Wheaton Precious Metals Corp (WPM) 2008 Q4 法說會逐字稿

Good morning, ladies and gentlemen. And welcome to the Silver Wheaton fourth quarter and full year results 2008 conference call. Please be advised that this conference call is being recorded.

I would now like to turn the meeting over to Mr. Brad Kopp, Director of Investor Relations. Please go ahead, Mr. Kopp.

Thanks, Crystal. Good morning, ladies and gentlemen and thank you for participating in today's call.

I'm joined by Peter Barnes, President and CEO, Randy Smallwood, Executive Vice President Corporate Development, and Gary Brown, Chief Financial Officer. Before I turn the call over to Peter, I'd like to read Silver Wheaton's forward-looking statements. Some of today's commentary may contain forward-looking statements. 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. We refer to you the section entitled risk factors in our prospectus dated February 6, 2009 and the section entitled Description of the Business, Risk factors in our most recent AIF. Both are on SEDAR and set out the material risk factors that could cause actual effects to differ, including the absence of control of our mining operations from which Silver Wheaton purchases silver, risks related to such mining operations, and the risk of a decline in silver prices. Now I'd like to turn the call over to Peter.

Thanks, Brad. Good morning, ladies and gentlemen. During the fourth quarter of 2008, total silver sales attributable to Silver Wheaton were 3.078 million ounces, slightly in excess of our guidance of 3 million ounces for the quarter. Finally, Luismin had a better quarter and we hope this is the start of a turnaround there. The number of silver ounces sold for the quarter were just over 2.7 million ounces as a result of late shipments at Zinkgruvan and Stratoni that we couldn't record as sales until early this year.

We had two major impacts on our financial results during the fourth quarter. Firstly, silver prices dropped very significantly during the quarter, by about 28% to an average of only $10.49 an ounce. Compared to $14.50 in Q3 and over $17 in Q2. Since year end, the silver price has bounced back nicely and at present it's sitting around about $14 an ounce. The second major impact on our financial results was the $64 million non-cash write-down of long term investments during the quarter. This mark-to-market adjustment was made simply to reflect the economic realities of these times, does not affect our cash flows and also does not affect our view of the long-term quality of the assets held by these companies. Each of our four core long-term investments owns one of the top 35 silver deposits in the world and we believe that ultimately each will turn into a successful mine.

Finally, before I hand it over to our CFO, Gary Brown, to review our financial results, I also want to mention that since year end, we successfully raised gross proceeds of $287 million Canadian by way of a Board deal financing at a price of $8 Canadian a share. The proceeds were used to pay off the balance owing under our revolving bank debt facility, eliminating any market concerns regarding our debt covenants and positioning us well for future growth.

Gary?

Thank you, Peter. Silver Wheaton generated net earnings and operating cash flow in the fourth quarter of 2008 of $10 million and $15 million respectively from the sale of 2.7 million ounces of silver at an average price of $10.49 per ounce. Prior to accounting for the effect of a $64 million non-cash write-down on long-term investments recorded in the quarter. This compared with net earnings and operating cash flow of $25 million and $34 million respectively for the fourth quarter of 2007 from the sale of 3.5 million ounces at an average price of $14.18 per ounce. It is important to note that approximately 336,000 ounces of silver sales were deferred from the fourth quarter of 2008 to the following quarter due to the timing of shipments. After adjusting for these shipments, we slightly beat our forecast for the fourth quarter.

Basic earnings and cash flow per share were $0.04 and $0.06 respectively for Q4 2008, prior to the write-down on long-term investments compared with $0.11 and $0.15 for Q4 2007. Earnings from operations for the fourth quarter of 2008 amounted to $13 million, representing a margin of 45% of revenue, compared with $30 million or 59% of revenue for the fourth quarter of 2007. The decrease in margin was virtually all due to the 26% decrease in the average silver prices realized in the fourth quarter of 2008, relative to the prior year. For the year, earnings from operations amounted to $103 million in 2008, virtually unchanged from the prior year, with a 12% increase in average silver prices being offset by a 15% decrease in the number of ounces sold. Breaking down the operating results further, during the fourth quarter of 2008, the Company sold 1.3 million-ounces of silver from the Luismin mines, generating net earnings and operating cash flows of $7.4 million and $8 million respectively.

