Wheaton Precious Metals Corp (WPM) 2009 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Silver Wheaton conference call announcing third quarter results. (Operator Instructions) I would like to remind everyone that this call is being recorded on Tuesday, November 10th at 11:00 a.m. Eastern time. I will now turn the call over to Brad Kopp, Director of Investor Relations. Please go ahead.

Thanks Rachel. Good morning ladies and gentlemen and thank you for participating in today's call. I'm joined today by Peter Barnes, Silver Wheaton's President and Chief Executive Officer. Randy Smallwood, Executive Vice President of Corporate Development and Gary Brown, our Chief Financial Officer.

I would like to bring your attention that some of the commentary on today's call 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. Please refer to the section entitled Description of the Business, Risk Factors in Silver Wheaton's annual information form which is available on C-dar and Silver Wheaton's form 40-F which is on file with the United States Securities and Exchange Commission.

The annual information form set though the material risk factors could cause actual results to differ including the absence of control over mining operations from which Silver Wheaton purchases silver, risks related to such mining operations and the risk of a decline in silver prices. Lastly it should be noted all figures discussed in today's call are in US dollars unless otherwise noted. Now I would like to turn the call over to Peter Barnes our President and CEO.

Thanks Brad, good morning ladies and gentlemen. I'm very pleased to be here today to discuss a record third quarter performance both in terms of operating results and in building long-term shareholder value. From an operational viewpoint, we set new records in terms of attributable silver production, sales, earnings and cash flows. This was despite lower than expected production at three of the mines, due to mining activities being carried out in lower grade areas of (inaudible) bodies. The good news is that each of these mines expects production to improve over the coming few months.

The other very good news from an operational point of view is the exciting progress at Penasquito, which is poised to deliver significant production and cash flow growth for Silver Wheaton over the next several years. Last week, Goldcorp announced they have commenced shipments of the first silver bearing lead and zinc concentrates produced at the Penasquito mine in Mexico with preliminary metal grades, recoveries and concentrate quality, meeting or exceeding expectations. This is obviously great news for Silver Wheaton.

The third quarter also set a new record in creating long-term shareholder value. With the announcement of our most significant acquisition to date, in September, we announced that we had entered into an agreement with Barrick to acquire 25% of the Life of Mine silver production from its Pascua-Lama project. As well as 100% of the silver production from it's [Lagunas Norte and Peerina and Valadaro] mines until the end of 2013. The total up front cash payments of $625 million payable over three years. This acquisition was transformational, adding an average of 2.4 million ounces of silver sales for the next four years and then boosting our long-term growth profile very significantly increasing annual silver sales by over 30% in 2013 to approximately 40 million ounces a year.

Pascua promises to be a long life, very low cost mine and this acquisition positions Silver Wheaton to receive silver from three of the five largest silver deposits in the world, an unprecedented accomplishment. Best of all, we remain well positioned to deliver further accretive growth per shareholders with more opportunities in front of us than ever before, and with cash of $165 million and an undrawn $400 million revolving debt facility fully available. Finally, in terms of 2009 guidance, we continue to project approximately 17 million ounces of silver equivalent production for the year, although we are removing the upside case of up to 19 million ounces, given that Penasquito hasn't come into production early as we were hoping originally and given that production ramp up challenges some of the smaller mines earlier on in the year.

So, we are maintaining guidance at the $17 million level. Now, I'll turn it over to Gary Brown, our CFO to review our quarterly results in more detail.

Thank you, Peter and good morning, ladies and gentlemen. Prior to reviewing Silver Wheaton's unaudited end term results for the third quarter of 2009, I would like to remind everyone that all monetary figures discussed are denominated in US dollars unless otherwise noted. Silver Wheaton had a very successful third quarter. In addition to closing the acquisition of the Barrick silver interest, the Company set new records for revenue earnings and operating cash flows driven by record levels of both silver equivalent production and sales.

