Wheaton Precious Metals Corp (WPM) 2008 Q1 法說會逐字稿

Ladies and gentlemen, welcome to the Silver Wheaton First 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. Please go ahead, Mr. Barnes.

Thank you, Operator. Good morning, ladies and gentlemen. Welcome to our first quarter earnings call. I have with me this morning Nolan Watson our CFO and Randy Smallwood our EVP Business Development.

For the first quarter we had record net earnings of US$27.9 million or US$0.13 a share from the sale of 2.8 million ounces of silver compared with US$24.9 million or US$0.11 a share from the sale of 3.3 million ounces of silver in 2007. Operating cash flows were US$33.1 million or US$0.15 a share compared with US$29.9 million or US$0.14 a share in 2007.

We're certainly disappointed that our silver sales were lower than expectations this quarter. They were about 14% down from where we had expected, about 470,000 ounces. The majority of this shortfall, some 270,000 ounces resulted purely from the timing of shipments at Stratoni and Zinkgruvan and will reverse in future quarters.

The remaining shortfall, some 200,000 ounces, resulted from the continued mining of below reserve grade ore at both Luismin and Yauliyacu. Randy is happy to talk about those later if there's any questions but let me just say that these are both world class deposits. It's only a matter of time before this mining [lessons] of grade ore turns around. It's not a question of "if" we'll get the silver from them, it's only a matter of when. In fact, Luismin's (inaudible) mine increased its proven and probable silver in 2007 by 24% and Yauliyacu increased their's by 39% which are very substantial numbers after taking into account production during the year.

It demonstrates the power of the Silver Wheaton model in a quarter where our silver ounces sold were about 14% less than we expected, we were still able to achieve record net earnings and near-record operating cash flows.

The most significant expense this quarter was the sale by Goldcorp of its entire 48% interest in Silver Wheaton which removed the perceived overhang in our stock and increased the market liquidity significantly.

We're actually very pleased with the way the sale went. It was the fourth largest equity [basis] in Canadian history and it was filled in less than two hours. We got some very long-term investors in as a result and this now puts us in a great position to continue to build the Company going forward. I've met with most of the substantial long-term investors that came into the Company during that time and I think they are all very happy to be invested in Silver Wheaton.

Lastly, we also announced a new silver stream acquisition from [Lacata] Minerals which will add approximately .5 million ounces of silver sales a year for more than 20 years.

I'll now hand it over to Nolan Watson to review the first quarter results in more detail.

Thank you, Peter, and good morning ladies and gentlemen. As Peter mentioned, during the first quarter of 2008 Silver Wheaton had record net earnings of US$27.9 million or US$0.13 per share and operating cash flows of US$33.1 million or US$0.14 per share from the sale of 2.8 million ounces and that was with a an average realized silver price of US$17.36 per ounce. That compares to net earnings and operating cash flows of US$24.9 million and US$29.9 million respectively from the sale of 3.3 million ounces at US$13.20 per ounce in the same quarter of 2007.

Our cash margin for the first quarter of '08 was nearly 80% due to the strong silver price and a fixed cash cost that averaged US$3.94 per ounce.

Getting in deep with the operations with respect to Luismin our operating results during the quarter, there was 1.7 million ounces of silver that we acquired and sold and that generated net earnings and operating cash flows of US$22 million. Details were approximately 100,000 ounces short of our projections as the average silver grade mine for the period at Luismin and San Dimas mine was 302 grams per tonne which is over 20% lower than the average reserve grade of 381 grams per tonne.

During the quarter, Silver Wheaton acquired and sold 734,000 ounces of silver from Yauliyacu generating net earnings and cash flows of US$7 million and US$10 million respectively and that was approximately 90,000 ounces short of our projections, again, due to lower grades.

Under the Zinkgruvan contract, the Company sold 318,000 ounces for the quarter generating net earnings and operating cash flows of US$4 million. One of the shipments that we had expected to recognize in the first quarter which had approximately 70,000 ounces of silver was sold just after March 31st and therefore this will be recognized in the second quarter.

