Wheaton Precious Metals Corp (WPM) 2010 Q1 法說會逐字稿

Good morning, ladies and gentlemen, and thank you for standing by. Welcome to Silver Wheaton's first quarter results conference call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded on Thursday, May 13th at eleven AM Eastern Time.

I will now turn the conference over to Mr. Brad Kopp, Vice President of Investor Relations. Please go ahead.

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

I'm joined today by Peter Barnes, Silver Wheaton's Chief Executive Officer; Randy Smallwood, our President; and Gary Brown, our Chief Financial Officer.

I would like to bring to your attention that some of the commentary on today's call may contain forward-looking statements. There can be no assurance that the 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 SEDAR and in Silver Wheaton's Form 40-F on file with the US Securities and Exchange Commission. The annual information form sets out the material risk factors that 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.

Now I would like to turn the call over to Peter, our Chief Executive Officer.

Thanks, Brad, and good morning, ladies and gentlemen. Our first quarter represented a solid start to the year for us. Production was in line with our forecasts, at 5.5 million silver equivalent ounces, representing an increase of 68% over the comparable period in 2009. PPS is on target to meet our 2010 forecast of 23.5 million ounces as Penasquito ramps up. Our average realized silver price was 45% higher than during the first quarter of 2009, while our cash margin per ounce was up 66%, demonstrating our ability to provide significant silver price leverage for shareholders. Silver sales were 5 million ounces, a 58% increase over last year, leading to net earnings of $44.6 million, almost triple those of last year. Operating cash flows were $57.6 million, up 149% from last year.

Penasquito continued its smooth ramp-up, meeting or exceeding design operating parameters. Goldcorp has really done an outstanding job in building this mine on time and on budget, which will drive continued production growth for Silver Wheaton over the next few years. Also during this quarter we acquired two new precious metals streams, further strengthening our industry-leading production growth profile. We completed a transaction, allowing us to purchase an amount equal to 100% of the life of mine silver and gold production from the Rosemont project in Arizona, and converted a debenture allowing us to acquire an amount equal to 12.5% of the life of mine silver production for the portion of the Navidad project in Argentina. These are both very high quality, advanced stage development projects, with a forecast to increase our silver equivalent production by approximately 5 million ounces a year once they're operating.

In terms of new growth, we still see good opportunities out there. We have a very strong balance sheet, with cash on hand of $280 million, and an undrawn $400 million revolving debt facility, which, combined with our strong operating cash flows, leaves us well positioned to pursue additional accretive acquisitions.

I will now turn it over to Gary Brown, our CFO, to review our financial results.

Thank you, Peter, and good morning, ladies and gentlemen.

Prior to reviewing Silver Wheaton's unaudited financial results for the three months ended March 31, 2010, I would like to remind everyone that all monetary figures discussed are denominated in US dollars unless otherwise noted.

Silver Wheaton's precious metal interests generated 5.5 million silver equivalent ounces of attributable production in the first quarter of 2010, representing a 68% increase from the comparable period of the prior year, with approximately 85% of this increase being attributable to acquisitions completed in 2009. As of March 31, 2010, approximately 1.4 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.

For the first quarter of 2010, Silver Wheaton generated revenue of $86 million from the sale of 4.4 million ounces of silver at an average price of $17.27 per ounce, and almost 9,000 ounces of gold at an average price of $1,100 per ounce. This represented an increase of 129% relative to the first quarter of 2009, driven by a 58% increase in the silver equivalent ounces sold combined with a 45% increase in the average realized selling price. Earnings from operations for the first quarter of 2010 amounted to $52 million, representing a margin of 61% of revenue, compared with $18 million, or 49% of revenue, for the first quarter of 2009, with the increase in margin being consistent with the increase in the average realized selling price.

Cash G&A expenses were $4.1 million, in the first quarter of 2010, compared to $2.7 million for the comparable period of 2009, with the increase due primarily to increased personnel-related costs. Excluding noncash stock-based compensation, the Company continues to expect G&A expenses to be in the range of $17 million to $19 million for 2010.

Silver Wheaton generated net earnings in the first quarter of 2010 of $45 million, representing an increase of approximately 200% from the first quarter of 2009. Similarly, operating cash flow increased by approximately 150% to $58 million in Q1 2010, relative to the comparable period of the prior year. Basic earnings and cash flow per share were $0.13 and $0.17 respectively, compared with $0.06 and $0.09 for the previous year, with the average number of shares outstanding increasing by 27%.

