership illegal by their tool FDR. They rig the system so they can’t lose. The only chance of victory is a mass awakening. Go talk to a dozen of your supposedly educated neighbors and you will see that the situation is hopeless.

  3. I must be thick headed. You’re telling us that Silver Wheaten is buying $900,000,000 of silver at
    $3.00 an ounce so that the mining company has cash to pay down debt? Unless I am even more
    thickheaded, many of your articles have shown production costs are a best $17.00. When you first started those articles mining costs were almost $30. If mining costs are $15.00 then Glencore is
    losing $12 an ounce . If they deliver 140,000,000 ounces and lose $12 an ounce they lose
    $1,680,000,000 the first year. They lose the $900,000,000 advance in the first 6 months of mining.
    If they are $30 billion in debt , then just on silver sales alone they lose $1.6 billion more each year.
    These are your figures Steve. It is impossible to avoid immediate bankruptcy for Glencore. With the $900 million advance how does Glencore cut their $30 billion of debt by a third? Where do you get these outrageous numbers? You say this agreement may come under stress in the future and I’ll say
    it is under stress tomorrow.

    • Sounds more like how the federal government would approach a debt problem if they ran Glencore, right? Then tell everyone “we have fixed the problem. Nothing to see here; move along”.

      • Oh I forgot. Then the mainstream media and mainstream financial pundits, totally devoid of investigative journalists and any ability to think for themselves, become a mouthpiece for the federal government’s stellar management of Glencore’s debt problem and state the problem has been fixed. People accept that at face value and bid up [buy] Glencore’s stock driving the price up. Fundamentals? How quaint.

      • Almost forgot. If Silver Wheaton buys Glencore Silver at $3 an ounce, why doesn’t
        Glencore go on eBAY at $12 an ounce in today’s $14.26 spot market. They will
        sell all the Silver they need to and make 4 times as much income.

        • Because Glencore doesn’t have the silver to sell on Ebay or anywhere.
          That is what they get for the promise of silver they will produce in the future.

  4. The “Buzzard’s” are circling. Give a cheer, the “Gang’s” all here!

    Royalty and streaming groups form syndicate, including pension funds and private equity.

    The targets are:
    Glencore, Barrick, Vale, Teck, Franco-Nevada and more.

    Properites include:
    Collahuasi, Antapaccay, Antamina

    The world’s largest royalty and streaming groups are clubbing together.

    http://www.globalminingobserver.com/royalty-groups-to-form-syndicate-145

  5. I think the FED must soon(about 1 year) create chaos to switch the money from stocks to bonds.

    But before they will drive down silver to 12$ and gold under 900$.Overnight they bought what they can.
    To increase Interest rate 0.25% is symbolic.It’s only not to blame completely.

    In ealier time we had bond rates in germany about 5-6%.This times are defintely over.USA is near to a recession, so there is no economic strength.

    Everything under 1% is a joke.

  6. Dear Glencore, you just sold your own mother to pay off a tiny part of your fiat addiction. When you read this, i’d like to buy 5 of your monsterbox sisters at 20% of spot.

  7. Secondary headline: “Silver Steaming Model …” – should be “Silver Streaming Model …”

    TODO: Fix text and delete this otherwise useless comment.

  8. Wow! Big deal Steve. You changed steaming to streaming? You correct typos but you leave the entire article uncorrected? Even you Steve should know that no one produces and sells silver for under $3.00 an ounce. If I’m wrong about this then place me an order for 25,000 ounces at $3an ounce. I’ll give them my credit card or have the bank wire the money. I must sell a few assets because I’d like to do this at least once per wee for the foreseeable future. . Joe

  9. They are not necessarily selling for that low price.

    They are selling THE PROMISE of silver in the future for that price. If they go bankrupt Silver Wheaton doesn’t get any more silver or their money back they have paid up front.

    To my knowledge that is how the silver streaming business works.

    If my premise is wrong correct me on this.

  10. Glencore seems to be either desperate or just stupid. If Silver trades for 15 bucks why to sell it for 20% of it’s value? I don’t thinks it’s a profitable deal for Glencore. If so, we would have to expect a price drop in Silver to 3 bucks but i don’t think that will happen. There is something starnge going on there.

  11. Glencor needs $ now. They do not have silver today. Instead selling future production on Comex (crimex) via big banks who in turn short market even more, they do business with royalty company. Works well for metal price and metal investors.
    Standard miners deal used to be: need cash, make deal with bank who requires future production hedge to guarantee loan, meaning selling future production. X amount of tons of copper or oz of Au, Ag sold forward continually depressing price. Remember 80 and 90s?

  12. If Glencore goes bankrupt with their Peru mine share of 33% the mine itself does not close. Mine operators are miners like BHP and Teck. These are real miners not traders. Mine itself is world class asset. 33% of mine silver stream is sold regardless who owns stream of copper or molybdenum from same 33% allotment.

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