Peñasquito silver stream
The following are two quotes from Peñasquito Project Technical Report, March 2009
p. 103
On July 24, 2007, Goldcorp and Silver Wheaton (SLW) entered into a transaction where SLW acquired 25% of the silver produced life of mine from the Peñasquito project for an upfront cash payment of $485 million. SLW will pay Goldcorp a per ounce cash payment of the lesser of $3.90 and the prevailing market price (subject to an inflationary adjustment commencing in 2011), for silver delivered under the contract. Goldcorp has provided a completion guarantee to Silver Wheaton that the Peñasquito mine will be constructed with certain minimum production criteria by certain dates.
p. 110
Silver revenue in the financial model is calculated using a $10/oz price. This is a result of pricing 25% of the silver at $4/oz (due to the Silver Wheaton contract, see section 1.25.5) and the remaining 75% at the $12/oz. In this regard, the project is credited with a $485 million payment in year 2007. This form of financing is best illustrated using the example of the Peñasquito Project in Mexico developed by Goldcorp who entered into a silver stream financing with Silver Wheaton (SLW).
From this Goldcorp sees the following cash flows:[AH1]
- Cash payment of $485M at time t = 0 (2007)
- Annual cash payment of ~$3.90/oz for 25% of silver production
- Annual loss of 25% of silver production valued at $10.00/oz
What is the value of this to Goldcorp and to Silver Wheaton and to Goldcorp over the life of the mine? The Peñasquito mine achieved commercial production in 2010. Over a 22-year life, the mine was expected to produce an annual average of 28 million ounces of silver (in addition to gold, lead, and zinc). Thus 25% of the annual silver production is 7Moz/yr.
The next figure shows the cash flow diagram of this transaction over the 22 year mine life starting in 2010 and ending in 2032.
The internal rate of return for Goldcorp is given by solving the following equation for the discount rate „r“.
Using trial and error or the Excel solver gives r = 5.1%.
As of October 2012, the price of silver was $28/oz. As of June 2020, it is about $25/oz. Assuming the 2020 price, the internal rate of return of this cash flow for Silver Wheaton is given by solving the following equation for the discount rate r.
Using trial and error or the Excel solver gives r = 19.7%.
But an advantage for Goldcorp is that the capital cost of $1,500M for Peñasquito is reduced to $1,000M resulting in a higher return.
