Wheaton Precious Metals Corp (WPM) 2008 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Welcome to Silver Wheaton's second-quarter results conference call. My name is Brad Kopp. I'm the Director of Investor Relations for Silver Wheaton. I'm joined today by Peter Barnes, our President and CEO; Randy Smallwood, the Executive Vice President of Corporate Development; and Gary Brown, our Chief Financial Officer.

Before I turn the call over to Peter, I would like to read Silver Wheaton's forward-looking statements. This conference call contains forward-looking information which may include statements with respect to the future financial performance of Silver Wheaton, the timing and amount of future Silver sales and the future price of silver. Forward-looking statements involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of Silver Wheaton to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements.

Such factors include among others the absence of control over mining operations, from which Silver Wheaton purchases silver and risks related to such mining operations, including risks related to international operations, changes in project parameters as well as those factors discussed in Silver Wheaton's disclosure documents filed with the U.S. and Canadian securities regulatory authorities.

Although Silver Wheaton has attempted to identify important factors that could cause actual actions, events, or results to differ materially from those described in the forward-looking statements, there may be other factors that cause actions, events or results to differ from those anticipated, estimated or intended. There can be no assurance that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Accordingly, you should not place undue reliance on forward-looking statements.

Now I'm going to turn the call over to Peter Barnes, Silver Wheaton's President and CEO.

Thanks, Brad. Good morning ladies and gentlemen. For the second quarter, we had net earnings of US$23 million or $0.10 a share from the sale of 2.9 million ounces of silver compared with similar numbers in 2007 from the sale of 3.1 million ounces. Operating cash flow was a record of US$36 million or $0.16 a share compared with US$28 million or $0.13 a share in 2007.

All operations were pretty much in line with expectations other than Luismin which had another disappointing quarter. As we previously discussed, Luismin's biggest challenge in the short term is that it is mining through a lower grade area right now and the continuing to mine below reserve grade ore. In my opinion, it's not a question of if this situation will reverse, it's only a matter of when. Luismin is a fantastic asset and it's these short-term problems will be fixed.

However, despite these short-term disappointments at Luismin, we remain on track to meet our guidance of silver sales between 13 million and 15 million this year. Having said that, if the shortfalls at Luismin continue for the remainder of the year, we are likely to be at the very low end of the range.

It's pleasing that despite the Luismin production shortfall we still achieved record operating cash flows. I think this really demonstrates the power of our model not having exposure to the escalating cost profile prevalent throughout the industry.

I'm also very pleased that during the quarter we negotiated more silver stream agreements than any other quarter in our history. In April, we finalized the commercial terms of our previously announced letter agreement with Augusta whereby we will receive 45% of the silver produced by Augusta's Rosemont Copper Project in Arizona for the life of mine. We will make an upfront cash payment of US$165 million on a drawdown basis to fund mine construction once all necessary permits have been received. Rosemont will be a long life mind and will add more than 1 million ounces a year to our production profile likely by 2011. We will make no ongoing per ounce payment for the silver received.

In May and June, we made two new acquisitions, one with Farallon on their ultra high grade Campo Morado property in Mexico and one with Aurcana on their La Negra mine in Mexico. Both of these acquisitions are cash flow accretive almost immediately and between them will add up to 1.5 million ounces a year to our production profile.

Our last five acquisitions have now been made without issuing a single share. In order to keep this going we announced at the end of June US$100 million increase in our revolving debt facility and the plan to raise up to C$136 million through an offer to induce the early exercise of two of our three series of in the money warrants. Should we be successful in these plans by the end of September, we should have more than US$200 million available for new acquisitions.

With eighth silver stream agreements completed and August a soon to be, we have been very successful in diversifying our portfolio of assets and expanding our relationships within the industry. With our financing needs now being addressed in a manner that minimizes long-term shareholder dilution, this puts us in a great position going forward.

The growing capital requirements associated with mine operators and development companies combined with the challenges faced by these companies in attracting traditional sources of capital create an environment that is ideally suited to our business model and should position us well for further growth.

