Silver streams, mine closures and finding the floor - Smallwood

Mineweb's Kip Keen speaks with Silver Wheaton President and CEO, Randy Smallwood about recent mine closures, value gaps and market strategy during the downturn.

Author: Kip Keen
Posted: Thursday , 25 Jul 2013

HALIFAX, NS (MINEWEB) -

The severe drop in the price of precious metals has already taken its first victims, with a growing number of higher cost producers, juniors ones especially, announcing mine closures. Silver Wheaton, a top silver streaming and royalty company, is not immune. One of its assets is a streaming agreement with a Yukon-silver miner Alexco Resources which recently announced it planned to shutter its Bellekeno mine for the winter, and perhaps for longer if silver prices don't improve. Mineweb's Kip Keen started there in an interview with Silver Wheaton President and CEO Randy Smallwood that also delves into his broader picture for the precious metals market.

Kip Keen: The first thing I want to ask you about is Alexco Resources and their plan to shut down for the winter, and perhaps beyond, unless there is a jump in the price of silver. Does your silver streaming agreement with Alexco, one of your smallest streaming assets, address such a circumstance?

Randy Smallwood: Streaming agreements generally do share operating risk. So, if we have a severe decrease in commodities prices, it pushes some of the higher cost operations to consider shutting down, or slowing down. We definitely do share that risk. Yes, when they shut down we won't get silver from Keno Hill.

As you already mentioned it's one of the smallest assets in our portfolio. It's very high grade and once things are up and running, very high margin. The challenge is that it's low tonnage. So there's a lot of overhead and the Yukon is a very expensive place to operate. We're not surprised, with the dramatic drop in silver prices we've seen over this year, that some of the assets like Keno Hill are having challenges.

But in terms of the price of silver longer term, we think this (potential closure) is an excellent indication of the fact that the silver price is not sustainable at these levels. We still think that Keno Hill has incredible potential. They've had some incredible exploration successes and we think they're really only scratching the surface. We're strong believers in that district.

KK: Certainly some of the discoveries they've had up there, Flame & Month for example, have been pretty eye-catching in terms of silver grades.

RS: Yes, the whole tenor of that entire district. Having been up there - early in my career I spent a lot of time up in the Yukon and then even more recently doing due diligence when we did the deal with Alexco - when you drive that highway all the way from Mayo to Keno Hill you're just astounded at the number of mines. And you think, now we've got a company that's finally consolidated this district that at times had 20, 30 different companies up there. I always said their biggest challenge is knowing where to scratch first. The few places they've scratched they've had a pretty good success rate.

You know, during low-end commodity price cycles fourth quartile producers will always have to tighten the belt and perhaps slow down or even stop for a while. But we know these assets will be back in production once you see a recovery in prices.

KK: I want to get to that in a moment, your thoughts on the silver price, but I'm curious about Silver Wheaton's asset base. In a situation where the price of silver drops so dramatically does it force Silver Wheaton to “stress test” its assets, or is the potential exposure limited?

RS: It is. But every quarter we take a look at all of the assets in our portfolio and we rank them on where they are in the cost curve. Now, most of our assets are copper mines, and gold mines, and lead-zinc mines. We don't have that many silver-focused assets, only Keno Hill, and Navidad down in Argentina which isn't operating. Those are the only two silver assets that we've got in our portfolio. We always look at where they fall within their respective cost curves and over 90 percent of our production is currently not in the fourth quartile. We're about 83 percent first quartile.

So those are the assets that will survive through the bottom of the mining cycles. We always try to focus on those assets. But Keno Hill represents one of those assets where it's a bit riskier. It's small scale. Yet, we think something like Flame & Moth, which has much wider thicknesses (than the Bellekeno mine), should be able to get their cost per tonne down dramatically. Bellekeno has proven a bit higher cost in terms of the sustaining capital on a per tonne basis, and that's what's hurting Alexco right now. But if they could get to a bigger tonnage operation on something like Flame & Moth, that will dramatically reduce that burden. So we do have some fourth quartile production but it's less and less.