Silver Wheaton's precious metal interests generated 4.3 million silver equivalent ounces of attributable production in the third quarter of 2009, representing a 56% increase from the 2.7 million ounces produced in the comparable period of the prior year. As of September 30, 2009, approximately one million silver equivalent ounces attributable to Silver Wheaton had been produced by our partners and will be recognized in future sales as they are delivered pursuant to contract terms. Silver Wheaton generated revenue for the third quarter of 2009 of $70 million from the sale of 4.6 million silver equivalent ounces at an average price of just over $15 per ounce.

This represented a 77% increase in revenue, driven by a 69% increase in the silver equivalent ounces sold, and a 5% increase in the average realized selling price. Net earnings and operating cash flow in the third quarter of 2009 were $34 million, and $45 million respectively, compared with $20 million and $27 million for the third quarter of 2008. Basic earnings and cash flow per share were $0.11 and $0.14 respectively for the third quarter of 2009, compared with $0.09 and $0.11 in the third quarter of 2008, an increase of 22% and 27% respectively. Earnings from operations for the third quarter of 2009 amounted to $38 million, representing a margin of 54% revenue compared with $24 million or 60% of revenue for the third quarter of 2008. The decrease in margin relative to the prior year was due primarily to the increase in the average depletion per silver equivalent ounce, being partially offset by a 5% increase in the average realized price per silver equivalent ounce.

The increase in depletion rates is primarily attributable to the silver sales relating to Luismin and Zinkgruvan representing a smaller portion of overall revenues. Breaking down the operating results further, during the third quarter of 2009, the Company sold 1.3 million ounces of silver relating to Luismin mines, representing a 9% increase relative to the prior year. This resulted in net earnings and operating cash flows for the third quarter of 2009 of $13 million, and $15 million respectively compared to $12 million and $13 million for the comparable period of the prior year. Zinkgruvan contributed net earnings and operating cash flows of $4 million, from the sale of 433,000 ounces of silver, consistent with comparable quarter of 2008.

Yauliyacu generated net earnings and operating cash flows of $5 million and $8 million respectively in the third quarter of 2009, based on the sale of 698,000 ounces of silver, virtually unchanged from the prior year. Yauliyacu concentrate flows had been adversely affected by the shut down of Doe Run smelter in Peru during 2009 with an estimated 450,000 ounces of silver having been produced in concentrate form but not shipped as of September 30th. The related silver ounces will be recognize in revenue by Silver Wheaton as the concentrate is shipped in future periods. During the third quarter of 2009, the Company sold 342,000 ounces of silver produced from the Stratoni mine, representing a 35% increase relative to the prior year. This increase was expected and is attributable to the late shipments from the second quarter of 2009 being recognized in revenue by Silver Wheaton in Q3.

For the third quarter of 2009, Stratoni generated net earnings and operating cash flows of $2 million and $3 million respectively, consistent with the prior year. Silver sales relating to the Penasquito heap leach operations amounted to 190,000 ounces during the third quarter and contributed net earnings and operating cash flow of $2 million. This compares to silver sales of 98,000 ounces in the third quarter of 2008, with the increased sales volume attributable to the ramping up of the heap leach operation. With Goldcorp having recently commenced the shipments of the first silver bearing lead and zinc concentrates producted from the Penasquito mill operations, Silver production relating to Penasquito is expected to increase in the fourth quarter. Campo Morado generated net earnings and operating cash flow during the third quarter of 2009 of $1 million and $2 million respectively from the sale of 170,000 ounces of silver. There were no silver sales from the Campo Morado mine in the comparable period of 2008.