Breaking down the operating results further, during the first quarter of 2010 silver production and sales relative to the Luismin mine totaled 1.3 million ounces, slightly lower than the prior year comparables but consistent with the Company's expectations. Silver sales relating to Zinkgruvan during the first quarter of 2010 totaled 498,000 ounces, exceeding silver production of 387,000 ounces, with the difference being attributable to a reduction in ounces produced but not shipped in prior quarters. The decreased production was primarily attributable to an ore pass blockage, with the lost production expected to be made up over the remainder of 2010.

Yauliyacu produced 737,000 ounces of silver in the first quarter of 2010, with 581,000 ounces being sold during the quarter. Concentrate shipments from the Yauliyacu mine have been affected by the shutdown of the Doe Run Peru smelter, which has resulted in timing differences between silver being produced by the mine and silver sales being recognized by Silver Wheaton. Although we understand that Glencore has established alternative out-take arrangements, the potential for these timing differences continues to exist.

Attributable silver production at Penasquito rose by 18% to 520,000 ounces in the first quarter of 2010, relative to the fourth quarter of 2009, reflecting the continued ramping up at the mill. Silver sales in the first quarter of 2010 relating to Penasquito amounted to 424,000 ounces, compared with 135,000 ounces in the first quarter of the prior year, with the Company recognizing the first silver deliveries relating to the sulfide processing line in the most recent quarter, in addition to the silver produced from the heap leach operation. From Silver Wheaton's perspective for accounting purposes, both the heap leech and sulfide processing line have achieved commercial production, and as such interest will no longer be capitalized to this silver interest.

The Minto mine produced 62,000 ounces of silver and 7,700 ounces of gold in the first quarter of 2010, with total silver equivalent production amounting to 569,000 ounces, with silver equivalent sales totaling 618,000 ounces. The Cozamin mine produced 401,000 ounces of silver in the first quarter of 2010, with silver sales of 281,000 ounces, with the difference between production and sales being attributable to timing of concentrate shipments. Both the Minto and Cozamin agreements were part of the Silverstone acquisition that closed in May of 2009.

During the first quarter of 2010, approximately 780,000 ounces of attributable silver was produced and sold relating to Silver Wheaton's interest in the Barrick mines, consistent with the prior quarter. Attributable silver production from other mines amounted to 791,000 ounces in the first quarter of 2010, representing a 56% increase from the prior year, attributable to increased production relating to Campo Morado and Mineral Park, as well as the addition of production from Neves-Corvo, acquired as part of the Silverstone acquisition. Silver sales relating to other mines amounted to 526,000 ounces in the first quarter of 2010, with the difference between silver produced and sold being primarily attributable to a combination of the timing of concentrate shipments and payable rates relating to Campo Morado.

During the first quarter of 2010, $6.6 million of interest was capitalized to the cost of the Penasquito, Barrick and Kino Hill silver interests. Of this amount, $6.2 million relates to interest accreting on the discounted future payments due to Barrick, with the remainder being attributable to bank debt, which bore an average interest rate for the quarter of just over 1%. As a reminder, the Company expects to capitalize all interest costs associated with currently outstanding obligations, until the Pascua-Lama mine achieves commercial production.

The Company repaid $7 million of outstanding debt under its term debt facility during the first quarter of 2010, leaving a principal balance of $129 million outstanding as at March 31st. Overall, the Company's cash balances increased by $52 million in the first quarter of 2010, resulting in $280 million of cash on hand as of March 31st. This cash balance, combined with the $400 million of available credit under the Company's revolving credit facility, positions the Company well to execute on its growth strategy.

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

Thanks, Gary. Now we'll open it up for questions. Operator?

(Operator Instructions)

Your first question comes from the line of Adam Brooks from Sidoti & Company. Your line is open.

Yes, good morning. Looking at possible acquisitions, would it be fair to assume that newer acquisitions would be based on mines that are currently producing, or would you still look at more development projects?

I mean, we will look at anything that is a high-quality asset and low-cost producer. Our focus is on current production, but you know, we can't determine the timing of when various deals become available, and we will look at any good deal. But we're only going to do deals that are accretive for shareholders.

Okay. And I guess kind of a similar question on source metal, would it make no difference as long as just view it as a good project, or would you focus on gold?

I think bottom line is we will look at any metal, as long as it is a very low cost producer in the sector, but diversification is important. We're -- I think over our 5.5 year history now, we've achieved good diversification. We are weighted fairly heavily on gold mines. I don't mind that reducing, as I said, as long as there are high-quality assets in other areas, but it is nice to have diversification if we can get it, but it is not our primary driver.

All right. Thank you.

Your next question comes from the line of Haytham Hodaly from Salman Partners. Your line is open.

