Wheaton Precious Metals acquires cobalt stream from Vale’s Voisey’s Bay Mine

by Keith Powell
Aerial view of the Voisey's Bay Mine.

Aerial view of the Voisey's Bay Mine. — Photo courtesy Vale

Wheaton Precious Metals™ Corp. ("Wheaton" or the "Company") is pleased to announce that it has agreed to acquire from a subsidiary of Vale S.A. ("Vale") (NYSE:VALE) an amount of finished cobalt equal to a fixed percentage of cobalt production from the Voisey's Bay mine (the "Cobalt Stream"). Wheaton will pay Vale upfront cash consideration of US$390 million upon closing of the Cobalt Stream. In addition, Wheaton will make ongoing payments of 18% of the Metal Bulletin market price ("cobalt spot price") per cobalt pound delivered1. Also on June 11, 2018, Vale entered into a separate streaming agreement with Cobalt 27 Capital Corp. ("Cobalt 27"). In total, Wheaton and Cobalt 27 will provide Vale an aggregate of US$690 million in funding for the combined purchase of cobalt equal to 75% of Voisey's Bay cobalt production effective January 1, 2021.

TRANSACTION HIGHLIGHTS

Adds to Wheaton's existing high-quality portfolio

  • Effective January 1, 2021, Wheaton will be entitled to receive from Vale an amount of cobalt equal to 42.4% of the Voisey's Bay mine cobalt production until the delivery of 31 million pounds of cobalt and an amount of cobalt equal to 21.2% of cobalt production thereafter for the life of mine.
  • Voisey's Bay is one of the lowest-cost, highest-margin nickel mines globally, ranking in the bottom half of the nickel cost curve.
  • Further strengthens Wheaton's partnership with Vale, one of the largest diversified mining companies in the world.

Increases Wheaton's growth profile and cash flow

  • Wheaton will be entitled to production starting in 2021, coincident with the anticipated ramp up in underground production from Voisey's Bay.
  • Attributable cobalt production is forecast to average 2.6 million pounds per year for the first 10 years and 2.4 million pounds for the life of mine. For context, on a gold equivalent ounce ("GEO") basis, that is the equivalent to approximately 80 thousand GEOs and 75 thousand GEOs per year, respectively.
  • Operating cash flow to Wheaton at current cobalt prices is forecast to average over US$75 million per year for the first 10 years.

Diversifies Wheaton's portfolio with an integral metal for clean energy

  • Cobalt is primarily used in battery technology, especially in the rapidly expanding electric vehicles ("EV") market.
  • Similar to silver, cobalt is primarily produced as a by-product.
  • While most cobalt supply comes from high political risk jurisdictions, Voisey's Bay is located in Newfoundland and Labrador, Canada.

"While our focus has been, and always will be on precious metal streaming, we welcomed the opportunity to invest in another low-cost, long-life asset with a partner of Vale's calibre. Wheaton has built a portfolio of streams on high-quality mines, and Voisey's Bay has both the quality and the scale to make it an accretive addition to this portfolio," said Randy Smallwood, Wheaton's President and Chief Executive Officer. "We see numerous similarities between cobalt and silver, as both are primarily produced as by-products and both are integral to sustainable clean energy and electronics. In addition, given cobalt supply is concentrated in high political risk jurisdictions, Voisey's Bay is particularly attractive for cobalt production as it is located in Canada."

TRANSACTION TERMS

  • Effective January 1, 2021, Wheaton will be entitled to receive from Vale an amount of cobalt equal to 42.4% of the Voisey's Bay mine cobalt production until the delivery of 31 million pounds of cobalt.
  • Once Wheaton has received 31 million pounds of cobalt, Wheaton will be entitled to 21.2% of cobalt production for the life of mine.
  • Wheaton will pay Vale cash consideration of US$390 million upon closing of the Cobalt Stream.
  • Wheaton will make ongoing payments of 18% of the cobalt spot price to Vale per cobalt pound delivered until the balance of the upfront cash consideration is reduced to zero.
  • When the balance of the upfront cash consideration is reduced to zero, Wheaton will make ongoing payments of 22% of the cobalt spot price per cobalt pound delivered.
  • Payable rates for cobalt in concentrate have generally been fixed at 93.3%
  • Wheaton will take physical deliveries of high-quality, finished cobalt by way of warehouse certificates.
  • Cobalt deliveries will be the obligation of Vale but will be guaranteed by Vale Newfoundland & Labrador Ltd., the project owner, and Vale S.A. will provide a financial guarantee.
  • The Cobalt Stream includes a completion test on underground operations measured by the throughput rate.
  • The stream area of interest is defined as the area including Voisey's Bay mining lease plus a 2 kilometre surrounding area of interest so long as any such cobalt is extracted using the same underground infrastructure as the planned Reid Brook and Eastern Deeps deposits.
  • Closing of the transaction is expected to occur shortly following announcement and is subject to the completion of certain corporate matters and customary conditions.
  • On June 11, 2018, Vale entered into separate streaming agreements with each of Wheaton and Cobalt 27 Capital Corp. for an aggregate total upfront consideration of US$690 million, of which Wheaton will contribute US$390 million for its stream. The terms of each streaming agreement are substantially similar other than in respect of the upfront consideration and cobalt stream percentages.

FINANCING THE TRANSACTION

The initial upfront cash payment of US$390 million will be paid by using amounts drawn from the Company's US$2 billion revolving credit facility. At March 31, 2018, the Company had approximately US$116 million of cash on hand and US$663 million outstanding under the revolving credit facility. With trailing four-quarter operating cash flow of just under $550 million5, the Company believes it has ample capacity to service the additional debt resulting from this transaction, especially given the low interest rate and flexible nature of the covenants under the revolving credit facility (minimum net debt to total net worth and minimum interest coverage tests).

ABOUT THE VOISEY'S BAY MINE

The Voisey's Bay mine and concentrator is located on the north coast of Labrador, approximately 1,200 kilometres north of St. John's, Newfoundland. Production began in 2005 and open pit mining is expected to continue until 2022. There will be a gradual transition from open pit to underground mining beginning in 2021. 

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