Miners cling to their sizzling silver streams

TORONTO Fri Mar 25, 2011 11:36am EDT

TORONTO (Reuters) - Silver is hot - even for gold miners - and those who held off on selling their silver in advance for quick cash during the global economic downturn are reaping the benefits of soaring prices.

Those who did sell are feeling a bit sheepish, as the spot price for silver - both an industrial and precious metal- has doubled in the last year.

"A lot of our competitors have sold away all their silver stream," Agnico Eagle (AEM.TO) Chief Executive Sean Boyd told the Reuters Mining and Steel Summit. "We've never done it. We like silver."

Advance silver sales - known as silver streams - make sense in times of economic uncertainty. Miners who produce the metal as a byproduct of gold extraction get cash up front to pay development costs, and are guaranteed a price - around $4 an ounce - for silver as it comes out of ground.

But $4 an ounce doesn't seem like much today, with silver hitting a 31-year high over $38 an ounce on Thursday.

By keeping silver in their portfolio, gold miners like Agnico Eagle can use ever rising silver profits as a credit against their gold production. This keeps cash costs down.

"We're budgeting $22 silver (in 2011)," said Boyd. "If we get $40 silver, you could see our unit cost per ounce (of gold) decline on an annual basis by about $80."

The cash cost credit alone is reason enough to avoid a silver stream deal. Add to this record profits as spot gold soars over $1,440 an ounce and miners aren't looking for extra cash up front.

"This year we're spending $1.8 billion in capital, and all of that is pretty easily funded by our internal cash flows," said Goldcorp (G.TO) Chief Executive Chuck Jeannes.

The situation was different back in 2007, when Goldcorp agreed to sell 25 percent of the silver from its Penasquito mine to Silver Wheaton (SLW.TO) in a stream deal to fund development of that project.

"At the time, it was a means of financing a very large project without equity dilution," said Jeannes. But with silver climbing faster than gold, Goldcorp will not do any more stream deals, he added.

"We're one of the biggest silver producers in the world," said Jeannes. "So we're fully exposed to anything that happens in the silver price."

SILVER OUTPLAYS GOLD

The big winner in the streaming game was Silver Wheaton. The world's largest silver stream company will sell 28 million ounces of silver in 2011 -- without mining a single ounce.

"We have become a mainstream form of financing," said Chief Executive Peter Barnes. "In the old days, you just had debt and equity. Now you have debt, equity and silver streaming."

Barnes said demand is still high for stream deals, but Silver Wheaton, one of the top 3 performers on the Toronto Stock Exchange last year, is having to pay more upfront.

When the company did its Goldcorp deal, it paid $485 million for about 7 million ounces a year.

Two years later, it paid Barrick Gold (ABX.TO) $625 million for 25 percent of silver production at Pascua Lama -- about 6.25 million ounces a year.

"They're obviously wanting a lot more money up front," said Barnes. "And that's fine. I'm bullish on silver prices over the next few years."

Others are upbeat on silver too.

"We believe that the number one area for investment in the future within the precious metals is silver," said Sprott Inc (SII.TO) Chief Executive Peter Grosskopf. "If anyone is selling a silver stream, we'd happily buy it."

Grosskopf sees silver as undervalued compared to gold, and believes the price should be closer to $90 an ounce within the next 12 months or so.

Since the Barrick deal, Silver Wheaton has made just one major buy, funneling $230 million into Augusta Resource (AZC.TO).

CEO Barnes says it's a matter of waiting out the highs.

"I think silver's going a lot higher in the short term, but at some stage it's going to come back down," he said. "When silver prices are on the way down, there's going to be even more deals to do."

(Additional reporting by Euan Rocha, Pav Jordan and Cameron French in Toronto, Matt Daily, Carole Vaporean and Steve James in New York; editing by Janet Guttsman and Frank McGurty)

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