WPM is ostensibly a precious metals streaming company (plus one cobalt stream). Considering only the silver component of its investible universe, WPM estimates the size of the potential market open to it to be the lower half of the cost curve of the 70% of global silver production of c 1,092Moz that is forecast to be produced in CY22 (source: the Silver Institute) as a by-product of either gold or base metal mines (ie approximately 382Moz pa). This compares with WPM’s production in FY21 of 26.0Moz silver – that is, WPM estimates that, to date, it has penetrated less than 7% of its potential market. Inevitably, WPM’s investible universe may be further refined by the requirement for the operations to be located in good mining jurisdictions, with relatively low political risk. Nevertheless, such figures serve to illustrate the fact that WPM’s marketplace is very far from being either saturated or mature.
Similarly, considering only the gold component of its investible universe, WPM’s potential market may be considered to be at least the lower half of the cost curve of the 33% of global gold production of 114.5Moz that was produced in CY21 (source: World Gold Council) as a by-product of other metal mines (ie approximately 18.9Moz pa), which compares with WPM’s production in FY21 of 342.5koz gold (ie just 1.8% of its potential market).
Within this context, WPM effectively has two types of client within the mining industry: those seeking ‘balance sheet repair’ and those seeking ‘development’. The former tend to be larger in size (eg representing streams in excess of US$1bn in value) but less numerous. Until recently, the majority of new business offered to WPM has been of this type. Recently, however, WPM reports that it has observed a shift to the latter. Typically, these ‘development’ opportunities are smaller than ‘balance sheet repair’ type opportunities (eg in the range US$100–400m), but more numerous (WPM estimates that it has seen at least 150 such opportunities over the past three to four years).
FY22 and five-year and 10-year guidance
WPM has provided a detailed production outlook for FY22 as well as longer-term guidance to FY31. This is summarised below and compared with Edison’s equivalent forecasts (now including Marathon, Curipamba and Goose, but not yet Fenix, which, at the current time, is non-binding):
Exhibit 11: WPM precious metals production – Edison forecasts cf guidance
|
FY22e |
Implied *FY23–26 average |
FY22–31 average |
Current Edison forecast |
|
|
|
Silver production (Moz) |
23.7 |
|
|
Gold production (koz) |
349.4 |
|
|
Cobalt production (klb) |
1,274 |
|
|
Palladium production (koz) |
19 |
|
|
Gold equivalent (koz) |
710.2 |
871 |
849 |
WPM updated guidance |
|
|
|
Silver production (Moz) |
23.0–25.0 |
|
|
Gold production (koz) |
350–380 |
|
|
Cobalt & palladium production (koz AuE) |
44–48 |
|
|
Palladium production (koz) |
N/A |
|
|
Gold equivalent (koz) |
700–760 |
880 |
910 |
Source: WPM, Edison Investment Research forecasts. Note: *Edison forecasts include Salobo III from FY23e and Rosemont from FY26e.
WPM’s updated five-year and 10-year guidance is based on standardised pricing assumptions of US$1,800/oz Au, US$24.00/oz Ag (cf US$25.00/oz previously), US$2,100/oz palladium (cf US$2,300/oz previously) and US$33.00/lb cobalt (cf US$17.75/lb previously). Of note in this context is an implied gold/silver ratio of 75x, which compares with its current ratio of 86.2x and a long-term average of 61.5x (since gold was demonetised in August 1971). Self-evidently, at the standardised prices indicated, our gold equivalent production forecast of 710.2koz AuE for FY22e lies well within WPM’s guidance range of 700–760koz AuE.
Otherwise, readers will note that Edison’s medium-term production forecasts are within 2% of WPM’s (implied) guidance for the period FY23–26 and within 7% of its longer-term guidance for FY22–31 (albeit this estimate necessarily excludes potential future stream acquisitions).