Last but certainly not least, we are very excited by the fact that Penasquito, our flagship asset, is proceeding very well and that we received our first shipment of silver during the quarter. As Goldcorp continues to derisk Penasquito and as production ramps up over the coming months, this asset promises to take Silver Wheaton to the next level with our total annual silver sales expected to increase 50% to 19 million ounces by next year.

In the end then I would sum things up here, Luismin had a disappointing quarter which wasn't totally unexpected. We thought that could well occur which is why we reduced our guidance at the end of last quarter. But other than that, things are going well and lots of growth opportunities around. And Penasquito is kicking in. So overall, I would say we are pretty happy with where we are and once Luismin is fixed, I think it's going to be -- we are going to be in a great position.

Now I will hand it over to Gary Brown to review the second-quarter results in more detail.

Thank you, Peter, and good morning, ladies and gentlemen. During the second quarter of 2008, Silver Wheaton generated net earnings of $23.3 million or $0.10 per share and a record operating cash flow of $35.9 million or $0.16 per share from the sale of 2.9 million ounces of silver with an average realized price of $17.35 per ounce. This compares to net earnings of $22.9 million or $0.10 per share and an operating cash flow of $27.8 million or $0.13 per share from the sale of 3.1 million ounces at $13.58 per ounce in the comparable quarter of 2007.

It is important to note that the net earnings for the second quarter of 2008 reflect a future income tax expense of $4.2 million relative to a $1.7 million future income tax benefit in the comparable quarter of the prior year. The future income tax expense in the most recent quarter is a non-cash item and is offset by a future income tax benefit of the same amount reflected in the statement of other comprehensive income. Adjusting for the effect of this non-cash anomaly, net earnings would have been $27.5 million or $0.12 per share.

Earnings from operations for the second quarter amounted to $33.2 million or 66.8% of revenue compared to $24 million or 57.8% of revenue in the comparable quarter of 2007. This increase in overall margin is due to higher silver prices with average cash costs and depreciation per ounce remaining relatively unchanged at $3.93 and $1.82 respectively compared to $3.90 and $1.83 in the prior year.

Breaking down the operating results further, during the second quarter of 2008 we sold 1.3 million ounces of silver from Luismin generating net earnings and offering cash flows of $16 million and $16.6 million respectively. These sales fell short of plan by more than 250,000 ounces with the average silver grade mine continuing to be lower than the average reserve grade. This variability in ore grade mine is normal for mining operations and a return to higher grades is expected in the future.

Zinkgruvan contributed net earnings and operating cash flows for the Company of $6.5 million and $7.6 million respectively in the second quarter of 2008 from the sale of 524,000 ounces. This volume was consistent with expectations and included approximately 70,000 ounces relating to a late shipment from the first quarter.

Yauliyacu generated net earnings and cash flows of $7.3 million and $9.9 million respectively based on the sale of 750,000 ounces of silver. This volume was consistent with our expectations for the quarter and the remainder of 2008.

Stratoni contributed net earnings and cash flow of $3.4 million and $4.8 million respectively during the second quarter of 2008 from the sale of 344,000 ounces of silver. The significant increase from the prior quarter reflects the effect of the strike at a port in the first quarter of 2008 which has been resolved but which delayed silver shipments from Q1 to Q2.

In addition to the silver sales described above, it is important to note that we received and sold the first shipment of silver from the Penasquito interest. The net revenue generated was offset against capitalized interest and debt financing costs for the quarter.

Overall, our silver sales fell 13% short of plan due primarily to the effect of lower grade ore being mined at the Luismin interest. Corporate costs were $9.9 million for the quarter ended June 30, 2008, compared to $1.1 million for the prior year. This $8.8 million increase is due primarily to the following factors. One, a $5.9 million variance in non-cash future income taxes between the two periods; two, a $2.4 million increase in general and administrative expenses; and three, a $451,000 increase in debt issue costs.

The non-cash future income tax expense recorded in the most recent quarter is directly related to the $36 million decrease in the value of our long-term investments. This decrease in value actually reduced our future income tax liabilities resulting in a net benefit which is reflective in the statement of comprehensive income.

As the Company only recognizes future income tax assets to the extent of liabilities, we needed to increase the valuation allowance associated with future income tax assets resulting in the non-cash future income tax expense in the statement of income. The benefit in the statement of comprehensive income offsets the expense of the same amount reflected in the statement of operations.

