Barrick Gold Corp.
(ABX), the world’s biggest gold producer, recently agreed to sell 25% interest in its Pascua-Lama silver project in South America to Silver Wheaton Corp. (SLW) for about $625 million.

Based in Vancouver, Canada, Silver Wheaton is the world’s only silver trading company. It does not own or operate mines, but buys silver at below-market prices through long-term contracts with five major silver producers including Goldcorp Inc. (GG), Lunding Mining, Hellas Gold and Glencore and then reselling it to major industrial customers at a markup.

Barrick will receive $3.90 for each ounce of silver delivered under the agreement, which covers the life of the mining project, expected to be about 25 years. For Silver Wheaton, the deal will generate 9 million ounces of silver annually over the first 5 years at the Pascua-Lama mine, which will raise the company’s output to 40 million ounces by 2013. Barrick expects production at Pascua-Lama in the range of 750,000 ounces to 800,000 ounces of gold and 35 million ounces of silver in the first 5 years.

Located on the Chile–Argentina border, Pascua-Lama is one of the richest deposits of precious metals in the world. It is expected to be one of the world’s largest and lowest-cost gold mines and has one of the biggest global silver deposits. Barrick started the project in May this year.

Until Pascua-Lama begins production sometime in 2014, Silver Wheaton will receive 100% of silver produced from three other Barrick mines – the Lagunas Norte and Pierina mines in Peru and the Veladero mine in the south of Pascua-Lama in Argentina. Barrick will retain 100% of the gold production at all mines and 75% of the silver at Pascua-Lama. While the deal provides Barrick with a source for financing its Pascua-Lama project, it significantly expands Silver Wheaton’s reserves.

Increase of Equity Offer

Separately, Barrick Gold raised its equity offering by $500 million. The Canadian gold mining company increased its offering to about $3.5 billion, or to 94.8 million shares, at $36.95 each, from a previous offering of $3 billion, or 81.2 million shares. The company also stated that the offering could surge to $4 billion if an overallotment is exercised.

Barrick plans to use $1.9 billion of proceeds to eliminate fixed priced gold contracts and $1.5 billion to eliminate a portion of its floating spot price contracts. It will record a third-quarter charge of $5.6 billion due to a change in accounting treatment for the contracts. We maintain our Neutral recommendation on the stock.

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