plucked from slw boardTelfer, ever the modern alchemist, merrily counts his silver blessings
ERIC REGULY
985 words
15 December 2005
The Globe and Mail
B2
VANCOUVER -- Creating companies out of nothing is something of an art for Ian Telfer, the financial engineer and Goldcorp boss who admits he knows zip about mining. Silver Wheaton, his creation, takes the art form to its most refined level.
The company has three employees, one of them merrily ensconced in the registered office in the Cayman Islands. It has no mines, no production, no hard assets beyond a pile of cash and a few sticks of furniture, no environmental liabilities and essentially no expenses.
What it does have is a market value of $1-billion, real cash flow and profit, a bunch of “buy” ratings from analysts and a plan (according to the official bumpf) “to be recognized as the largest, most profitable and best managed pure silver company in the world.”
And you thought Vancouver's mining promoters had tuned it down a notch.
“No one else has done what we've done before,” Mr. Telfer, a Silver Wheaton director, says, grinning like he just invented Linoleum.
He's not referring to the synthetic feel of the company — gold royalty companies, such as the old Franco-Nevada, also existed largely on paper. He's referring to the “pure silver” bit. If you want all silver all the time, Silver Wheaton is the play, although Pan American Silver comes close (its mines also spew some quantitiesof zinc, lead and copper).
Give Telfer & Co. credit for sweet timing. The company has been operating little more than a year. In that time, silver prices have gone from a low of $5.50 (U.S.) an ounce to about $8.40. Silver Wheaton, as a result, has hauled in profits all year. In the third quarter, its net profit was $6.4-million, or 4 cents a share.
Silver Wheaton does it all without getting grubby hands. The company simply buys silver production from mines at a set contract price and sells it to smelters at the market price. The profit is the spread. Because silver prices are on the move, the spread is widening, taking the profits and share price up with it. The shares have climbed more than 50 per cent this year, to $5.76 (Canadian).
There's another angle to the story. Through luck, the company ended up with 15 per cent of Vancouver's Bear Creek Mining, whose chairman, and 1999's “Mining Man of the Year,” Catherine McLeod Seltzer, knows a thing or two about exploration. She's the lady who sold the Arequipa gold find in Peru to Barrick Gold for $1.1-billion in 1996.
Bear Creek is sitting on a big silver deposit, called Corani, in Peru. If a mine gets developed there, Silver Wheaton (assuming it remains a Bear Creek investor) might get the diversification strategy it desperately needs to grow the company and reduce risk. So far, it has a grand total of two silver purchase contracts. If one falls apart, Silver Wheaton could fall apart with it.
Like so many junior mining companies, Silver Wheaton came to life in the alchemist's bubbling pot. Mr. Telfer was the CEO of Wheaton Gold (which would later merge with Goldcorp, taking the Goldcorp name). One of Wheaton's assets was the Luismin gold mine in Mexico.
Luismin also produced considerable amounts of silver. Problem: The value of the silver, a suddenly hot metal with both industrial and vanity uses, was not reflected in the Wheaton share price. Silver bugs make gold bugs look like zombies. Silver companies trade at even higher cash flow multiples than gold multiples. If you put the silver in a separate package and sell it, you're turning silver into gold, so to speak.
Enter the alchemist. Mr. Telfer spun a new company out of Wheaton and called it Silver Wheaton. It signed a contract to buy Luismin's silver production at $3.90 (U.S.) an ounce.
In exchange for the right to buy the silver for the life of the mine, it handed Wheaton a $50-million cheque and about $200-million of Silver Wheaton shares. The negotiations weren't exactly fraught with tension. “We were negotiating with ourselves,” he says.
Goldcorp owns about two-thirds of Silver Wheaton. The difference between the contract price and the market price is now about $4.50. That's the current gross profit per ounce. But what if the market price drops below the contract price? Wheaton is protected because it pays the contract price or the market price, whichever is lower.
That contract was signed in October, 2004, the month Silver Wheaton shares joined the TSX. Two months later, Silver Wheaton essentially cloned the Luismin contract with a Swedish company called Lundin Mining, the owner of a zinc-lead-silver mine called Zinkgruvan. In the first nine months of this year, Silver Wheaton sold 7.5 million ounces of silver.
If it all seems too good to be true, that's because it is. Silver Wheaton has no control over the Swedish operations. If Zinkgruvan shuts down because of an accident, or if silver production comes up short, Silver Wheaton can do nothing but cry. Cannacord Capital said in a research note that investors, above all, should beware Silver Wheaton's “absence of operation decision-making control.”
The solution is to get more silver from more mines.
“We need to have contracts with 10 mines instead of two mines,” Mr. Telfer says. “We would like to do another deal in the next few months.
Bear Creek might provide a juicy option on the new mine front. Mr. Telfer and his investors are praying the Swedish mine pumps out silver without a hiccup. In the meantime, he's beaming that he created an apparent profit machine out of thin air.