G&A expenses for the quarter were $4.7 million compared to $2.3 million for the comparable quarter of 2007. With the increase of being primarily due to a $600,000 increase in the non-cash stock-based compensation costs, nonrecurring employment related expenditures of $900,000, and the increased costs from reducing our reliance on Goldcorp's administrated services including additional staffing requirements. We expect the G&A expenses for 2008 excluding stock-based compensation to be approximately $13 million.

The debt issue costs incurred in the most recent quarter related to the $100 million increase in our revolving credit facilities. During the quarter, $4.8 million of interest was capitalized for the cost of the Penasquito Mineral Park and Campo Morado silver interest with an average realized interest rate of 4.6%. It is important to note that as these three projects achieve commercial production, the related interest charges will be expensed rather than capitalized. As previously noted, it is expected that the Penasquito heap leach operations along with both Mineral Park and Campo Morado will achieve commercial production prior to the end of 2008.

At June 30, 2008, the total debt outstanding under the Company's term and revolving debt facilities was $493 million, an increase of $106 million from the prior quarter. The increase was due to drawdowns made to fund the upfront payments for the Mineral Park, Campo Morado and La Negra silver interest offset by principal repayments during the quarter. It should be noted that the upfront payment relating to the acquisition of the La Negra silver interest was not made until July 4, 2008, which is the primary reason for the increase in cash and cash equivalents at June 30, 2008.

During the quarter, we increased the amount of the revolving debt available by $100 million bringing total revolving debt to $400 million with approximately $86 million available as at June 30, 2008.

That concludes the financial summary and with that, I turn the call back over to Peter.

Thanks, Gary. Now we will open it up for questions, operator.

Thank you, Mr. Barnes. (OPERATOR INSTRUCTIONS) John Bridges, JPMorgan.

Good morning, Peter.

Good morning, John.

I just wondered, you've added these two new projects but you didn't change your guidance for '09 and '10. Just wonder if you could comment on that?

Yes. At the end of the first quarter obviously Luismin has had a disappointing quarter and it wasn't in line with budget. So we dropped our guidance from 15 million ounces to 13 million to 15 million. Based on the fact that if Luismin continued to hiccup, then we'd be at the bottom end of the range and if they turn things around, then it would be higher up in the range. As we've added on these new contracts I wasn't -- I mean -- Luismin has been very difficult to predict. This quarter for instance, they were 500,000 ounces off their original budget and 300 less than what we hoped at the end of the first quarter.

So the last thing we were going to do was start upping our guidance again as we added on these new deals and particularly as most of them are -- I mean they are smaller deals and most of them come in towards the end of the year anyway. So if you like, that gave me some comfort that we would be within that range. That is where we are expecting to be. We are still expecting to be within the 13 million to 15 million ounce range.

Okay. What are they telling you about the development? They've got a lot of development to do to catch up for the depletion of that big fat stoke they had. But how are they getting on with that?

John, it's Randy Smallwood here. I was just down at San Dimas last week, and they're working forward, I mean development is a bit behind schedule but they have -- all systems are focused on moving in these lower tunnels into that central block area. And also the development on the Sinaloa (inaudible). So I came away feeling pretty comfortable about the fact that the efforts being made down there; it's just a matter of time.

So are they finding new broader targets or are they still tunneling toward them?

Yes, the areas that they are driving towards have all been divined by drilling activity. So they are driving toward them. They already have a good feel in terms of what they are working toward. The Sinaloa (inaudible) is a bit more of an earlier stage project. They've got some drill success in there but Goldcorp will probably provide a bit more detail tomorrow in their conference call.

Any sense on how quickly they will build up the number of available stokes?

It's going to improve through this year as they get toward -- I mean --their schedule has opening up some of these veins at depth over the rest of this year. So, I would think that we might be at a bottom right now.

Okay, thanks a lot, Randy.

David Stein, Cormark.

Thanks, good morning, guys. I was going to ask about intelligence on Luismin going forward but maybe I will just skip that since you dealt with that and move onto an accounting question. And that is right not you guys capitalize the majority of your interest charges and I guess as projects become commercial, you have to move to expensing them. And I was just wondering if you could give us some guidance on first of all, if I'm right about that? And then second of all, which parts of the debt are associated with which projects so that we can figure out when they are going to be expensed?