For the year, the Company sold 5.4 million ounces of silver attributable to the Luismin mines generating net earnings and operating cash flows of $57 million and $60 million, respectively. This compares to 2007 during which the Company generated net earnings and operating cash flow of $63 million and $66 million respectively from the sale of 6.9 million-ounces of silver, with a 21% decrease in volume being partially offset by a 12% increase in the average price of silver. Zinkgruvan contributed net earnings and operating cash flow of $1.3 million and $1.5 million respectively in the fourth quarter of 2008 from the sale of 303,000-ounces of silver, with approximately 146,000-ounces being delayed due to the timing of shipments. For the year, the Company sold 1.6 million-ounces of silver from the Zinkgruvan mine, generating net earnings and operating cash flow of $15 million and $18 million respectively. This contribution was consistent with the 2007 results, with a 15% decrease in volume in 2008 being offset by an increase in the average realized silver price.

Yauliyacu generated net earnings and cash flows of $1.8 million and $3.9 million in the fourth quarter of 2008 based on the sale of 602,000-ounces of silver. For the year, Yauliyacu contributed 2.8 million-ounces of silver sales, generating $22 million of net earnings and $32 million of operating cash flow. This compares to 2007, during which Yauliyacu contributed 3.4 million-ounces of silver sales and generated net earnings and operating cash flow of $20 million $33 million respectively. Stratoni contributed net earnings and operating cash flow of $2 million during the fourth quarter of 2008 from the sale of 262,000-ounces of silver with approximately 190,000-ounces of silver being delayed due to the timing of concentrate shipments. For the year, Stratoni generated net earnings and operating cash flows of $7 million and $10 million respectively from the sale of 947,000 ounces of silver. In 2007, Stratoni generated net earnings and operating cash flow for the Company of $4.9 million and $8.3 million respectively from the sale of 868,000-ounces of silver.

Silver flows from the Penasquito heat leach operations amounted to 190,000-ounces during the fourth quarter of 2008, representing a 94% increase from the prior quarter with the increase being consistent with the ramp up in the stacking of ore on the heat leach pads. For the year, silver sales totaling 228,0000 related to the Penasquito heat leach operation, generating net earnings and operating cash flow of $2 million. Silver deliveries commenced under the La Negra silver purchase agreement in the second quarter of 2008, and contributed 69,000-ounces of silver during the fourth quarter. For the year, La Negra contributed 128,000-ounces of silver sales, generating operating cash flows of $1 million. Silver deliveries did not commence under the silver purchase agreements related to Mineral Park and Campo Morado in the fourth quarter of 2008. However, both operations are in the final stages of the commissioning process and deliveries are expected to occur in the first quarter of 2009.

The Company reaffirms its previously provided guidance for 2009 with silver sales from its existing silver interests forecast to be in the range of 15 to 17 million-ounces. G&A expenses were $3 million in the fourth quarter of 2008, consistent with the fourth quarter of 2007. For the year, G&A expenses increased by approximately $6.7 million, due primarily to additional personnel required to accommodate the elimination of administrative services that were previously provided by Gold Corp. Of these additional costs, approximately $1.1 million are considered to be non-recurring. We expect that G&A expenses for 2009 will be in the $11 million to $13 million range excluding non-cash stock-based compensation. Future income tax expenses of $1 million were reflected in the statements of operations for 2008 which are non-cash in nature and for which an equivalent benefit has been reflected in the statement of other comprehensive income.

During the fourth quarter of 2008, $4.3 million of interest was capitalized at the cost of Penasquito Mineral Park and Campo Morado silver interests with an average realized interest rate of 4.7%. For the year, $20.2 million of interest was capitalized to these silver interests. As discussed previously, from Silver Wheaton's perspective, the Penasquito heat leach operations had achieved commercial production, with the expectation that both Mineral Park and Campo Morado will achieve production during the first quarter of 2009. Penasquito's mill operation is expected to achieve commercial production from Silver Wheaton's perspective in the latter half of 2009. It is important to understand that due to the vast majority of the value associated with the Penasquito silver interest being derived from the silver flows to be generated from the mill operations, interest on all of the currently outstanding debt will continue to be capitalized until the Penasquito mill operation achieves commercial operation.

