Who Wins From SLW's Bear Creek Purchase?Who Wins From Silver Wheaton's Bear Creek Purchase?
By David J. DesLauriers
16 Aug 2005 at 05:59 PM EDT
TORONTO (ResourceInvestor.com) -- Silver Wheaton shares [TSX:SLW; AMEX:SLW] are up nearly 10% since the company took a piece of Bear Creek [TSXv:BCM] last Thursday. At the same time, BCM is up 15% from SLW’s average cost of C$3.03, and Silver Wheaton’s interest created enough new buyers and momentum that Bear Creek was able to do a C$10 million bought deal financing at C$3.25 per share.
As most investors know, a big run in Bear Creek stock from around C$1 to as high as C$3.74 has come on the back of two sets of very positive assay results from the company’s Corani prospect in Peru, which may contain a large silver ore body. Resource Investor alerted readers to the opportunity in “Former Arequipa Team on the Brink of Sizable Silver Strike?” slightly over one month ago at just under half the current share price.
Resource Investor also put readers on notice some three weeks ago in “Silver Wheaton Primed for Accretive Acquisitions” that SLW was likely going to have to adapt its stated acquisition strategy to the realities of high prices for operating assets, and go for something at an earlier stage of development, otherwise risk unacceptably diluting shareholders.
Admittedly, Bear Creek’s Corani project is quite a bit earlier than what we had in mind. Nonetheless, this is an interesting deal in the junior sector and Resource Investor will set out to examine the relative merits of the deal from the perspective of both BCM and SLW.
Bear Creek
From Bear Creek’s perspective, Silver Wheaton’s interest is obviously positive, and it adds credibility to the discovery for those (many retail investors) who were not familiar with the caliber of the team running BCM.
Clearly, Silver Wheaton’s timely purchase also allowed MK Resources to monetise their interest in the company, and eliminated a potential overhang situation in one shot.
As well, it provided a resurgent momentum to the company’s share price, which was beginning to wane slightly after tripling in a short time period. By doing so, the transaction gave Bear Creek the opportunity to raise money at lofty levels, minimising dilution.
With a market capitalisation of little more than C$100 million even at current prices, many who are comparing BCM’s discovery to San Cristobal, Navidad and Penasquito feel that there is still upside here. And, with warrants in the money and the latest financing, Bear Creek stands ready to mount an aggressive drilling campaign to delineate and then define Corani.
For that reason, one questions whether this is an investment pure and simple for Silver Wheaton, or whether they may at some point look to bring BCM into the fold.
Keep in mind that David Lowell and Catherine McLeod Seltzer sold their Pierina mine, also in Peru, to Barrick for C$1 billion about a decade ago. Though it is still early days, Silver Wheaton does not have the size or the liquidity of a Barrick, but if the BCM team can continue to grow Corani and its market capitalization with it, SLW could well monetise their equity bet on the property’s potential into a tidy profit.
Silver Wheaton
Being first in the door doesn’t necessarily confer a serious advantage to SLW down the road if Corani becomes big enough that other players get involved. Keep in mind that as Resource Investor told readers in July, “Bear Creek can vest a 100% interest in the project if the resource on the project is less than 10 million gold equivalent ounces (600 million ounces of silver). If it’s more, Rio Tinto [NYSE:RTP] has a back in right for 60% of the deposit, but must carry BCM to production. The back in right is triggered by a feasibility study.”
Right now the indication is that the deposit is very big, but not that big, which is easy for interested onlookers to predict because it is essentially an exercise in positive visualisation.
Because Rio Tinto could be involved, and because a mine is still years away and that is not strictly in fitting with Silver Wheaton’s raison d'être, the chances are that SLW’s only real design on BCM at the moment is as a way to transfer geological/mining industry/valuation knowledge into a profitable equity speculation based on Corani numbers thus far, and anticipated results.
Given Silver Wheaton’s present situation, and the potential cost of bringing on a mine like Corani in several years, SLW really doesn’t add any value here in terms of either technical expertise, or a better vehicle for investors to reap the rewards of the discovery – BCM could just as easily bring it on stream itself.
Conclusion
Ultimately, the team that has been part of making this discovery has found elephants before and sold out to the majors. Whether or not this will prove to be their next big score is not knowable at this point. Everything looks great, but it is early days.
The logical conclusion to the question of the BCM/SLW transaction is that Silver Wheaton is probably playing this strictly as an equity investment, and will win or lose at the end of a drill bit. In the near term, however, BCM has already won from their interest in the story for all the reasons listed above.