Okay, it's Gary Brown here. You are right that we are capitalizing interest relating to the Penasquito, Campo Morado, and Mineral Park acquisitions. We will stop expensing those as those projects achieve commercial production. It's expected that Mineral Park and Campo Morado will achieve commercial production in Q3 likely at the latter part of Q3. So we would start expensing the related interest charges at that time.

Penasquito is a little trickier to answer. We are trying to determine whether or not commercial production has been achieved based upon the flow of silver from the heap leach operation there. And we expect that certainly a portion of the interest on the Penasquito project will start to be expensed in Q3.

Okay. I guess we will have to -- will you have to split your debt for Penasquito into oxide and sulphide and then expense it accordingly? Is that the way that will work?

Well, it is likely that we won't split. We are still really evaluating that. But it's likely that once the Heap leach operations achieve commercial production that we will expense all of the interest. I think it's important to note that this is really just -- our cash flow is unaffected by this accounting treatment. We are paying these interest charges as they are being incurred currently.

So it is -- it will affect net earnings. I realize that but it's hard to -- it's difficult for me to say at this stage whether or not we will be expensing all of the interest or a portion of the interest relating to the Penasquito project. The expectation at this time is that once the heap leach operations are considered to have achieved commercial production that we will be expensing all of the interest.

Okay. And would you mind just maybe giving a breakdown of how much debt is against Penasquito, Morado and Mineral Park if you have that?

I don't have that handy. The Mineral Park and Campo Morado projects, the Mineral Park project we've borrowed $42 million for. The Campo Morado project is $65 million. We borrowed $485 million for the Penasquito deal but we've repaid a significant portion of that debt.

Okay. Okay, I can figure out the balance then just using math on the balance sheet there.

We can call you later with the details if you want them, David?

Yes, I think I can figure it out from there. Maybe just I only need a call if it is it different than what you said. Okay and then lastly, just maybe a strategic comment from you Peter. You are going to have a cash inflow presumably from the warrants. Are you still seeing plenty of good deals out there or might you put that against repaying some more debt? Maybe just a comment on that.

Sure. I mean there are two things there. First of all, the way we structured our debt facilities is that we put all our cash flow to repay them and their revolving facilities and then we can draw them down for the next deal. So, that is what we do and that is the best way of doing it because you're not building up cash and earning nothing on it and paying interest on your debt. So we pay the interest -- we pay the debt down as quickly as possible and then draw it down for the next deal.

If these warrants come in and we expect they will, then we are going to have more than $200 million available for new deals. We've done four deals in four months and they are not large deals like Penasquito but I think they are very accretive deals for us over the long term and I think they've all got very significant upside for us.

We continue to see a lot of opportunities. The challenge is continuing to pick up the good ones. I mean I think one thing that Silver Wheaton has been very good at over the years is only doing good deals. And even Luismin has been an great deal for us and will continue to be a great deal for us in the long-term. It is just going through a hiccup now.

So yes, there is a lot of opportunities out there and we expect that we will be announcing more deals going forward probably not one a month but I think there will continue to be accretive deal flow.

Okay, thank you very much, guys.

Steven Butler, Canaccord Adams.

Good morning, guys, Peter, Gary. I'm no accountant and I guess I'm glad I'm not but Gary, just a clarification. If you can go through the math with us again and maybe it's a question that we could address off-line but as to the reason for the financial income tax expense, I know I see it as an offset against comprehensive income. Maybe just a brief dialog there on comprehensive income, why the classification there and resulting in the offset on the income statement. Because intuitively the value of the assets went down, the investments went down, yet there is an income tax provision on the official income statement.

Yes, okay. This is a little difficult to understand. So I have some compassion for you but I'm surprised that everyone out there doesn't want to be an accountant.

The real -- the expense on the income statement really just flows from the benefit that was calculated with reference to the comprehensive income statement. So our long-term investments dropped by $36 million in the wake of some of the challenges that the junior mining companies are experiencing right now. That dropped it -- we had previously recorded gains on those investments. And as we recorded gains on those investments in prior quarters, we had future income tax expenses running through the comprehensive income statement.

