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.
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.
Read the full analyst report on “ABX”
Read the full analyst report on “SLW”
Read the full analyst report on “GG”
Zacks Investment Research