The Minto mine, which was acquired on May 21st, 2009, as part of the Silverstone acquisition, generated net earnings and operating cash flow in the third quarter of $4 million and $6 million respectively from the sale of 68,000 ounces of silver and 10,000 ounces of gold. It is important to note that truck transportation of concentrate from the Minto mine is unavailable for certain periods of the year, as a result of the freezing and breaking up of the Yukon River, which prevents access to the mine. As a result silver sales from the Minto mine will vary significantly from quarter to quarter. The Cozamin mine also acquired as part of the Silverstone acquisition contributed net earnings and operating cash flow of $2 million and $4 million in the third quarter of 2009, from the sale of 384,000 ounces of silver. Silver deliveries from other silver purchase agreements amounted to 192,000 ounces in the second quarter,-- sorry the third quarter of 2009, contributing net earnings and operating cash flow of $1million. For the year the Company estimates production will total 60 million ounces of silver and 17,000 ounces of gold for a total of approximately 17 million silver equivalent ounces.

G&A expenses amounted to $3.9 million in the third quarter of 2009, representing a 9% increase from the comparable period of the prior year, primarily attributable to increased salary and consulting expenses. Excluding noncash stock based compensation, G&A expenses for the entire year are estimated to be approximately $13 million. Interest costs of $600,000 were capitalized primarily to the cost of the Penasquito silver interest during the third quarter of 2009, with an average realized interest rate of only 1.45%. This compares to the third quarter of the prior year during which $5.2 million of interest was capitalized to silver interests. The lower amount of interest incurred in the most recent quarter is attributable to combination of lower outstanding debt levels and lower interest rates. It is anticipated that all interest charges on currently outstanding debt will be capitalized until the Pascua-Lama mine achieves commercial production.

On September 30th, 2009 the Company successfully closed an equity financing, raising gross proceeds of $287.5 million through the issuance of approximately 26 million common shares at $11.10 per share. At September 30th, 2009, cash on hand amounted to $305 million and total bank debt outstanding amounted to $283 million, with $140 million having been temporarily drawn to partially fund the initial $212.5 million installment relating to the Barrick silver stream acquisition. Subsequent to the end of the quarter, the $140 million outstanding under the revolving bank debt facility was repaid in full. Following this repayment, the Company's well positioned to pursue further accretive acquisitions with over $165 million of cash on hand. And the full $400 million of credit available under its revolving bank facility. That concludes the financial summary and with that we shall open the call up for questions.

(Operator instructions). Your first question comes from John Bridges from JPMorgan.

Good morning, Peter, everybody. Just a question from I think last quarter you said you would be paying some taxes at the Minto mine, but we don't see it in the numbers. Is it tucked away somewhere? Or has it been deferred?

It's Gary here. No. We, there is a few things that help us reduce taxes on the Minto mine. We had lost carry forward at Silverstone that we have used. Moving forward, we have lost carry forwards at December 31, 2008, Silver Wheaton had about $59 million of noncapital losses carrying forward that we'll be using to offset income from the Minto mine and the [Keno Hill] project once it's up and running.

And in addition, we have ongoing G&A expenses in Canada that will also be used to offset that income. So there were no taxes related to the Minto income, in Q3. And we wouldn't anticipate taxes for, until we have exhausted those loss carry forwards.

Okay. Great. The other thing is trying to reconcile your sales numbers with the production numbers, which are probably going to be highlighted, particularly by Penasquito over the next year or so and presumably there will be an increasing lock up of silver in the pipeline. You presumably report sales, once it's been refined and is actually sold?

Yes, well it varies agreement by agreement, John. We've always, it's interesting-- the numbers, the guidance we've always given was actually production. And in the past, because the first several of our grievance rules steady state operations, you really didn't see any fluctuations there. But just from quarter to quarter you might have one shipment missing or something. But over the last year, there has been a bigger divergence between them because partly the production issues or sorry, the smelter issues in Peru, and also because some of our-- several of our operations have been ramping up over the last year, some of the smaller ones.

Yes with Penasquito, we still haven't sorted out exactly what stage we are going to get the silver there. But there could well be timing issues between production and sales on that and on some of the others. It's going to be an ongoing challenge. Which is why we've changed our guidance to production. Because I mean it's literally impossible to predict a quarter ahead, a year ahead, what sales could be really it depends on a lot of factors out of almost anybody's control that far in advance.