The reversal of that situation resulted in a reduction of the future income tax liabilities relating to those unrealized gains. We have a significant amount of future income tax assets that are not recorded on the balance sheet and we had to increase our valuation allowance relating to those future income tax assets reducing the amount that we actually have recognized in order to -- in order that our future income tax assets equal our future income tax liabilities on the balance sheet.

So that component, the increase in the valuation allowance against our assets gets recorded as an expense. Basically we are debiting future income tax expense and crediting the future income tax liabilities.

Okay. I guess it's because it's a effectively off-balance sheet or maybe because they are netted out that you don't see the balance sheet. Maybe that is why we lack some of that clarity. But I appreciate that.

That is it exactly. We have zero net assets or liabilities from a future income tax perspective recorded on the balance sheet.

Bottom line, it is very hard to understand, but bottom line is a, it's not in cash and it won't be cash. And b, it is just reversing something that happened in the past. So to me, those are the two key concepts to hang onto.

Peter or Gary, if you sold those assets today for $80 million, any idea what tax bill you would pay? Roughly? Would it be effectively the full Canadian tax rate on the value less the cost?

Well I don't think we would pay any tax on it because, as Gary said, first of all, our cost is rounded out the $80 million anyway. Secondly, we do have tax pools.

Right.

Okay.

This is all accounting gobbledygook. (multiple speakers)

Sorry to monopolize the time on accounting gobbledygook. It's never a great thing. Peter, any sense of -- conviction you have -- I mean La Negra is -- there's no issue there of commercial or noncommercial. La Negra albeit small is producing, correct? And you are just going to be raking the silver stream there as soon as it is executed?

Is, I think we have already received or we are receiving our first silver shipments on that one. So --.

And timing of -- I mean the next one in line for me in Mineral Park, don't have a lot this year but Campo Morado will have a reasonable contribution. Your sense of timing there -- you said late Q3 commercial?

It's Randy Smallwood. With Mineral Park late Q3 they're talking September having the mill turning and Campo Morado is again late Q3, probably early Q4. The mill has turned down at Campo Morado and it's a matter of just developing enough ore faces in front of them to -- they are building a stockpile at the mill and expect to be up and going by the end of Q3 and probably pretty consistent production into October.

Okay. Thank you very much, guys.

Daniel Earle, TD Newcrest.

Good morning, guys. With respect to Luismin, obviously San Dimas is the big contributor there. But was there also lower grades encountered at some of the other operations?

The only two other operations that contribute to the Luismin is the San Martin which is operated by Starcorp, and their grades the last time I looked at it, it's a very small contribution. But their grades were I think only slightly below. They weren't too far off the target. And then Los Filos, which is very minimal silver production. So the bulk of it is I would say 95% of the silver production comes out of the San Dimas camp.

Okay, and then at San Dimas, over the past year or so we've seen that that has become increasingly silver rich relative to gold. Does that trend reverse itself when you get into these higher grade areas that I guess they are developing towards now?

There is, Daniel, there is great trends or silver or gold ratio trends on the district. And yes the Roberta and Robertita tend to have a bit more gold than silver. I think their ratios are about 50 to 1, i.e. 1 ounce of gold -- there's 50 ounces of silver for every ounce of gold. What we find though especially along these vein systems themselves, you also get that ratio and so the farther you get away from the core area, the higher the silver ratio, the more silver there is relative to gold.

So you see a localized effect on each of the veins and you see a regional effect also. As they get down into the further reaches of these vein systems, I think we should see a bit of benefit that way.

Okay. And then finally on Stratoni, how much of the volume was due to making the shipments that were delayed from Q1 and then how much of it was just sort of the normal production there?

Stratoni was basically on target when you adjust for shipments.

Okay, that is great. Thanks a lot.

200,000 ounces from Q1 roughly.

Yes, but I don't think that that means that 140,000 ounces would have otherwise been received from Stratoni. I think we didn't actually start seeing shipments of silver until June from Stratoni. So the --

Last year.

No, no, this quarter.

Oh, this year.

