Investors Should Know about Vale's Performance and Outlook (Part 15 of 17)
(Continued from Part 14)
The gold stream agreement
On March 2, 2015, Vale S.A. (VALE) announced that it has entered into a gold stream agreement with Silver Wheaton Corp. (SLW) to sell an additional 25% of the payable gold by-product stream from the Salobo copper mine for the life of the mine.
Payment terms
The original gold purchase agreement of February 2013, which provided for 25% stream, has been amended to provide for the additional 25% stream. Vale will receive an initial cash payment of $900 million, future cash payments of $400 per ounce, and an additional 1% annual inflation adjustment from 2017 or prevailing gold price, whichever is lower, for every ounce of gold delivered to Silver Wheaton.
Vale may also receive an additional cash payment contingent on its decision to expand the capacity to process Salobo copper ores to more than 28 million tons per annum (or Mtpa) before 2036. Salobo I and Salobo II, which are ramping up, will have a total capacity to process 24 Mtpa of run-of-mine (or ROM). The additional amount will range from $88 million to $720 million depending on timing and size of the expansion.
Who bears what risk?
Silver Wheaton bears the upside as well as the downside production risk. Under the agreement, Vale is not committed to deliver a specific quantity, but the volumes will be a percentage of the gold by-product stream from Salobo.
Vale, on the other hand, is subject to gold price risk only if the gold price falls below $400 per ounce.
Transaction rationale
Vale entered into this transaction with a view to create shareholder value from its base metals division. Vale’s chief executive officer mentioned a week before the agreement that gold stream transactions are a possible way to generate cash. But the market was not expecting this transaction so quickly, and the market took it positively. It’s a good way to bridge Vale’s free cash flow gap and improve investor confidence in Vale’s ability to manage liquidity and leverage concerns going forward.
BHP Billiton (BHP) and Rio Tinto (RIO) have also entered into such transactions in the past to improve their respective cash flow profiles. These two companies form 28.9% of the iShares MSCI Global Metals & Mining Producers ETF (PICK). The SPDR S&P Metals and Mining ETF (XME) provides diversified exposure to the metals and mining space. Silver Wheaton Corp. (SLW) forms 4.6% of the Market Vectors Gold Miners ETF (GDX).
Continue to Part 16
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