That's a good segway into the final question. Are you willing to take a stab at 2010 yet?

We are just starting to get budgets trickling in from people and I don't want to take a stab and have to change it. I can tell you production wise it should be up very significantly from this year. I can't say more than that. But, it should show a very significant increase. Don't have budgets yet for Penasquito, but a year ago we were expect to get about 5 million ounces production next year.

Okay, great. Well done Peter.

Thank you.

Thanks, John.

Your next question comes from the line of Haytham Hodaly of Salmon Partners. Please go ahead.

How are you? Just a couple of quick questions. Looks like this quarter, some of the shortfall in production was offset by a higher realized silver price. Last quarter I think there was some inventoried ounces if I recall and I see you reported again more inventoried ounces this quarter, that you were expecting to get out in this quarter specifically at Yauliyacu and one of the other operations, what's happened with regard to those inventoried ounces? Are they making it through or what's going on there?

The Yaulilyacu I don't think we ever said we were expecting to get them this quarter. We said as they shipped the concentrate out then we would get them. That is certainly the case there. Glencore have found other sources to sell it to. Certainly in big lumps which means one lump went through last quarter, one lump's already gone through this quarter.

Hopefully there will be another one toward the end of the next quarter but it is too difficult to predict sales at the moment. I focus on production once it's produced it is going to get sold. It is sitting there waiting to get sold it will happen whether it's this quarter, next quarter. It's going to happen. It is not as if it is the same old inventory sitting there. It is like putting sausage meat in a long tube. You are sticking it in one end and other stuff is coming out the other end.

I guess I was trying to figure out any irregularities in the shipments more so than in the past?

Well, Yauliyacu for sure. Given the problems at the smelter that is still shut down, people are expecting it's going to reopen. We were actually down in Peru the other week and most of the people down there seem to think it's going to be reopened again, it's just a matter of when. And that, of course, will-- should mean that we start getting sales in line with production again at Yauliyacu.

That's great. Then 17 million-ounce guidance this year. Can you just, and I'm sure you have done this before. I just want to confirm the numbers I have, can you breakdown the big components of that?

There is only one quarter left now, Haytham, I don't really want to break it down by mine. Of course the large one will be Penasquito. But, when it's ramping up production, I think we have a budget of 5 or 600,000 ounces there. But probably it won't hit budget. But will it be above that? Will it be below that? Who knows when it's ramping up but it's looking good right now.

(Inaudible) Going back to John's question we have to fill up the pipeline at Penasquito Or Goldcorp has to fill up the pipeline. We are hoping it comes through in the fourth quarter but we'll see. Thank you John.

Next question from Adam Brooks, Sidoti & Co. Please go ahead.

Could you talk maybe a little bit about the leasing expenses kind of at the Silverstone acquisitions? Maybe Campo Morado and Barrick going forward what the expectations are?

Yes, it is Gary here. We have included the depletion per ounce numbers this quarter in our MD&A. So for the Minto mine and Cozamin mine we are looking at 450, 470 per ounce. And we don't expect there will be a material change in those depletion rates per ounce moving forward.

All right. So essentially everything stays static? All right.

Relatively. I mean, things will change slightly as resources get converted into reserves, et cetera. But it shouldn't have a dramatic impact on the depletion rates.

And one more quick question I guess kind of on San Dimas . Looking at what Goldcorp has said the last few conference calls they keep talking about improving grade and obviously you guys have a wide range as far as expectation from Luismin for the foreseeable future. What do you guys really plan, I know you may not even want to talk too much. Are we going to stay closer to the 5, 6 million run rate than closer to the upwards of 8 million?

We don't have-- we are still going through the budgeting process, as we said. So I don't want to start talking about budgets. We haven't got the formal budgets yet on San Dimas but clearly, I think it's been through tough times. It was at 8 million ounces a year in the past. It is down to the 5, 5.5 ounces level now. I can't see it going lower than this. I can only see upside in the future. But, if you want to be conservative, you can assume not much of a change for the next while. But I suspect over the longer term it is going to get back to, I mean, it's mining below reserve rate right now.

