Wheaton Precious Metals Corp (WPM) 2007 Q2 法說會逐字稿

Good morning, ladies and gentlemen, welcome to the Silver Wheaton 2nd quarter results conference call. Please be advised that this call is being recorded. I would now like to turn the meeting over to Mr. Peter Barnes, President and CEO. Go ahead, Mr. Barnes.

Thank you. Good morning ladies and gentlemen and welcome to our 2nd quarter earnings call. Some of my commentary may contain forward looking information. Therefore, you're cautioned that our actual results may differ materially from my conclusions, forecast, projections. I refer you to the section entitled description of our business, risk factors in our most recent annual information form available on CDA which sets out certain material factors that could cause actual results to differ. Net earnings for the quarter were 23 million U.S. or $0.10 a share from the sale of 3.1 million ounces of silver, compared with 25 million U.S. or $0.12 a share from the sale of 3.8 million ounces of silver in 2006. Operating cash flows were 28 million U.S. or $0.13 per share. Compared with 33 million or $0.15 a share last year.

These results were impacted by temporary production shortfalls at Luismin San Dimas mines in Mexico, where silver production was close to 800,000 ounces below budget for the quarter. All of our other operations were at or above expectations. San Dimas had production shortfalls continuing through the remainder of this year and as a result, we're reducing our guidance for the second half of the year to 6.5 million ounces from 8 million. We are confident, though, that the San Dimas production shortfall is only temporary and that it will be resolved by the end of the year. Randy Smallwood our EVP/Business Development will discuss our operations in a bit more detail in a few minutes.

Really, though, the major story of our second quarter is our two acquisitions which will transform the Company. These two acquisitions help us more than double our annual ounces sold over the next five years to close to 30 million ounces a year. In addition, they will boost our long term cash flow per share by about 30% with no shareholder dilution.

Goldcorp's Peñasquito project in Mexico also provides us with a very strong organic gross profits. Just in the last 12 months, Peñasquito's silver reserves increased by 50% as a result of strong exploration results and this is expected to continue going forward. There are also appears to be strong potential for the open pit production from Peñasquito . There's good potential Peñasquito will develop into an underground mine [inaudible] at no cost to us. The future growth prospects for Silver Wheaton have never been better. Our expectation is that we have positioned ourselves to do a minimum of two to four accretive transactions a year over the next several years. I shall now turn it over to Nolan Watson, our CFO, to review our quarterly results, following which Randy will make a few comments on the operations.

Thank you, Pierre and good morning ladies and gentlemen. As Peter mentioned net earnings and operating cash flows for the second quarter of 2007 were 22.9 million or $0.10 per share from 27.8 million or $0.13 per share respectively, from the sale of 3.1 million ounces of silver with an averaged realized price of $15.58 per ounce. This compares to net earnings and operating cash flow of 25.2 million or $0.12 per share and 32.7 million or $0.15 per share respectively from the sale of 3.8 million ounces at $12.46 per ounce in the same quarter of 2006.

The difference between the two quarters is partly driven by the fact that Luismin had a record quarter in the 2nd quarter of 2006. Our cash margin for the 2nd quarter of 2007 was over 70%, again due to a strong silver price and a fixed cash cost of only $3.90 per ounce and the fact that we structure our contracts to pay zero income taxes. With respect to operating results, during the quarter we acquired and sold 1.4 million ounces of silver from Luismin generating net earnings and cash flow of 12.4 million and 12.7 million respectively. The average silver grade for the purity of Luismin and San Dimas mine which is where we get most of our silver was 286 grams per ton which is below the average reserve grade of 388 grams per ton by 26%. And as Peter mentioned, Randy will be talking more about the operations of our various mines in a few minutes.

During the quarter, Silver Wheaton acquired and sold 844,000 ounces of silver from Yauliyacu generating net earnings and cash flow of 5.2 million and 8.3 million, respectively. And then there is the Zinkgruven contract, the Company sold 539,000 ounces for the quarter generating net earnings of 4.8 million and operating cash flow of 5.7 million. This actually represents record earnings in cash flow from the Zinkgruven contract compared to all previous quarters and it just goes to show the power of our model and as we continue to expand even when some contracts have temporary reductions and sales, other contracts are setting records. In April the Company purchased the new Stratoni contract for 57.5 million which is financed with cash on hand from contract, the Company purchased and sold 276,000 ounces during the quarter, generating net earnings of 1.5 million and operating cash flows of 2.4 million. This represents production of over 90,000 ounces per month and is typical of what we're expecting for the remainder of 2007. Depreciation for this contract was $3.98 per ounce during the quarter, and we do expect that to fall in future years as they continue to have exploration success.