When Constancia, Pascua-Lama, and Rosemont get up and running, we'll be over 90-percent first quartile, which really makes us immune to the bottom of the commodity price cycles.

KK: Interesting, you noted that you view recent mine closures as a signal of a floor on precious metals, silver in particular.

RS: Definitely. I put more faith in the gold side mostly because so much silver is produced as a byproduct. Only about 25 percent of silver actually comes from silver mines. Having silver mines shut down doesn't really have that big of an overall impact because so much of silver still gets produced as a byproduct no matter what the price of silver is. So we tend to look at gold from that perspective more than silver.

And when I see mines shutting down because they can't work at $1,250 gold, or $1,300 gold, more expansion projects being cancelled or deferred, that tells me that we have hit a bottom. The supply side is just not there. And once you see tightening on the supply side that puts price pressure on the commodity. There are all sorts of other factors, but having that price pressure sure helps. I do think it indicates we are at a bottom.

The entire industry, especially in the gold space, has been adamant that these prices aren't sustainable. Copper guys are doing a bit better. When you look at their cost curves they're doing pretty well with copper up over $3 a pound. That's well over the fourth quartile range. But in the gold space at $1,250, $1,300 gold, there are a lot of mines that aren't making money right now. They're just treading water. I do think it means we're near a bottom. We are definitely closer to a bottom than a top and to me that's the time to be stepping into any kind of market.

KK: That segues into my next question. I want to ask you about corporate strategy at a time like this, tough for juniors and miners alike. People are shopping around assets right now. How do you approach a market like this, acquisitions in particular?

RS: It's a buyer's market out there. That's for sure. There are a lot of assets and not a lot of buyers out there. There is not a lot of capital available for making investments in new acquisitions. So there's definitely a lot of interest in having someone like Silver Wheaton, or a streaming company, come forward and supply the capital. Our challenge is we always buy within the context of the current market. When you see silver down around $19 or $20 an ounce - it's up above that now - when it's down that low and you've got analysts still using a long term number of $23, $24, it's tough to meet expectations. People still have pretty high expectations in terms of commodity prices.

KK: In that sense you find potential candidates reticent to deal at this time?

RS: That's right. There's a bit of a value gap between what we're willing to pay and what potential partners are willing to sell for. Several factors will close that gap. The need is obviously one of those things, the need for the capital. But, that said, good projects always find a way to get financed. Need usually isn't something that drives it. If someone is desperate, that means, maybe we shouldn't be investing. We're selective especially about our larger scale investments.

Then it comes down to a bit more strength in the market. We have seen that over the last couple weeks here. In the last week and a half we have seen a bit of a movement up here, a bit of positive pressure up. Considering that we're in the middle of July - traditionally a pretty quiet time - I am hopeful that September will be a pretty exciting time; that we may see a rebirth of interest into the precious metals market, and a little bit of forward momentum.

I can tell you, the junior sector definitely needs it. It is as bad as I've ever seen it out there. I know of companies where insiders are having to provide funding just to keep the business going. There's just no market. Even with reasonable results that four years ago would have had a line up of investors coming forward, they have to look to insiders for support, because there's not an appetite for it right now.

KK: It has been buoyant for a couple weeks now for miners and explorers. Do you see it as a quick blip?

RS: I think it is moving a bit faster than is normally sustainable. But one of the reasons the price of precious metals has suffered, though I don't quite understand it, is there's a belief out there that the US dollar is all of a sudden becoming a good place to be. I tell you, there's nothing that has changed fundamentally about the US dollar and the amount of quantitative easing out there and the lack of value. There's been no fundamental change in fiscal policies in the United States. As a store of value we still see gold and silver as great places to be.

KK: Certainly the next few years will be telling in terms of the broader economic picture there. Randy, thanks for taking my questions today.

RS: No problem. Good talking to you.

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