Adam, as they talked about in their conference call, they have had some success in that (inaudible) area which is one of the key areas for growth down there. So they have had some vein intersections that look very promising. We are looking forward to see how it shapes up.

Thank you very much .

Next question from Dan Rollins, UBS Securities. Please go ahead

Thanks. All my questions have been asked.

Next question from David Haughton, BMO Capital Markets. Please go ahead.

Good morning, Peter and team. You're in a pretty good position right now. As far as your balance sheet goes to look for further acquisitions. Are you keeping Randy on the road? Looking at additional prospects?

I mean, listen. I think one of the benefits of this of the Barrick deal, which in my view is probably the best deal we've ever done. It's with the largest gold company in the world and one of the best assets out there. I think one of the benefits that we are seeing is people who we have been talking to for awhile see Barrick do a deal and they say well you know what? If it makes sense for Barrick maybe it does make sense for us.

And we are seeing more good quality opportunities now than we've ever seen-- I know I say that every quarter, but we keep oncoming up with good acquisitions. And I don't think that's going to slow down. I think we're going to have more good quality acquisitions to announce over the next year or two. So yeah, Randy's very busy. He just had to leave, actually, to work on something.

Yes. His frequent mile points must be quite impressive. And of course you've still got the other two of the top five silver mines to think about.

Well yes, that's the other thing. Is Randy, I don't know if you want to talk a little bit about the pan American?

Well, with Pan American acquiring or-- the friendly acquisition of [Aqualine] with that transaction going forward, I think given Pan American's track record-- a very good track record within Argentina, we are quite happy with how this project is maturing our portfolio and look forward to working with Pan American. So I think that has given that asset a bit more value in our portfolio.

Yeah you've got a good option over that asset.

Yes we do.

The other thing is, with all that cash, have you turned your mind to dividends at all?

Listen. I mean, we will, undoubtedly, look at dividends at some time in the future. Right now, as I said before, we see so many opportunities out there. If we pay dividends of $20 million a year right now, we would reduce our debt capability by maybe close to $100 million.

So what it would mean by paying $20 million of dividends is you would have to raise $100 million of equity to do another deal and that done make a lot of sense to me in the short-term. So while we see these good opportunities we do have payments to make on the Barrick deal in the future and although that should at any reasonable price come out of cash flows. Yeah something will always think about and as companies mature and evolve that's typically the way they go. But right now, we are focused on increasing shareholder value through further acquisitions.

Thank you very much.

Next question comes from David Christie Scotia Capital. Please go ahead

Morning guys. Just quickly. On the acquisition side to follow-up on David's comments there, when you look at assets out there and then you are looking at things like Pascua-Lama versus silver stream from a base metal asset, do you prefer the base metal side of things moreso than the silver side or the gold assets? Or the other way around?

Randy here, David. Silver is silver. We'll take it from wherever it comes from. But we think it works better with some of the base metal operators out there, simply because they tend not to hold silver as close to their hearts as the gold producers do. So we tend we think we have a better chance chance of success in the base metal side. However, it all comes down to finding needs on their side for completing a transaction.

Peter here. I mean, my comments on this is that our focus isn't on what the mine is. It's on the quality of mine, the quality of the management. And a good asset and low cost asset. We've got silver coming from two zinc deposits right now.

I remember a year ago people were panicking saying zinc is in the toilet, are those mines going to shut down. That's when zinc got down to $0.60. Those mines were mining at $0.30 a pound. They were never at any danger of even not making money. So key thing is good quality assets, good quality people, we don't really care, as long as it's a low cost producer with lots of exploration upside.

Good. Thank you.

Well I think we'll call today now then. Thank you for calling in. We look forward to speaking with you again in the near future.

Ladies and Gentlemen this concludes the conference call for today. Thank you for participating. Please disconnect your lines.