With respect to the Stratoni contract, the Company purchased and sold 88,000 ounces during the quarter generating net earnings and operating cash flows of US$1 million. And this sales figure only represents one month's worth of production as there was a strike at the port that affected shipping. That strike has already been resolved and therefore the sales will be recognized in the second quarter.

G&A expenses for the quarter were US$5.3 million and although that is US$3.1 million higher than the US$2.2 million SG&A occurred in the first quarter of 2007, nearly US$2 million of that difference related to a non-cash stock option expense as a result of options granted during the quarter. The remaining difference related primarily to increase costs associated with becoming administratively independent from Goldcorp as well as one-time costs associated with year-end and regulatory compliance issues. So overall, we still expect our cash G&A to approximate US$10 million for the year.

During the quarter, US$5.8 million worth of interest was capitalized the cost of dependency of silver contracts with an average realized interest rate of 5.7%. And it's interesting to note that as interest rates are coming down, the current rate of interest that Silver Wheaton is paying is now approximately 5%. It should also be noted that once the Penasquito project is producing silver, which is expected to begin sometime in the latter half of this year, we will begin expensing the interest we incur rather than capitalizing it.

At March 31st, the total debt outstanding under the Company's term and revolving debt facilities was US$386 million which we continue to pay down very quickly with our cash flows from operations. Currently, we have approximately US$100 million available under our revolving facility that we can draw on at any time for acquisitions and we're also talking to our banks about increasing the size of our revolver, another US$100 million, in order to increase the cash available for acquisitions to US$200 million.

And that's the financial summary and now I'll turn it back over to Peter.

Thanks, Nolan. In terms of sales guidance for 2008 and beyond, we have revised our guidance for 2008 to between 13 million and 15 million ounces, a drop of 6% from our previous guidance if we hit the mid-points of the range. Our future guidance is unchanged at 19 million ounces in 2009 and 25 million ounces in 2010.

The reason we changed the guidance for this year is, it's fairly simple. Penasquito kicks in sometime in the second half and, of course, that's a big unknown as to exactly when that will come in. Certainly, we know that Goldcorp is doing everything they can to bring it in ahead of plan.

And secondly, Luismin, last year was their first year in over ten years that Luismin failed to meet budgets. It was a surprise to all of us. They did budget again the first quarter of this year by about 100,000 ounces as a result of mining lower grade areas. We hope that they will meet or exceed their 2008 budget going forward in which case we expect to be at or above the mid-points of our 13 million to 15 million ounce range.

To sum it up as simply as possible, the concern this year is that if Luismin continues to hiccup and, again, we hope it won't, or if Penasquito doesn't come in on time, and again we hope it will, that we don't have any positives sitting there to off-set it; whereas, in future years we're very comfortable that we do have upside in a lot of the operations which should off-set any hiccups at any of the other mines.

In terms of future growth prospects, things have never looked better. We announced the Augusta deal in December which we plan to finalize by June this year. We then announced the Mercator acquisition in March and we hope that we shall have several more accretive transactions to announce over the next several months.

These volatile markets are perfect for us as we can utilize our strong balance sheet to fund acquisitions at a time when most small and medium-sized companies are struggling to raise debt and equity.

And now we'll open it up for questions, Operator.

Thank you. (OPERATOR INSTRUCTIONS) John Bridges, JPMorgan Chase & Company.

This is [Lanko Shar] on behalf of John Bridges. Peter, could you give us some number as to how many ounces you expect from Stratoni to come into Q2 from Q1?

Well, it's tough to say. It's Randy here. The Stratoni operation is ramping up towards the end of the year so you'll see a slight increase over Q1 from Stratoni. As they bring in that lower production ramp facility at the bottom and bring it in to play and start running the mill on a full-time basis instead of a campaign basis you'll see improvements towards the end of the year in terms of our increases, in terms of the production rates.

Okay. But in terms of the shipments that were not made, so only one month of shipment was done, do you expect that the rest of the Q1 production to correctly reflect into Q2 now?

Yes. We do. But of course you never know what these operations, whether something from Q2 might just buy a few days into Q3. That is possible.

