Analyst Actions: Credit Suisse On Impact of Time Out at Pascua Lima for Silver Wheaton
Event: "Barrick Gold Corp. (ABX, US$24.46, OUTPERFORM, TP US$40) announced suspension of construction work on the Chilean side of the Pascua-Lama ( PL ) project while it works to address environmental and other regulatory requirements to the satisfaction of Chilean authorities. The ABX announcement follows media reports (Reuters) indicating a Chilean court had issued a preliminary injunction to halt construction activities pending a full hearing.
Impact: Potentially negative; SLW partially protected by Completion Guarantee. As part of the 2009 PL silver stream agreement, ABX has provided SLW with a Completion Guarantee ( CG ), requiring ABX to complete PL to >75% of design capacity by December 31, 2015. During 2014-15, SLW will be entitled to the silver production from currently producing mines to the extent of any production shortfall at PL, until ABX satisfies the CG. If ABX fails to satisfy terms, SLW may elect to terminate and be entitled to the return of its $625Mln upfront cash payment, less credits for silver delivered."
Catalyst: "We estimate each six month delay at PL impacts NAV by 1%, with no PL (worst-case) lowering NAV by 15% (after credits). SLW's PL silver stream (25% of LOM production) currently accounts for 18% of our SLW NAV and 20% of FY15 attributable silver production (26% in FY16). ABX noted that construction activity in Argentina, where the majority of critical infrastructure is located, including the process plant and tailings storage facility, is not affected, and ABX further noted that it is too early to assess the impact on scheduling."
Valuation: "Our TP of C$44 is based on an equal weighting of 1.2x our cash-adjusted NAVPS (C$29.88) and 25x FY13/14 CFPS ($1.90) under a metal price scenario of $30/oz silver and $1,600/oz gold."