As previously noted, due to the uncertainty that currently exists with respect to the global economy, the Company recorded a $64 million non-cash write-down of its long-term investments in its statement of operations for the fourth quarter of 2008. It is important to note that of the $64 million write-down, $44 million had been reflected in the statement of other comprehensive income in prior periods and was reclassified to the statement of operations in the fourth quarter. We felt that this was consistent with conservative accounting practices and prudent given the current economic climate. As already mentioned, the write-down does not affect cash flows, and does not change our positive views on the long-term merits of these companies and their projects.

At December 31st, 2008, the total debt outstanding under the Company's term and revolving debt facilities was $378 million, a decrease of approximately $2 million from the prior quarter. With $15 million being drawn in the fourth quarter in conjunction with the upfront payments made with respect to the Keno Hills silver interest. As Peter has noted, subsequent to year end, the company successfully closed equity financing raising gross proceeds of approximately $230 million through the issuance of approximately 36 million common shares. The net proceeds from this financing are being used to repay outstanding debt under the Company's revolving credit facilities, leaving the entire $400 million of credit available to fund future acquisitions of silver interests. Following this repayment, the Company will have only $157 million of debt outstanding under the term facility, both the term and revolving credit facilities mature in July of 2014 and bear interest at LIBOR plus a spread, which based on the current leverage ratio, will be less than 1.25%.

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

Thanks, Gary. Before we open it up for questions, I want to discuss briefly where we see Silver Wheaton going over the next couple of years. Firstly, as I mentioned earlier, the silver price has bounced back nicely from its lows in November, December and it now sits at around about $14 an ounce. At these levels, we produce strong cash flows, and of course we also have the best leverage to increasing silver prices of any Company. For a 10% increase in silver prices from these levels, our cash flows increase by about 16%. We remain more bullish on long-term silver prices than ever as a result of what's unfolding in the global markets to date.

Secondly, we maintained our 2009 silver sales guidance at between 15 million and 17 million ounces for the year. We believe this to be a relatively conservative number. It's a significant increase from the 2008 levels, and will be driven by growth at several of the mines, but in particular by Penasquito. This is our flagship asset going forward, and will add up to 8 million-ounces of silver sales a year as it comes fully on-stream. Silver sales from our existing assets are expected to approach 30 million-ounces a year by 2013, giving us an unrivaled growth profile. On top of that, following our recent equity financing, we now have very low debt levels and a $400 million revolving debt facility fully available to finance new growth opportunities. Although these are very difficult economic times, and they're hurting many companies, they're actually providing us with the best growth prospect that I have ever seen. I believe the next 12 to 18 months, Silver Wheaton will have the opportunity to grow the company significantly, in an accretive manner. Our focus is clear; acquisitions that are accretive, provide immediate cash flow, a low risk in terms of asset quality and jurisdiction and do not overleverage the company's balance sheet. I believe that 2009 promises to be our best year ever.

Now, we'll open it up for questions.

Thank you. We'll now take questions from the telephone lines. (Operator Instructions). The first question will be from David Haughton from BMO Capital Markets. Please go ahead.

Yes, hello, this is David Haughton . I see in your guidance that firstly you've kept the 15 to 17 million-ounces, 2009. You've aggregated together a number of entities there, Campo, Mineral Park and La Negra. Wonder if you could split that out for us, please.

The reason we put them together, David, is they're relatively small deals for us and we kind of look at them on a portfolio approach. Some may underperform slightly, some may overperform. The reason we aggregated them was because we didn't want to particularly split them out. They're not material and we don't want too much focus on any small deal.

Okay. And in the case of Mineral Park also Campo, we previously expected that we might see some production in the fourth quarter. It didn't happen. Would we see some in the first quarter of '09 or are we pushing more into the second quarter.

David, it's Randy here. Though, it will be first quarter. They're all in process, in mechanical completion and working through the start-up issues. They've had concentrates shipped in both cases so we fully expect silver delivered in the first quarter of this year.