On 24 October 2018, Vale announced the approval of the Salobo III brownfields mine expansion, intended to increase processing capacity at Salobo from 24Mtpa to 36Mtpa, with start-up at that point scheduled for H222 and an estimated ramp-up time of 15 months. According to its agreement with Vale, depending on the grade of the material processed, WPM will be required to make a payment to Vale for this expansion, which WPM estimates will be in the range US$550–670m in FY23, in return for which it will be entitled to its full 75% attributable share of expanded gold production. This compares to WPM’s purchase of a 25% stream from Salobo in August 2016 for a consideration of US$800m (see our note Going for gold, published on 30 August 2016), the US$900m it paid for a similar stream in March 2015 (when the gold price averaged US$1,179/oz) and the US$1.33bn it paid for its original 25% stream in February 2013.
According to Vale’s Q122 performance report, the Salobo III mine expansion is now 90% complete (see Exhibit 2) and remains on schedule for start-up in H222 (probably Q422). Once Salobo III has been completed, however, WPM believes reserves and resources could support a further 33% capacity increase at Salobo, from 90ktpd to 120ktpd (denoted Salobo IV). In addition to its long-term underground mining potential, WPM believes such an expansion could still be supported by output from the open pit. Under the terms of its agreement with Vale, there would be no additional payment due from WPM in respect of this expansion, although Vale could exercise a right to alter the timing of the incremental payment due for Salobo III.
WPM’s contract with Barrick provided for a completion test that, if unfulfilled by 30 June 2020, would result in WPM being entitled to the return of its upfront cash consideration of US$625m less a credit for any silver delivered up to that date from three other Barrick mines (at which point it would have no further streaming interest in the mine). Given the test was unfulfilled, WPM had the right to an estimated US$252.3m (the carrying value of Pascua-Lama in WPM’s accounts) repayment from Barrick in FY20. Given the long-term optionality provided by the Pascua-Lama project, however, WPM instead opted not to enforce the repayment of its entitlement and to instead maintain its streaming interest in the project (which was originally expected to deliver an attributable 1.7–12.0Moz silver pa, averaging 5.2Moz Ag pa, to WPM at a cost of US$3.90/oz inflating at 1% per year).
Another major project with which WPM has a streaming agreement for attributable gold and silver production is Rosemont copper in Arizona.
Rosemont is near a number of large porphyry-type producing copper mines and will be one of the largest copper mines in the United States, with initial output of c 86,000t copper per year from mined sources, accounting for c 8% of total US copper production, rising to c 101,000tpa after 16 years. Total by-product production of silver attributable to WPM is estimated to be c 1.7Moz Ag pa for Phase I, followed by c 2.4Moz Ag pa for Phase II.
Rosemont’s operator, Hudbay, received both a Mine Plan of Operations from the US Forest Service and a Section 404 Water Permit from the US Army Corps of Engineers in March 2019, which was effectively the final material administrative step before the mine could start development. Subsequently, Hudbay indicated it would seek board approval to start construction work by the end of CY19, which would have enabled first production ‘by the end of 2022’. In the meantime, it started early works to run concurrently with financing activities (including a potential joint venture partner).
On 31 July 2019, however, the US District Court for the District of Arizona issued a ruling relating to a number of lawsuits challenging the US Forest Service’s issuance of the Final Record of Decision effectively halting construction, saying that:
■
the US Forest Service ‘abdicated its duty to protect the Coronado National Forest’ when it failed to consider whether the mining company held valid unpatented mining claims; and
■
the Forest Service had ‘no factual basis to determine that Rosemont had valid unpatented mining claims’ on 2,447 acres and the claims were invalid under the Mining Law of 1872.
Hudbay responded by saying that it believed the ruling to be without precedent and that the court had misinterpreted federal mining laws and Forest Service regulations as they applied to Rosemont. It pointed out that the Forest Service issued its decision in 2017 after a ‘thorough process of 10 years involving 17 co-operating agencies at various levels of government, 16 hearings, over 1,000 studies, and 245 days of public comment resulting in more than 36,000 comments’ and with a long list of studies that have examined the potential effects of the proposed mine on the environment. Hudbay also pointed out that various agencies had accepted the company could operate the mine in compliance with environmental laws. As a result, Hudbay appealed the ruling to the Ninth Circuit Court of Appeals, which was delivered on 24 May 2022 to the effect that it affirmed the US District Court for the District of Arizona’s decision in July 2019. In the decision, the Court of Appeals agreed with the District Court’s ruling that the US Forest Service had relied on incorrect assumptions regarding its legal authority and the validity of Rosemont’s unpatented mining claims in the issuance of Rosemont’s Final Environmental Impact Statement. Hudbay is in the process of reviewing the decision.