Good morning, gentlemen. It is Haytham Hodaly here.

One day someone will get your name right.

That's okay. One, is it possible to look at what the breakdown from the other category is? Obviously, you mentioned in your opening remarks the Campo Morado and Mineral Park and Neves-Corvo had better than -- has been improving constantly. What type of levels are you getting out of those these days?

Haytham, it is Randy here. I won't give the sort of detailed breakdown here on the phone, but all of them are performing pretty close to budget. Neves is a little bit behind, but -- with some of the challenges, labor challenges that they've had down in Portugal, but beyond that, Mineral Park is continuing to expand and move its way forward. They're moving into the phase -- phase 1.5, as they call it, and had their -- their Q1 was actually pretty good on the silver side. So in terms of the breakdown, we just -- these assets are not material, and in the grand scheme of Silver Wheaton, they just -- we feel it is a lot better to sort of group these together.

Did they perform similarly to last quarter? Or, I mean, were there any big changes?

Well, Mineral Park is gradually working its way up, and so it's going to see improvement. The rest of them are pretty well online with what they've done in previous quarters.

Okay, perfect. That's all I needed to know. And I guess just the decision with regards to, has there been any talk about a dividend?

Same as last time we had a conference call, and I think the time before that, and probably the time before that, too; I think we're getting close to the stage where we will start thinking about a dividend. I want to see -- I mean, Penasquito is doing fabulously. I think it is exceeding most people's expectations. I would like to see that for another few quarters, and then I think we will start thinking about it.

One last question. Any -- obviously, most of your debt at this point is associated with Penasquito. Before you actually begin to get the full level of production there you are expecting out of Penasquito, would you consider repaying that debt?

No, I mean we're down to $120 million of debt, and the interest rate this last quarter was just over 1%, so I don't know why you would repay such cheap money. We will just keep on paying it out over the next four years, or whatever is left.

Perfect. Makes sense. Thank you.

Your next question comes from the line of John Flanagan from Fundamental Equities. Your line is open.

Peter, you could kind of characterize the current tone of demand for silver in world markets, and do you have a number on the real growth rate for silver consumption this year?

Well, I mean there's a lot of aspects to silver demand, and you know, I don't want to go no a lot of detail here. Feel free to give Brad Kopp, our Investor Relations guru, a call afterwards, and he can spend a lot more time on it with you.

But there are two fundamental drivers for the price of silver. One is industrial demand, and one is investment demand. Industrial demand did drop fairly significantly in 2008-2009, as a result of the worldwide economic collapse. But it has started building back, and I think there is good prospects that will continue to keep on building long into the future. There is a lot of unique things about silver that result in strong and growing industrial demand.

What has driven the silver prices, despite the drop in industrial demand over the last 18 months or so, has been investment demand, because silver is also a precious metal along with gold. And you know, investment demand is coming into the precious metals at an unprecedented rate. Demand has never been higher. And the good news for silver is that the investment demand has supported the price, and in fact increased the price, and will continue to do so, we believe, over the next year or two. And meanwhile, industrial demand is building back, and at some stage when investment demand maybe slows down, we think that industrial demand will be building in behind there, and will continue to maintain strong silver prices long into the future.

Okay. Thanks.

Your next question comes from the line of Dan Rollins from UBS Securities. Your line is open.

Good morning. A couple of quick questions. Just one on Keno Hill, how much is left to spend on the capitalized portion of that contract?

Well, we've just during the month of April forwarded $5 million -- right Gary -- $5 million toward them, so it is slightly behind schedule in terms of what we expected, but the next few months will be pretty capital intensive in terms of them going forward. So we have -- it's a total of a $35 million commitment that still has to be paid. We still got $30 million coming into it.

And then just on the G&A, what can we expect going forward I guess on an annualized basis? Because the G&A ex the stock-based comp seems to be up a little bit this quarter?

Yes, so G&A, excluding stock-based comp, was $4.1 million in Q1. We reiterate that we expect for the year that cash G&A will be in the neighborhood of $17 million to $19 million.

So to put it in perspective, our G&A was actually a bit lower than we expected, than we budgeted, if you like, in Q1.

Okay. And just another one, just on the ORCANA silver contract, where does that stand right now? Are you still taking deliveries at a reduced rate? Are you taking deliveries at all right now? Or is it back to normalized levels, given ORCANA seems to have strengthened their balance sheet as of late?