Moving on to a little bit more of a meaningful asset, looking at Stratoni, production expected to ramp up quite markedly in 2009. Can we see that more as back end loaded or are we thinking about a fairly smooth transition throughout the year to get to the rate that you're forecasting.

It's Randy, again. European Gold Fields Announced earlier on this year that they're not going to move forward with that tipped continued expansion. The increase in production here represents the fact that they were ramping up production through 2008 and they're going to maintain the same production levels that they had in at the end of 2008. They decided to sort of defer more CapEx expenditures in terms of expanding the process capacity on the mill side, so they're going to maintain their Q4 levels throughout the year. The reason the number is higher is of course they were climbing through the year in 2008 and so the ultimate number in 2009 will be higher.

All right. Because if I'm to annualize the fourth quarter, I'm quite a bit lower than your forecast. So annualizing the fourth quarter we get just over a million, maybe 1.1 million-ounces per annum. You're shooting toward 1.6 to 1.7.

You have to remember that there was a deferred shipment from Stratoni, it's detailed in the coverage. And so when you add that in, that will bring it up to the higher level.

Okay. And also --

One of the mines that we had a deferred shipment from.

Okay. Deferred shipment. I didn't see that in the note. What sort of quantum was that?

It was about 190,000-ounces.

Okay. All right. So -- all right. That gets us to about the ballpark that you've been shooting for. So thanks.

That's right.

Now, you also pointed Ott pointed out that in the first quarter you're expecting 3 million-ounces per annum. That is a conservative softening up for us or is that a realistic kind of expectation and if it's the number you're really shooting for, what kind of progression can we see throughout the year to get to your guidance level?

Peter here. Well, I mean, our guidance for the year is the 15 to 17. It is certainly back end weighted because Q4 does include some expected mill production from Penasquito. But having said that, almost all of -- we're expecting growth in sales from almost all of the mines and I mean, that doesn't just happen on January 1st. So 3 million, yeah, we think the 15 to 17 is reasonably conservative. We certainly think the 3 million is conservative. We're trying to make sure that we give guidance that we can meet or beat going forward. We expect each quarter for essentially the next five years to be better than the quarter before. I mean, we go through huge growth over the next four or five years.

Okay. So just making it broader then, a split, say, of maybe 6 or 7 million in the first half and 9 or 10 in the second half is something you'd feel comfortable with?

Yeah, probably 7 or so in the first half.

Okay. All right. Now, post financing, well positioned cash-wise, your debt repayment through to July 2014, do you have any intention to accelerate that payment as cash flow becomes available? You did pay down the debt as quickly as you can or would you like to keep a little bit of debt there and build up a cash balance?

Our debt as Gary mentioned, we're paying about 1.25% on it right now. We have our $400 million debt facility available to -- and of course we only need cash for one thing and that's to make more acquisitions so right now we're stock piling cash. We're not planning on paying down the term loan because the trouble is you pay that down and you can never draw it again, it's gone. So we'll stockpile cash because we see very significant growth opportunities over the next 12 to 18 months. If those growth opportunities don't materialize, I guess we may change our minds and just pay off the debt. But I don't expect that to happen and I expect that we'll have a use of the cash over the next period of time.

Okay. Final one, on income tax. What's your expectation go forward for your income tax rate?

Well, I think the future income tax expense that we recorded this year was really just an anomaly related to the reversal of the future income tax that we booked in prior periods on the appreciation in our long-term investments. So I think it's safe to say that until Keno Hill comes on line in a couple of years, that we will continue to have no income tax.

All right. Thank you very much.

Thank you. The next question will be from Haytham Hodaly from Salman Partners. Please go ahead.

Good morning, gentlemen, how are you?

Great, thanks. How are you?

Few questions, first on the financials. The full MD&A wasn't provided just yet, so could you break out what the remaining balance on the term facility and the revolving credit facility was as the end of the 2008?

The term, we had $164.3 million. We've since paid about $7.1 million of that off.

That's in that 2009?

Yeah. In January, we made that scheduled payment.

7.1, you said?

Yeah. So we're down to about $157 million currently and at December 31st we had $213.5 million outstanding under the revolving loan.

Okay. Perfect. Next question, I guess with Yauliyacu, production seems to have declined and looks like it will be tougher to hit that 2.9 to 3.5 million in 2009 based on the declines we see. How do you see that playing out after 2009?