The first two months I think were that the port was backed up with respective shipments and so I think we expect that Stratoni's flows this quarter are consistent with what our expectations are for the rest of the year.

Okay, great. Thanks a lot.

Barry Cooper, CIBC World Markets.

Good day. Just wondering if you can walk us through how you get to your low end of your guidance of 13 million ounces? I guess there is -- you are calling for somewhere between 7.3 and 9.3 million ounces if you look at your range of guidance. But just walk us through how you get to the low end, if you don't mind.

You can look at it a couple of different ways. In the first six months, we've just under 6 million ounces of silver sales. And so the low end is 7 million roughly for the second half, which basically assumes Luismin will continue more of the same and every other mine will basically continue more of the same and then we have Penasquito coming in --

So how much for --

(multiple speakers) La Negra coming in.

Maybe, Peter, maybe I'll be more specific then. How much from each mine there?

To me it's a [mug's] game to try and give guidance on every mine because in the mining industry, grades are up, grades are down. I think that is part of the challenge that we have had before where Luismin is hiccupping and it's large enough that we don't have anything else to cover it off. I mean we are giving guidance company wide. You can look at what each mine has done so far for the year and go from there. But basically --

I guess that is the problem. I don't see how you get there then.

Well, I mean we are expecting around about 800,000 ounces from Penasquito in the last half of the year and then we are expecting a couple hundred thousand from Mercator and 100,000, 200,000 from Farallon and La Negra.

On Penasquito in terms of the difference between commercial and noncommercial, I guess I was a little bit surprised. I thought because Goldcorp is probably not going to declare commercial production, official commercial production until sometime next year and could be well into next year, what relevance does that have with respect to whether you are considering it in commercial production or not? Because you are in essence getting the silver and I would have thought from your perspective as soon as you start getting the silver, you are in commercial production from your perspective.

Right. Well I mean you are largely right there. It is totally irrelevant what Goldcorp does and we are not looking at that. However, in June for instance, at the end of June, we received 6000 ounces which we obviously didn't pay that much money to get 6000 ounces a month. As that ramps up, yes, which is why Goldcorp I think they won't declare commercial production until the mill is going which is a year, a year and a half from now.

We are going to be doing it in the next few months as the silver flow starts get a bit more meaningful. But it is only in the next few months that we are talking about whether it as of -- it may end up being as of July 1. It could well be that but it could also be the other date is probably October 1. It's probably somewhere in there, that kind of range.

So where does the -- how do you book the cash between the -- well the 6600 ounces that you sold, where does that go because it didn't go through the P&L? And there is no real capital to credit -- do you credit against interest?

No, we capitalize. We paid $485 million up front to Goldcorp and then we've been capitalizing interest. So we just offset it against that.

Okay. So we'll have to guess as to when you are going to declare something commercial then on that one in particular because 800,000 ounces, it's conceivable you don't -- it could be 400 if you are talking commercial as of October.

Well, yes, but we will still have received the ounces, right? So those ounces may not be shown as sales but they will still -- we still get the cash flow from selling them one way or another. But of we get 400,000 ounces of this quarter, which I don't expect this Q3, they will almost certainly be shown in this commercial production.

Okay. And then what were the grades at Luismin? Or San Dimas?

They are a bit lower than what they budgeted. It's a reflection of some of the challenges they are having in keeping the silver rich stokes going.

Yes, I guess I was looking for a number. Okay, good enough then. Thanks.

Maybe just one more call, operator.

Haytham Hodaly, Salman Partners.

Good morning, Peter, gentlemen. How are you?

Good, thanks.

I will make this an easy one as many of my questions have already been answered. Just some housekeeping issues, just on the G&A side, where do you expect your G&A expenses to be with and without stock-based compensation this year?

Without, we expect it to be about $13 million and then I think we expect stock-based comp to come in about [$5 million to $6 million].

Perfect. That is all I needed, thank you.

Thanks a lot, Haytham.

Thank you. There are no further questions. I would like to turn the meeting back over to Mr. Barnes.

Thank you, ladies and gentlemen, for calling in and we will talk to you either for Q3 or before. Thanks a lot. Bye-bye.

Thank you, Mr. Barnes. The conference has now ended. Please disconnect your lines at this time and thank you for your participation.