In the meantime however, Hudbay has continued to explore in and around the area of the mine and, on 22 September 2021, announced the intersection of additional high-grade copper sulphide and oxide mineralisation predominantly located on its wholly owned patented mining claims (denoted Copper World). To date, seven deposits have been identified at Copper World with a combined strike length of over 7km and, on 15 December 2021, Hudbay announced a maiden mineral resource at Copper World of 272Mt in the indicated category and 142Mt in the inferred category, both at an average grade of 0.36% copper. The mineralisation consists of both skarn and porphyry copper sulphides with a significant oxidised component along a regional fault along the west side of the Rosemont, Bolsa and Broad Top Butte deposits known as the Backbone Fault. As a consequence of this exploration, it was determined that approximately 33Mt of inferred mineral resources at the Bolsa deposit, which were previously considered to be waste in the resource pit shell used for Rosemont’s NI 43-101 feasibility study, could now potentially be converted into reserves, which would result in less waste being mined at Rosemont, thereby reducing costs and energy consumption per tonne of ore mined. In addition, the Rosemont deposit also contains oxide mineralisation that was previously classified as waste, which could be processed with the oxide mineralisation at Copper World, and it is expected that further synergies will be identified as Hudbay continues to close the drilling gap between Bolsa and Rosemont. Note, the Copper World discovery is included in WPM’s area of interest under its PMPA with Hudbay.
As a result of these discoveries, Hudbay has adjusted its plan to develop the district. Among other things, it has now acquired a private land package totalling approximately 4,500 acres to support an operation on private lands. The initial technical studies for Copper World were incorporated into a preliminary economic assessment (PEA) investigating the development of the Copper World deposits in conjunction with an alternative plan for the Rosemont deposit, which was announced to the market on 8 June, and proposed a two-phase mine plan to develop the project. The first phase of the mine plan requires only state and local permits and reflects an approximate 16-year mine life. The second phase then extends the mine life to 44 years and incorporates an expansion onto federal lands to mine the entire Rosemont and Copper World deposits. The second phase of the mine plan would be subject to the federal permitting process and the company expects that it will be able to pursue the federal permits within the constraints imposed by the courts’ most recent legal decisions if any subsequent appeals are not successful.
Within this context, on 24 May, Hudbay received a favourable decision from the US District Court for the District of Arizona on all issues relating to the development of Copper World, including that Copper World and Rosemont are not connected under the National Environmental Policy Act (NEPA) and, therefore, that the Army Corps of Engineers (ACOE) does not have an obligation to include Copper World as part of its NEPA review of Rosemont. The District Court also granted Hudbay’s motion to dismiss the Copper World preliminary injunction request filed by the plaintiffs in the two lawsuits challenging the Section 404 Clean Water Act permit for Rosemont on the basis that the lawsuits were moot after the company surrendered its 404 permit back to the ACOE in April 2022. The ACOE has never determined that there are jurisdictional waters of the US on the Copper World site and Hudbay has independently concluded through its own scientific analysis that there are no such waters in the area. In this respect, Hudbay believes the District Court’s decision, together with the 12 May decision, clarifies the permitting path for Copper World, including the requirements to receive federal permits for the second phase only under existing mining regulations.
Resources were reported to have expanded materially to 792Mt in the measured category, 381Mt in the indicated category and 262Mt in the inferred category at the time Hudbay’s PEA at an average grade of 0.40% copper. In April 2022, the company commenced early works at Copper World with initial grading and clearing activities at site. It expects to advance a pre-feasibility study (PFS) for Phase I of the Copper World project in H222, which will focus on converting the remaining inferred mineral resources to measured and indicated status and the evaluation of many of the project’s optimisation and upside opportunities. It will then complete a definitive feasibility study (DFS) as well as receiving all required state and local permits during 2023, while simultaneously evaluating a variety of financing options, including a potential minority joint venture partner, prior to project sanction potentially as early as 2024. In the meantime, it is continuing exploration and technical work at site with seven drill rigs conducting infill drilling to support the feasibility studies.