Sure. That's fair. And then a second question. On the Mercator, just wanted to re-check. The US$42 million payment is due in Q2. Right?

Well, whenever we finite the deal and we hope it will be in Q2. Yes.

In that case, would you be funding it by another further draw from the revolver or --?

Yes. We'll fund that one through the revolver. We've got US$100 million available in the revolver right now and, as Nolan said, we're talking to the banks about increasing that by another US$100 million.

Thanks. Good luck.

Thank you. Mike Curran, Royal Bank.

I think this is for Nolan. I think he actually answered my question but I didn't catch any -- I was really -- the timing or the trigger for switching from capitalizing the debt interest to expensing it, what was the trigger for that?

It's once the Penasquito project gets into commercial production and we start purchasing and selling silver under that contract.

Great. Thank you.

[Siluct Lentoni], Private Investor.

Good job with the earnings to everyone on the team. I guess there was two -- I might have missed it but there's two that didn't fall in, as far as some of the sales of silver, that didn't fall in on the first quarter that are going to be on the balance sheet for the second quarter. Is that correct?

Yes. There was 270,000 ounces which we buy at US$3.90 actually and sell at spot silver price which would have been US$17. That would have been, US$4 million, I guess, of extra cash flow if we had managed to get those in the first quarter.

So those will reflect on the balance sheet for the second quarter. Also, going forward here with gold price and -- excuse me, silver price being down US$0.44 today, what do you see because -- as far as pressure on commodities going forward as far as silver in your business? Is demand starting to fall off or tail off here as we're going forward here?

No. Demand isn't tailing off significantly. The demand supply picture for silver continues to look pretty robust going out. In the end, my view though, is gold and silver aren't particularly being driven by demand and supply, they are driven by what happens with geopolitical risks and also with the U.S. Dollar. And my view is that the geopolitical risks aren't going away and the U.S. Dollar will continue to decline.

I think what we're seeing is silver did have a strong run through US$20 and a lot of people, I think, took money off the table at that stage and the prices -- I mean, these things never go straight up.

No. I understand.

My view is that silver is going to US$30 in the next couple of years but it takes a bit of consolidation. Whenever it hits a new level then it consolidates for awhile and then it takes another run. I think you'll see that with gold and with silver.

Is the summer time, these months that we're going into in the second quarter, is this -- do you see that quite possibly there's going to be some pressure on the downward side?

I can't really answer that. People say that historically some of the purchasing of gold and silver goes up over the summer period but in the end, again, my view is that demand -- or the silver price and the gold price are driven by the U.S. Dollar and I can't predict in the short-term what's going to happen but my strong feeling is in the long-term, the U.S. Dollar still has a long way to go.

As far as the future now looking -- going forward, are these deals that you are going to try to realize in this second quarter the one that I believe is the US$40 million or US$42 million, how are those going to add to, as far as -- I mean, how are they going to add to the balance sheet going forward as we look in the second quarter and out into the third quarter?

Well, that US$42 million deal, the money goes toward construction costs. It's going to be in construction with -- it's going to be in operation within the third quarter so we will start getting silver from that mine starting sometime in the third quarter. And then, of course, it goes on from there for 20 years. That's .5 million ounces a year so at current silver prices that's US$7 million of cash flow for us.

And, also, I know Thompson has you at US$0.14 per share and you came in with US$0.11 and last year was US$0.10 per share and that -- was the difference because of some of the sales that you weren't to realize on the first quarter balance sheet but they will be realized on the second? And is that going to cause some conflicts on the --?

I would say three things, and that's a good question. I would say three things. First of all, the guidance we've given in the past were 50 million ounces. At the time when we did that, which was back in November when we first started doing it, we didn't have all the budgets from the various mines. I think most people, because we didn't talk about it on a quarterly basis, most people kind of divided it by four (inaudible) and said that's what the estimate is each quarter.

Well, clearly that isn't the case because we've got (inaudible) Stratoni. The key one, of course, is Penasquito where we're projecting to get about 600,000 ounces from Penasquito but that isn't until the fourth quarter. It could come in in the third quarter but certainly there's nothing in Q1 or Q2. So people should not have straight-lined the 15 million ounces anyway so that's point number one.

