The sometimes painful debt restructuring for major mining company Glencore (LON:GLEN) has been well-documented. After investors lost faith in the company and shares began to plummet this year, CEO Ivan Glasenberg set out to arrest the exodus of investment and dwindling confidence of creditors.
One of the methods that the company is using to pay down its debt is selling off future production from its mining operations. Other big mining firms like Silver Wheaton (NYSE, TSX:SLW) have been all too happy to scoop up the production at discounted prices.
Quite appropriately, Silver Wheaton Corp. calls themselves the "silver streaming company." More than a marketing ploy, this slogan truly reflects the firm's business model. With many of their peers struggling under the pressures of slumping metal prices, SLW has been eager and willing to enter into silver streaming arrangements with many of the world's largest miners. In addition to Glencore, they also recently negotiated the same kind of deal with Barrick Gold (NYSE, TSX, SWX:ABX), the world's largest mining company.
Glencore PLC will raise $900 million up-front in the deal as part of its plan to pay down its near-term debt obligations. In exchange, Silver Wheaton will enjoy a continual stream of silver production from one of the Glencore's major mines in Peru: More than 1/3 of all silver production from the mine will go directly to Silver Wheaton up to the first 140 million ounces, while it will continue to receive 23% of all subsequent production for the full remaining life of the mine.
Streaming arrangements are certainly a central strategy for SLW, as illustrated by the flow chart below.
Paying Down Debt
Glencore has been trying to slash its $30 billion debt load by at least a third before the end of 2016. So far, the signs have been encouraging for the mining giant. The company has done so faster than expected, boosting share prices in the process. In addition to the streaming deal, Glencore has cut expenditures, suspended distributing new dividends, sold off assets (including $2.5 billion in fresh stock offerings), and closing several of its copper mines.
As copper mining operations slow or are forced to shut down altogether due to low prices, this also cuts into silver production. Fewer and fewer strictly silver mines remain online outside of Latin America, as a great deal of silver is actually recovered as a secondary resource from the unrefined ore extracted in copper, gold, and tungsten mining, to name a few.
The opinions and forecasts herein are provided solely for informational purposes, and should not be used or construed as an offer, solicitation, or recommendation to buy or sell any product.