Randy again. Yauliyacu is a bit of a -- it's a great asset in the sense that it's got the high grade zones that it can take down and that's what they're focusing on. When we were down there during the fourth quarter they were redoing their mine plan to reflect the lower values in zinc commodity prices and so rescheduling this year, focus on those low prices which chases into the higher grade zones. On top of that, they're in the middle of doing some infrastructure improvements within the actual operation itself which should improve the ability to pull some of the, increase the tonnage capacities from some of the deeper portions of the mine. Some internal shaft upgrades and such. We're pretty comfortable with that going forward. They're also the concept of expanding capacity with the mill if it ever comes through.

Because I think Yauliyacu initially was supposed to get up to, what was it, 4.75 million ounces I think a year?

The agreement that we have with them is if it exceeds 4.5 million-ounces that we're capped at that level. They haven't achieved that level yet and any differential gets carried over for subsequent years.

Using 3.5, in that range, 2.9 to 3.5 is probably reasonable for a couple of years at least.

I think the one trigger that may accelerate it is if the [Lazaro] mill comes into play which is sitting -- it is in the process of being parked right now. So with the current commodity prices, they're not -- there's not a lot of drive to sort of accelerate production from this base metal deposit so we'll see what the timing is on that going forward.

Okay. Maybe one other financial question. Can you refresh my memory as to what you decided to do with respect to the treatment of silver from the Penasquito leech and the Penasquito mill? I know you report your production or your outlook based on the ounces you're getting from there. Will those -- at least will the mill ounces hit the income statement prior to commercial production?

It's Gary here. Yeah, we're going to be taking the position that the heat leach and mill operations achieve commercial production from an accounting perspective upon the receipt of our first flows of silver from each. So to date, we've recorded the silver from the heat leach operations in revenue. And we will do the same when the mill operation starts to produce silver flows.

Haytham, it's Randy here. It's important to note that when we talk about our commercial production, it is different than Gold Corp. We talked about their commercial production being achieved in the first quarter of 2010. What we're talking about is from our own perspective.

Sure, no, that makes sense. They did say 2010 this morning. The only other thing I would note is that from a production perspective here going forward, or sorry, not from production, from a tax, interest perspective going forward, you will be capitalizing the interest on the debt, however, you still have the ability to do that, do you?

Yes, yeah, we will be capitalizing the interest on the debt until the Penasquito operation achieves commercial production. The mill side of that operation achieves commercial production from Silver Wheaton's perspective.

Okay. Interesting. Thank you.

Thank you. (Operator Instructions). The next question will be from David Christie from Scotia Capital. Please go ahead.

Quick question, one part. Just on the investment write-downs, could you give me a little more detail on what they all were. Maybe I missed it, already talked about it.

In terms of what the investments are.

The long-term investments that were written off.

They weren't written off, David. They were written down to the market value of those investments as at December 31st. So the write-down was $64 million in total. The write-down was comprised of 20 -- I'll just give you round numbers, $29 million on the Bear Creek investment, $10 million on Revet, $8 million on Aqua Line.

Okay.

$7 million on Sabina and $6.8 million on mine management.

Okay. What's your plan with things like Bear Creek?

It's Randy here, David. Bear Creek's got the Karani and Santa Ana project. They're moving forward on these. They're still advancing Santa Ana. Karani is going through feasibility studies. So we've seen no change in terms of the quality of these assets. Obviously the market has had a different perspective and we had to reflect that.

The economics didn't look very good. Okay. Thank you.

Thank you. The next question will be from John Doody from Gold Stock Analysts.

Hi, gentlemen. Even though it's Gold Stock Analysts, we still like some silver companies.

That's good.

The simple question. What's the number of shares outstanding now?

About 200 --

after the sale in the beginning of the year.

About 288 million, John.

288 million.

Yeah, post financing, yeah.

Okay. That's all I needed. Everybody else got the good questions. Thank you.

Thank you.

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

Thank you, operator, thank you ladies and gentlemen for calling in and we'll speak to you on the next conference call.

Thank you. The conference has now ended. Please disconnect your lines at this time. We thank you for your participation.