During the quarter we entered into an agreement with Goldcorp to purchase 25% of the life of mine silver produced at the Peñasquito mine and that deal was completed on July 24. Production and therefore earnings for cash flow is expected to begin at the end of 2008 for that contract. In order to fund the 485 million purchase price the Company entered into a 200 million seven-year amortizing term loan and a 300 million seven-year revolving facility of which the term loan is fully drawn and we have drawn 246 million of the revolver. While the balance of the purchase price was paid with cash on hand. Upon entering into this debt facility we canceled their existing $25 million revolving facility. General and administrative expenses for the quarter are approximately 2.3 million this includes $0.6 million of amortization of stock-based compensation which is a noncash item. Silver Wheaton's strategic investments continue to perform well and at June 30, had a market value of 123 million representing significant value accretion to total EBIT compared to the cost of those investments. That's the financial summary, and now I'll turn it over to Randy.

Thanks, Nolan, and good morning, everyone. I'm just going to provide a bit of an update on the operations. I'll start with the San Dimas operations down in Mexico with a slight production shortfall. San Dimas is a broad epithermal vein camp that produces from many veins, sometimes up to five or ten veins producing at the same time and one of the most prolific veins down there has reached a narrow -- a good wide zone or a good wide system consistently averaging about six meters in thickness, and they're just going through a transition over the next few months as it's come down to a 2.5 meter thickness, and working their way forward. So it's a -- it's had a bit of an effect on silver production, typical of these camps, but there's a couple other [inaudible] coming on stream on the other vein systems that will be phased in over the next couple months, and we expect this prolific camp to continue moving its way forward and meeting the goals that we have set out as mentioned earlier on the new production schedule out of San Dimas [inaudible] over the next two quarters, no reason to expect [inaudible] everything looks pretty positive toward that. And should be back on stream by the end of the year for 2008.

Down at Yauliyacu, the continued success drilling at depths below the 39 level. There's very active drill [inaudible] There's three drills on the reserve [inaudible] so we continue to see great growth in the Yauliyacu camp. The Zinkgruven operations have directional drilling undergoing on a depth extent of the Zinkgruven asset with pretty positive results. It's followed up with the three drilled holes that were completed in 2006 so we do expect some pretty significant resource growth from that area over the next few months as they continue defining that. And, of course, it all comes as part of the contract moving forward. So quite happy with that one.

On the Stratoni contract in Greece, the development decline that's going underneath the decline body, we have a couple drills active on that decline with positive results, we're quite happy with the depth potential on this. It performed very well for us in the short time that we've had it, and we're quite excited about that exploration potential and look forward to that when growing up into one of the major contributors to Silver Wheaton. And lastly a bit of a Peñasquito update. Progress is going well, they have about 35% of the BCM contracts have been issued out for the sag line, concrete being poured, the primary pressure foundations done. The camp is up and running, they have got 300 people in the camp. Power line is near to complete, probably about 85%, 90% complete in terms of the power construction and highway bypasses are very near completion, and so progress is going well at Peñasquito,it's a very busy site as can you imagine. There is a power plant test -- decline that's being being driven down and pilot plant is going to be up in September and October. And looking forward to this, as the deposit matures, turning into a big contributor. There is a lot of studies going on with the deep potential of Peñasquito. Some of the high grade results that have been released to date by Goldcorp show great promise for traditional mining, but the large block underground mining concept is getting serious study by all parties, and by all means everything that we've seen so far indicates that the mineralization will support such a focus as the deposit matures. So that's it. With that, I'll turn it back to Peter Barnes, the CEO. Thank you, everyone.

Great, thanks. Actually, we'll open it up for questions, now.

Thank you, Mr. Barnes. [OPERATOR INSTRUCTIONS] The first question is from John Bridges. Please go ahead.

Hi everybody. I just want to dig a little deeper into this Luismin situation to begin with. The Company is aggressively developing out for this big expansion, which has been promised to us, and I'm just surprised that this narrowing would surprise them. You know, how much proven reserve do they have? How much -- how many years of proven reserve do they have?

Right now they have got about 1.6 million gold equivalent ounces slightly over 90 million silver equivalent. We're talking about probably 50 million silver ounces in the reserves going forward 55 million. The issue -- the Santa Lucia vein system was one of the most prolific producers over the last five years. It consistently averaged over six meters in thickness. We've now reached sort of the top third of this vein system, where it does significantly narrow up, and some supporting development that was supposed to make up the production shortfall from that is on schedule now to be completed here shortly. But it just didn't step in at the same time that the Santa Lucia narrowed up, and hence the production shortfall.

What went wrong?

Obviously a bit of a mistake in short term planning.

There were some labor problems in Mexico recently, was it related to that?