We are taking silver deliveries at reduced levels. We're working with them. They were really put behind the eight ball when metal prices plummeted, and they had to repay a fair bit of money that they didn't have any more on concentrate sales, which affected a lot of mining companies, not just ORCANA. But when you were trying to start a mine up in the environment at the end of 2008, it was the worst time you could ever dream of it. So we have been working with them. We believe that over the next six, 12 months, we will resolve the -- we will resolve it to everybody's satisfaction.

All right. Perfect. Thank you very much.

They are looking to raise money, and I think that is probably very good for the company, and I think it will put it in a much better standing going forward.

Okay. Great. Thanks.

Your next question comes from the line of Ken Kramer from Citigroup Global Markets. Your line is open.

Good morning. How many employees do you have currently, and how that compares to a year ago, please?

We had about 19 employees a year ago, and currently we have about 24.

Thank you.

Your next question comes from the line of Steven Butler from Canaccord Genuity. Your line is open.

Good afternoon, guys. You can hear me?

Yes.

Yes, so Peter, guys, a question for you, with respect to the Rosemont deal. Is there any particular update to the time line on permits there, Peter? Is everything on track for permits potentially by year-end?

It is Randy. Augusta has received some feedback on their permit applications, and there's a few extra points that they have to do a bit more research on. That was disclosed in a press release from Augusta I think about two weeks ago, possibly three weeks ago, I can't remember the exact date.

And you know, I look at it as a bit of a positive, because it sort of highlights a couple of areas that need a bit more further study, for them to support on the document going forward, so it will likely put a bit of a delay on it, a couple of months, three months, but -- and I'm not sure if they come out with a revised schedule in terms of that going forward, but there is no doubt there is going to be a bit of a delay. And you know, we're still pretty bullish that they should be able to get something to the table by the end of this year, or first quarter of next year.

Right. Okay. Thanks. And then we saw in the MD&A, or the disclosure by your -- Pan American silver on the Navidad, with respect to their holder of the debenture, i.e. didn't identify you guys obviously, but you guys hold those and convert into convertibility into the life of mine 12.5% uptick. Any -- with some suggested potential revisions, is there anything that is large? Or is it very small changes that may result, if any, from the conversion terms into a silver stream there, thanks?

The conversion terms are set out in the legal agreement of the debenture; we actually have already converted, and Pan American are aware of that, so we do have a silver stream on it. We still have to flesh out the legal details on it. But the key parameters are set in stone, what we pay, how much of the silver we get, how much cash we have to put in, so that is all set in stone. I have not read their MD&A. I'm not sure what you're referring to. But from our point of view, any changes to that have to be -- we have to get something out of it as well.

Okay. Thanks, Peter.

Your next question comes from the line of Ralph Profiti from Credit Suisse. Your line is open.

Thanks very much, guys. Good morning. I just want to confirm, to make sure I have the numbers right, we should see the first bullet payment to Barrick in the September quarter, roughly $138 million, and that will be followed by a bullet payment to Augusta, roughly $77 million in the fourth quarter; do I have the math right there?

No, I mean we made our first payment to Barrick last September, and then we have three more of $138 million over the -- September this year and next year and the year after. Augusta and Pan American, for that matter, Navidad, we don't put any money up until they get all the permits. So right now, I think until we find out when they get the permits, it is premature, but I can't see us making any payments to either -- well, certainly to Augusta this year. As Randy said, you know, we're thinking they might get their permits this year, more likely maybe a Q1 next year, so that's when we would expect to start putting money in, once they've got all of their financing in place, and once they start construction. The only other money we got to pay this year I think is the $30 million to Elexco that we talked about earlier.

Got it. Okay. Thank you. And Peter, just another question. Could we get your thoughts on sort of how you think about Argentina and the Navidad project, understanding that over the years that you have probably done your own due diligence in the country, and just what you are thinking more on sort of the permitting issues specifically?

We've been -- Randy and I have actually been involved in Argentina for many years now when we were with Goldcorp, and one of the significant cash drivers is a mine in Argentina. We've been involved there for years. I think Argentina is a decent place to do business in. It is not without its difficulties, but that is primarily from the mining company's point of view, not from our point of view, because we're not having to do the business there.

And one of the things we were very pleased about is Pan American ended up owning this asset. They have been doing business in Argentina. They're very well respected there. They do a good job. You couldn't ask for probably a better company than Pan American to be taking this asset forward.

We believe that they will almost certainly get their permits there. We have actually been looking at this project one way or another for quite a few years. It is a great project, and we think they will get their permits, and probably this year.

Excellent, guys. Good luck.

Thanks. All right, Operator, I think we will call an end to the Q&A period. Thank you, everybody, for calling in. Thank you for the questions, and we will talk to you next quarter.

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