For those of you who have some knowledge of the Silver Wheaton Corporation (SLW) you will be aware that the on-going purchase costs are in the order of $3.90/oz. Now, when we look at our mail bag some of our readers have misconstrued this figure as being the total purchase cost. The total purchase cost is made up of this figure of $3.90/oz plus the up front cash price paid to secure the supply of silver plus the running costs of SLW, etc. To get to the true figure we decided to ask SLW for a breakdown of the these costs so what follows is a Q&A via emails between the Silver Wheaton Corporation and Silver-prices.net.

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Subject: Purchase Costs
 
For the attention of Mr Brad Kopp,
 
Good Morning Sir,
 
Silver Wheaton is currently our largest single holding and we have recommended the accumulation of your stock on many occasions to our subscribers and readers. 
 
One question that regularly pops up is what exactly is the purchase cost of silver to you. We are aware that many of the contracts refer to a cost of $3.90/oz, but we would like to know the total cost including the inclusion of the up front cash payments and your overheads etc, an all inclusive cost to be precise.
 
Many thanks indeed,
 
 
Best wishes,
 
Bob Kirtley 
Editor
www.silver-prices.net
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Dear Bob,
 
Thank you for your email. Silver Wheaton currently has fourteen silver purchase agreements and two precious metals agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver production, at a low fixed cost, from high-quality mines located politically stables regions around the world. Attached to this email is our most recent Corporate Presentation; our agreements are listed out on slides 44 - 47.
 
As you know, Silver Wheaton pays an ongoing production payment of US$3.90/oz of silver, with a small annual inflationary adjustment. In addition, when acquiring a new silver stream Silver Wheaton pays the partner mining company an upfront cash payment. Details of each specific agreement and upfront payment can be found in our press releases. Other than the initial up-front cash payment, Silver Wheaton does not contribute to future capital expenditures or exploration costs invested by the mine, yet Silver Wheaton benefits from the production and exploration growth that results from these expenditures.
 
To roughly calculate the per ounce cost for upfront payments, you can simply divide the upfront payment by the number of ounces Silver Wheaton expects to receive from that particular silver stream. To then arrive at the total cost per ounce you would add the upfront payment per ounce cost to US$3.90/oz silver. For example, analysts have calculated that Silver Wheaton paid in total approximately US$7.50/oz silver for the Barrick transaction.
 
In your email below you also ask about Silver Wheaton’s overheads. The company’s cash G&A is forecast to be approximately US$17–19 million in 2010. I trust this answers your questions, but if you would like to speak about this further please feel free to call Brad Kopp (Vice-President, Investor Relations) at 604-639-9504.
 
Kind regards,
Teya
 
Teya Aasen
Manager, Corporate Communications
SILVER | WHEATON
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Hi Teya,

Thank you for this speedy response which is very informative however it does not answer the question, as per quote from analysts as follows.

For example, analysts have calculated that Silver Wheaton paid in total approximately US$7.50/oz silver for the Barrick transaction.

What we want to know is, what your calculation is for SLW in total.

You know the up front payment and the on-going cost of $3.90/oz and the number of ounces involved, so there must be a final figure of say $10.00/oz on average, and this is the figure that we are looking for.

Best wishes,

Bob Kirtley
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Hi Bob,
 
Thanks for the email. The best way to estimate this is to take our current depletion per silver ounce, which is approximately $2.61 and add this to the ongoing production payment of $3.97 per ounce. This gives an aggregate total per ounce cost of approximately $6.58. This is likely lower than analysts estimates as we include some value for resource to reserve conversion, as well as exploration potential.
 
I will be returning to the office on Monday if you have any additional questions.
 
Thanks
 
Brad
 
Brad Kopp
Vice President, Investor Relations
SILVER | WHEATON
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Good Day Brad,

Thanks for the prompt reply which is very much appreciated.

Rightly or wrongly we imagined that there would exist in your organisation a spread sheet that would list the silver producing mines, the upfront cash payments, the cost per silver ounce, overheads, etc. This would give you the total purchase cost for each ounce of silver mine by mine.

Weighted percentages could then be calculated based on the estimated number of ounces expected to be produced by each mine, eventually coming up with a total average purchase cost per ounce of silver to Silver Wheaton.

Your calculation of that number is what we would like to see.

Please tell us if we are missing the point or if we are going about this exercise incorrectly.

Best wishes,

Bob Kirtley
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Hi Bob,
 
I’ve attached a spreadsheet detailing the up front cash payments for each of our silver stream acquisitions, along with the ongoing per ounce production payments. Other than General and Administrative expenses of approximately US$17-19 million in cash per annum, we have no other overhead. So, this figure can be easily incorporated. Most analysts have their own internal models forecasting future payable silver production from each of the mines which leads them to their own estimate of Silver Wheaton’s all in cost per ounce.
 
Your methodology is correct, however, we can not provide you with our internal forecasts for expected life of mine silver production by project (and therefore can not give you the exact figure you are searching for). This is confidential information which we use in our initial valuation modeling to determine up front cash payments and is not something we disclose to the market (or our counterparty for that matter). As mentioned earlier, this is something that you can estimate on your own by using your own forecast of what each mine will produce over its life. Alternatively, we deplete our up front cash payments on a per ounce basis, so the description in my last email regarding our average depletion rates per ounce is a good estimate of the number of ounces we expect to receive from the mines.
 
If you have further questions, it might be best to discuss this over the phone. My direct line is below. Please don’t hesitate to contact me.
 
Best regards,
 
Brad
 
 
Brad Kopp
Vice President, Investor Relations
SILVER | WHEATON
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Hi Brad,

Once again thank you for your time it is very much appreciated.

As we see it, if we use your aggregate figure of $6.58/oz and add say the G&A at $0.50/oz ($20 million per annum/40,000,000 equivalent ozs) we get near enough $7.00/oz, which is not far from the figure of $7.50/oz figure that you mentioned for the Barrick transaction.

We hope to write this up shortly so if you have any final comments then please let us know and we will include them.

Many thanks once again,

Best wishes,

Bob Kirtley
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Hi Bob,
 
Your analysis looks to be sound.
 
Thanks
 
Brad
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Hi Brad,

Thanks for your time and patience, we will write it up shortly.

Best wishes,

Bob Kirtley
www.silver-prices.net

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The spreadsheet provided by SLW consisted of three elements which are:

the mining interest
the initial upfront payment
the cash payment per ounce

We had hoped that it would go further and include the expected production from each mine and the overheads, etc, in order to have a clear financial picture, alas these were not forthcoming. This was a little disappointing as we have then to add the overheads into the equation and we may well have missed other considerations that effect the final cost due to our ignorance.
So, in conclusion we think the purchase costs are in the range of $7.00/oz to $8.00/oz of silver.

Hope this helps.

Have a good one.

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