Vale SA (ADR) (NYSE:VALE) announced that a subsidiary of Silver Wheaton has purchased the rights to 25% of the gold retrieved from their Salobo mine in Brazil. This deal extends through the whole lifetime of the mine. This is addition to the current deal the company has with Silver Wheaton for another 25% of the mines discoveries. Silver Wheaton will pay Vale $900million for the additional 25% stake. To sweeten the deal, Silver Wheaton will pay an additional $400 million – with1% tagged on for inflation – or the prevailing market price for gold per-ounce, depending on which amount is lower. The original agreement has been updated to reflect the additional amount of 25%.
Immediate Cash Flow
The deal creates an immediate stream of cash flow for Vale based on 50% of the company’s pull from the mine. This will continue over the life of the mine and is solid insurance for future earnings reports. The mine is expected to generate significant production and the deal allows Vale to expand that effort and also meet rising exploration costs. The mine is expected to produce at least 70,000 ounces of gold in the first ten years and another 60,000 per year over the next 30 years.
For Silver Wheaton, Vales Salobo mine is considered a cornerstone asset and a major contributor to their gold operations. It is a high quality mine and this agreement solidifies the relationship between the two companies. The mine is offering a minimum of a 40 year lifetime and also the potential of significant exploration potential allowing for the possible discovery of more deposits. It offers both sides a winning proposition. Vale SA (ADR) (NYSE:VALE) is guaranteed to sell the gold it removes from the mine at a fair market price, and Silver Wheaton is assured a solid flow of product for many decades to come.
The stock is creating a very intriguing channel pattern. It is staying well within the defined pattern. Technical indicators are mixed. Volume is steady but momentum has experienced a bearish cross over. It’s a wait-and-see scenario until the stock makes a serious attempt at $8.