In a June 12 research report, analyst Ralph Profiti with Eight Capital reported Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) acquired a cobalt stream for CA$390 million from the Voisey's Bay mine, where Vale S.A. will complete a US$28 million underground expansion by 2022.
The agreement terms are such that Wheaton will pay the entire purchase price upfront to Vale. To do so, it will draw from cash and borrow against its CA$2 billion credit facility. Until it recoups the CA$390 million, the company will pay 18% of the cobalt spot price, after which it will pay 22%.
Wheaton will receive its first cobalt from Voisey's Bay in January 2021 when ramp-up of the underground mine begins. For the first 10 years, 2.6 million pounds (2.6 Mlb) of cobalt will go to Wheaton annually, followed by 2.4 Mlb annually throughout the mine's remaining life. These amounts equate to "42.4% of Voisey's Bay cobalt production until 31 Mlb are delivered and 21.2% thereafter," explained Profiti.
The cobalt stream arrangement also encompasses "a completion test on underground operations measured by throughput (85% of targeted levels by Dec. 31, 2025)," Profiti noted.
Eight Capital views the deal as "positive," wrote Profiti. It should return an estimated 9%, assuming a cobalt price of CA$35 per pound and a 20% tax rate. This return rate is higher than the 4 to 6% expected from recent larger precious metals streams, the analyst pointed out.
Ultimately, the Voisey's Bay cobalt stream "drives 7–8% of Wheaton's revenues and represents 6% of net asset value per share," Profiti projected. Further, the precious metals company still provides investors "a high margin play on precious metals exposure that should still command a multiple more in line with royalty/streaming peer valuations and a premium to precious metals miners."
In other news, Wheaton expects to enter into another stream deal, a CA$300–500 million precious metals one, in the next few months, according to its CEO. The company should have about CA$1.06 billion in liquidity available to it after the Voisey's Bay transaction closes.
Eight Capital reiterated its Buy rating and CA$34 per share target price on Wheaton Precious Metals, which is currently trading at around CA$29.08 per share.
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1) Doresa Banning compiled this article for Streetwise Reports LLC and provides services to Streetwise reports as an independent contractor. She or members of her household own securities of the following companies mentioned in the article: None. She or members of her household are paid by the following companies mentioned in this article: None.
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Disclosures from Eight Capital, Wheaton Precious Metals Corp., Comment, June 12, 2018
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