Point number two is we did have two shipments that didn't go through, or three shipments that didn't go through of 270,000 ounces in quarter 1. That will come through in future quarters.

And then, thirdly, we did have two mines which mined lower grade ore this quarter. But that is far from unusual in the mining industry. The mining industry is a hard industry to predict numbers for. I mean, even though you've got average grades at a mine that is all it is, is average grade. You go through lower grades, you go through higher grades. In a year and year and one-half ago we were getting more than this grade and people were saying, "Well, let's (inaudible)." You know what? It didn't. Now we're getting less than the [mature] grade and, hopefully, people will also think the same thing.

Do you see that getting updates on the mines, which I assume you would, do you see that it's possibly changing from updates that they may or may not give you?

Sorry. I'm not sure I understand the question.

As far as the grades going forward --

No, listen, again, at Luismin for instance, we got less silver this quarter. I've not seen their numbers but I'm pretty sure they also got less gold. But it's more dependent on the ore body. It has nothing to do with anything else and you've got ups and downs.

One of the issues that we've had in the past is that we were very dependent on the Luismin mine. And really it (inaudible). Well, that is changing. As we bring on more deals and as Penasquito comes on stream we'll be less dependent on Luismin and we'll be able, hopefully, as we have more deals going forward. But if you have a hiccup at one there's also some upside in another one that largely off-sets it.

Thank you very much for your time and thank you for saying that I had a good question. Take care.

Thank you. Mike Jalonen, Merrill Lynch.

Couple of questions. Going back to Mike Curran's question, or Nolan's answer there, I believe Goldcorp is saying that they are not going to get to commercial production for Penasquito until some time in 2009, possibly later in 2009. But then Nolan mentioned when you guys start receiving silver, which would be this year. So I'm just wondering when exactly -- when that timing would be for expensing your interest?

This is Nolan here. There's I guess a couple of issues. One is on the accounting side. As soon as we start getting material amounts of silver we will start expensing it. Now there's two stages to this mine. There's the oxide and the sulfide so the sulfides, you're correct, are not expected to come in until 2009. The oxides are still expected to come in at the end of 2008 and we've made the internal decision here that that's enough silver for us to start expensing the interest.

So the, basically, nothing in '08 but will be expensing in 2009?

Well, there will be some interest expense assuming that they come on line with the oxides on time at the end of this year.

Mike, we're really going to have to take the view at the time how much silver are we getting and whether we expense it all or expense a portion of it. We're going to have to take that view at the time. But the fact is, all it is, is the income statement versus putting it on the balance sheet. It doesn't change our tax loads at all.

Yes. But my research sector tells me to forecast earnings. We get ranked on StarMine and so -- but -- well, okay. I'll just keep talking to you guys and we'll see how it goes.

And just on the other question, you've given us a bit of a wide range, 13 million to 15 million ounces and you pointed to two assets that could lead to your shortfall and you mention trying to get to the mid-point of the range and then you mention Penasquito, your forecast of 600,000 ounces in the second half and also for the year, is that the original 600,000 -- is that number there, is that the original forecast within the 15 million ounces or is that revised?

No. It's the original. And, listen, the reason we've given the wide range is because there was two uncertainties of fairly significance. I mean if Penasquito comes in early or if it comes in a month or two late, it could have a significant impact on our performance here if you just look at this year. In the long-term, it had almost no impact but this year's earnings, of course, it does.

So when you are sitting there with 15 million guidance we are still hoping we could be close to 15 million ounces but given that Luismin has now had five quarters in a row, I think, of below budget, we felt there was more downside risk in the 15 million than there was upside. And so we want to put a wide range out there that we're comfortable we'll be within. We're certainly hoping we'll be at or about the mid-point and we'll try and narrow down the range as we get further into the year.

But don't forget, we're only one quarter into the year so far.

True.

We want to be -- what we're trying to do is give the market as much guidance as possible.

Let's see, the Luismin forecast, the original forecast you've been carrying for the year?

