Gold Producers Eye Silver's Soaring Market

Night view of Agnico Eagle's Pinos Altos gold-silver mine plant in northern Mexico. The combination
open- pit/underground operation has current proven and probable reserves of almost 94 million oz of silver,
along with 3.4 million oz of gold. (Photo courtesy of Agnico Eagle Mines)
Silver is hot—even for gold miners—and those who held off on selling their silver in advance for quick cash during the global economic downturn are reaping the benefits of soaring prices, said several gold-producer executives at a recent mining conference held in Toronto, Ontario. Those who did sell are feeling a bit sheepish, as the spot price for silver doubled in the last year, according to a session report offered by conference sponsor Reuters news service.

"A lot of our competitors have sold away all their silver stream," Agnico Eagle Chief Executive Sean Boyd told the Reuters Mining and Steel Summit. "We've never done it. We like silver."

Advance silver sales—known as silver streams—make sense in times of economic uncertainty. Miners who produce the metal as a byproduct of gold extraction get cash up front to pay development costs, and are guaranteed a price of around $4/oz for silver as it comes out of the ground. But $4 does not seem like much today, with silver hitting a 31-year high over $38/oz in late March. By keeping silver in their portfolio, gold miners like Agnico Eagle can use rising silver profits as a credit against their gold production. This keeps cash costs down.

"We're budgeting $22 silver [in 2011]," said Boyd. "If we get $40 silver, you could see our unit cost per ounce [of gold] decline on an annual basis by about $80."

The cash cost credit alone is reason enough to avoid a silver stream deal. Add to this record profits as spot gold soars over $1,440/oz and miners aren't looking for extra cash up front.

"This year we're spending $1.8 billion in capital, and all of that is pretty easily funded by our internal cash flows," said Goldcorp Chief Executive Chuck Jeannes. The situation was different back in 2007, when Goldcorp agreed to sell 25% of the silver from its Penasquito mine to Silver Wheaton in a stream deal to fund development of that project.

"At the time, it was a means of financing a very large project without equity dilution," said Jeannes. But with silver climbing faster than gold, Goldcorp will not do any more stream deals, he added. "We're one of the biggest silver producers in the world. So we're fully exposed to anything that happens in the silver price."

The big winner in the streaming game, according to Reuters, was Silver Wheaton. The world's largest silver stream company will sell 28 million oz of silver in 2011— without mining a single ounce.

"We have become a mainstream form of financing," said Chief Executive Peter Barnes. "In the old days, you just had debt and equity. Now you have debt, equity and silver streaming." Barnes said demand is still high for stream deals, but Silver Wheaton, one of the top three performers on the Toronto Stock Exchange last year, is having to pay more upfront.

When the company did its Goldcorp deal, it paid $485 million for about 7 million ounces a year. Two years later, it paid Barrick Gold $625 million for 25% of silver production at Pascua Lama—about 6.25 million oz/y.

"They're obviously wanting a lot more money up front," said Barnes. "And that's fine. I'm bullish on silver prices over the next few years."

Since the Barrick deal, Silver Wheaton has made just one major buy, funneling $230 million into Augusta Resource Corp. CEO Barnes says it's a matter of waiting out the highs.

As featured in Womp 2011 Vol 03 -