No, no, in the Luismin mine operations, the disturbance was very short. I think it was measured in a matter of days, not even a week, so I don't think that had any issue there's at all. These epithermal vein systems, there's always a bit of a challenge in terms of keeping the right amount of working spaces in front of you as they're so development intensive, that I think this one here just transitioning from a vein system that's typically 6 meters wide, to something that's a little over 2 meters wide that essentially means have you to have two other working spaces coming on stream to replace it if the average thickness is typically about two meters. And it's a just a mix up in short term, a little bit of a miss in short term planning.

Okay. I think to some extent you answered my second question in your talk. But the contract levels of sales from Yauliyacu are significantly different to the ones you're reporting at the moment. How are we going to get from that to the contract levels? Or are we going to get to the contract levels?

Yes, the Yauliyacu is essentially made up of -- I"m going to use their terminology, "corporeals", or bodies, which are wide, different sections and then "vetas" or veins, which are more narrower portions. Corporeals are more zinc rich zones, they have lower silver grades. Because they're thicker, they're more profitable for mining. The vetas, the veins are more lead rich, and therefore have higher silver grades but higher cost of mining. They've had essentially the challenges that we've had at Yauliyacu is that the exploration success they've had there has meant that there's more corporal production, more body production, more zinc rich production and less silver rich production. The veins are still there, the reserves are there, it's just a matter of the operational flexibility that Yauliyacu has in terms of taking the most profitable materials in front of them as they are going forward. So, with the exploration success on these Corporeals, it's been more of a focus toward that style of production over this period. Those veta -- those silver rich reserves are still there, and they will ultimately feed into the play as we move forward on this one, but, you know, it's -- it's really what it comes down to is there's some zinc rich zones and there's some silver rich zones.

That's helpful color. With respect to the big jump we've seen in lead prices , is that likely to have enough of an influence to get them back into the vetas?

I sure hope so. Yeah, there's no doubt that lead has become much more attractive with the current upswing in lead prices.

They are also looking to ramp up production too, which will -- even if they're producing more from the zinc rich zones, and then also produce more from the silver rich zones too, so we're not concerned that we're not going to get our silver, remember, if there's any shortfall in any year, they've got to make it up in future years.

No, the -- it's fascinating to see the limited influence of the miss in Luismin. It sort of supports your profile. The impact on the bottom line of the miss at Luismin at the mine level is significantly more impressive, I think. Anyway. Thanks a lot.

Yep, thanks, John.

Thank you. [OPERATOR INSTRUCTIONS] The next question is from Tony Lesiak please go ahead.

Good morning, Peter, could you just run through what your forecasts look like for Luismin in 2008, 2009?

Well, I would prefer to wait for now. I mean, they think that over the next five, six months they're going to get back to normal levels. If they do, we're comfortable that overall we'll be between 15 and 16 million ounces company-wide next year, just from existing contracts. But, you know, I don't want to start getting into Luismin numbers for next year, until we see how this thing goes. I mean, we're hopeful that it's not going to take six months, but I don't want to get burnt again.

How about I ask you what the breakdown is for the other contracts so I can back calculate what the number for Luismin would be.

[laughter] I think we're comfortable. Even on a conservative base for Luismin for next year, we think we're going to be in the 15 to 16 million range overall for the Company next year.

Okay. Just on the new debt, I'm assuming you're going to be capitalizing the bulk of that?

When you say new debt--

--or are you going to be expensing on your income statement?

Well, we expense the interest.

Yes. So all of it's going to be expensed?

Yes, it is. Going-forward. All right. Yes.

And just on Yauliyacu, there's a time value of money associated with them chasing the zinc in favor of the NSRs there, is there any sort of contingency for them delaying paying you out the residual on the contract?

No, I mean, again, you know, if there's a shortfall during the year, and there is this year, then they make it up in future years. As I said before, they are looking at ramping up production over the next couple years, we're very comfortable we're going to get it back in not too long of a point in time. And then of course, over the life of the contract there's also a minimum, but we don't expect that to be an issue at all.

Okay. And just on the rampup, can you talk to what kind of tonnages they're planning to get to?

They're looking at a potential expansion of about 30% on top of current production rates. So they'll be -- concept right now would have that coming into play in 2009, during 2009.

They would be over a million tons a year? On a throughput basis?

Yes.

Okay. Great, thanks very much.

Thank you.

Thank you. There are no further questions registered at this time. I would now like to turn the meeting back over to Mr. Barnes.

Okay. Well, thank you very much, ladies and gentlemen. Obviously, the quarterly results were a bit disappointing in terms of number of ounces produced, but as we said before, we're very happy that that is a short term phenomenon, and I think the growth that we generated during the quarter has added a huge amount of value to the Company over and above these short term issues. So we look forward to continuing to grow the Company. Thank you very much. Bye.

Thank you. The conference has now ended. Please disconnect your lines at this time. Thank you for your participation and have a great day.