Just over 7 million ounces.

Thank you and good luck.

(OPERATOR INSTRUCTIONS) John Doody, Gold Stock Analyst.

Thanks for the ongoing update here. Could you give us a sense on how things are going on the Rosemont negotiations and the US$100 million expansion of the revolver that you are looking for. Should we think of that as being pigeon-holed for the Rosemont deal?

No. Rosemont, we don't like to talk about -- there's really no negotiations on Rosemont anymore. They just have to decide where they want to be within the 45% to 90% range and whether we're taxable or not. They've got -- there's other cogs in the wheel, if you like, in terms of what they -- how much they need from us and therefore what proportion of silver they want to sell.

I think we'll have it wrapped up by June 30th and certainly our expectations are it will be -- I would suspect it will be kind of in the 50% type range is my best guess right now, which is fine for us. It's still going to give us over a million ounces a year and our interests are certainly aligned when they are also getting roughly [half] for silver.

And the money that you are looking for is basically enough to do that range?

Well, I think we'll end up doing Rosemont out of cash flows and that's what I was going to say. Because we do not put any money up on Rosemont until they get all their mining permits, until they can show us they've got all the other cash necessary to build the mine and they still have mine construction which is probably what, Randy, over a year away from now?

Yes. Their guidance right now is to be in production by 2011. So that would have construction starting late in 2009.

So by then if we don't do anymore deals like that, we'll have basically gone by that stage and we can use the debt facility and cash flows to pay for Rosemont without, again, raising any equity.

So that extra US$100 million that we're looking to increase our facility by now is purely new deals that we hope to be able to get over the next -- I think I said several months before. I meant to say 12 months or so. Clearly, even when we've negotiated some of these deals, it takes a long time to actually get them announced because there's a lot of -- once the negotiations are finished, there's still a lot of paperwork for the lawyers to do. So timing and announcing these things is often difficult. But we're hopeful there will be some good deal flow over the next 12 months or so and that's why we're looking to get that extra US$100 million in our facility.

And the new deals are generally existing production or funding CapEx for new production?

It's a combination but where it's funding CapEx we try and get as much existing production as possible because, of course, still the prices are strong. But we also have CapEx but a lot of the ones we're talking (inaudible) is near-term production.

Great. Maybe we can get back up to that 15 million ounces in '08.

That's what we're trying for.

Thank you. Mike [Cozak], Cormark Securities.

Hi, Peter. Just one quick question. I understand that you guys grew Los Filos in Luismin. I also understand that Goldcorp declared partial production there on January 1st of this year. I was just wondering if you guys saw any ounces out of that particular operation?

Yes. There is some silver production out of Los Filos. It's very minimal. Recoveries -- Goldcorp started up Los Filos as a pure run-up mine reaching operation. And so recoveries of silver are a bit less than the crush leach that we had expected. But there is some silver production coming through that.

And so you did receive a little bit in Q1?

Yes.

Thank you. Jim Sterling, Wachovia Securities.

I just have a question from a risk management standpoint that I was curious about. Is there any stipulation in any of your contracts or as far as you know with the local laws that should silver reach a certain upward limit where your profit sharing and the price of that silver is capped off or where the contracts can be declared, any of the contracts that you have, can be declared null and void or commutable for a certain period of time?

No. When we negotiate these contracts what we're, of course, looking for is the upside to increase the silver price. So, no, that isn't the case. However, on most of them we actually have it the other way where if the silver price ever goes below US$3.90 we actually buy it below US$3.90 in the spot silver price. So essentially, then, the deal is structured where our downside is protected but we get the full upside.

And that's also true for -- as far as your understanding is concerned for local laws and so forth that these contracts cannot be declared null and void for any reason?

Yes. We have lawyers involved in all of these deals and clearly that's what we try to do. Yes. A lot of these deals are patchy in the country, anyway. They are offshore in the country so, yes, we're very confident that that's the case.

Very good. Thank you.

Operator, let's end it there if we can.

Thank you. This conference is now ended. Please disconnect your lines at this time. We thank you for your participation and have a great day.