Wheaton Precious Metals Corp (WPM) 2010 Q2 法說會逐字稿

Good morning ladies and gentlemen, thank you far standing by, welcome to Silver Wheaton 2010 second quarter results conference call. (Operator Instructions) Thank you. I would like to remind everyone that this conference call is being recorded today, Thursday, August 12th, at 11 AM, Eastern Time. I will now turn the conference over to Mr. Brad Kopp, Vice President of Investor Relations. Please go ahead, sir.

Great. Thanks operator. Good morning ladies and gentlemen, thank you 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 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 on Silver Wheaton's form 40F on file with the US Securities and Exchange Commission.

The annual information form sets out the risk factors that could cause actual results to differ including absence of control over mining operations from which Silver Wheaton purchases its 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, good morning ladies and gentlemen. Our second quarter ended a good first half of the year for us with record sales and earnings. Production for the second quarter was in line with our forecasts at 5.7 million silver equivalent ounces, an increase of 33%, over the comparable period in 2009. This led to record silver equivalent sales of 5.1 million ounces, an increase of over 70%, compared with 2009. Strong silver price combined with only a 1% increase in our cash costs led to record cash operating margins of over $14 per silver equivalent balance and 44% increase compared with 2009 and clearly demonstrating the advantages of Silver Wheaton business model of low fixed operating costs. Net earnings for the quarter almost tripled to a record $53 million, while operating cash flows increased by more than 150% to $67 million.

Our organic growth over the next three years will be driven by our two corner stone assets Penasquito and Pascua-Lama. With Goldcorp's world class Penasquito mine in Mexico continuing to ramp up silver production ahead of schedule we look forward to an even stronger second half of a year and maintain our annual attributable production guidance of 23.5 million Silver equivalent ounces. Meanwhile, construction at Penasquito is going well and remains on track to enter production in early 2013. During the second quarter we completed two more transactions both having potential to further increase Silver Wheaton's industry leading production growth profile.

First in connection with Goldcorp's sale of the San Dimas mines to Primero Mining, Silver Wheaton amended the relations on the purchase agreement to the benefit of both parties. The final agreement provides Silver Wheaton with a continuing Goldcorp guarantee extends the agreement from the fixed term to the life of mine and more importantly it incentivises Primero to increase silver production at this high quality, low cost mine. Second, Silver Wheaton acquired a right of first refusal over any silver streams relating to Ventana's Columbian properties including its flagship high grade gold-silver La Bodega project one of the most exciting gold discoveries in the last decade.

As Ventana continues to advance this potential world class project closest production and evaluates project financing options we anticipate working towards completing a silver stream agreement. Lastly, in terms of future growth we still see good opportunities out there and with our strong balance sheets combined with increasing cash flows we remain very well positioned to continue to add shareholder value. Now I will turn it over to Gary Brown our CFO to review our financial results.

Thank you Peter good morning ladies and gentlemen. Prior to reviewing Silver Wheaton unaudited financial results for the second quarter of 2010, I would like to remind everyone that all monetary figures discussed are denominated in US dollars unless otherwise noted. Silver Wheaton continued to demonstrate a strong growth profile during the second quarter of 2010 achieving record levels of revenue and earnings, both on an outright basis and a per share basis.

The Company's precious metal interest generated a 5.7 million silver equivalent ounces of tributable production in the second quarter of 2010, representing a 33% increase from the comparable period of the prior year with approximately 60% of the increase being attributable to the acquisitions completed in 2009, and the remainder being primarily attributable to the ramp up of Penasquito's milling operations and to a lesser extent, to improving operations of both Campo Morado and Mineral Park. Consistent with prior quarters, as of June 30th, 2010, approximately 1.4 million silver equivalent payable ounces have been produced by our partners but will be delivered and recognized Silver Wheaton's revenues in future periods.

For the second quarter of 2010 Silver Wheaton generated a record setting $95 million of revenue from the sale of 4.6 ounces of silver at an average price of $18.46 per ounce and 8,000 ounces of gold at a average price of $1,219 per ounce, resulting in 5.1 million silver equivalent ounces in total sales setting a new record for the Company. This represented an increase of 130% relative to the second quarter of 2009 driven by 74% increase in silver equivalent ounces sold combined with a 32% increase in the average realized selling price. Of the increase in silver equivalent ounces sold, approximately 70% related to silver from the acquisition which closed in 2009 with remaining increase being primarily attributable to the ramp of the mill at Penasquito and the shipment of concentrates that have been stock piled at Campo Morado in prior quarters. Earnings from operations for the second quarter of 2010 amounted to a record setting $59 million, representing a margin of 62% revenue compared with $23 million or 56% revenue for the second quarter of 2009.

With the increase in margin being consistent with the increase in the average realized selling price partially offset by higher depletion rates, cash G&A expenses were $4.1 million in the second quarter of 2010, compared to $3.6 million for the comparable period of 2009, with the increase due primarily to increased personnel related costs. Excluding non-cash stock based compensation the Company continues to expect G&A expenses to be in the range of $17 million to $19 million for 2010. Net earnings for Silver Wheaton second quarter of 2010 were a record setting $53 million, representing a increase of almost 200% from prior year. Similarly, operating cash flow increased by over 150%, to $67 million in Q2, 2010, relative to comparable period of the prior year.

Basic earnings per share amounted to $0.16 for the second quarter of 2010, again representing a record for the Company with cash flow per share amounting to $0.20. This compared with $0.07 and $0.09 for the previous year with the average number of shares outstanding increasing by 15% from the comparable period subsequent to June 30th, 2010 the sale of the San Dimas mine from Goldcorp. to Primero Mining Corp. closed. As a result, the information relating to San Dimas has been separately disclosed from the other mines associated with the original Luismin Silver purchase agreement, namely Los Filos and San Martin the information relating to Los Filos and San Martin are now reflected in the other silver and gold interests.

Breaking down the operating results further, during the second quarter of 2010, silver production sales relative to San Dimas totaled 1.1 million ounces, slightly lower than the prior year comparables but consistent with the Company's expectations. Zinkgruvan producted 478,000 ounces of silver during the second quarter of 2010 with 24% increase relative to the prior quarter reflecting the successful resolution of the ore pass blockage that hampered production in the first quarter of 2010, silver sales amounted to 313,000 ounces during the second quarter of 2010 with the difference between silver ounces produced and delivered representing ounces which will be delivered in future periods pursuant to contract terms. Yauliyacu produced 692,000-ounces of silver in the second quarter of 2010, with 517,000 ounces being sold during the quarter.

Concentrated shipments from the Yauliyacu mine have been affected by the shut down 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 offtake arrangements, potential for these timing differences continues to exist. Attributable silver production of Penasquito rose by 54%, to 800,000 ounces in the second quarter of 2010, relative to the first quarter of 2010. Reflecting the continued ramping up of the mill with the second sulfide processing line achieving mechanical completion during the second quarter.

Silver sales in the second quarter of 2010 relating to Penasquito amounted to 656,000 ounces representing a increase of over 400% compared with the sales of 130,000 ounces in the second quarter of the prior year with prior year sales reflecting ounces produced solely from the heap leech operation. The Minto Mine produced 49,000-ounces of silver and 5,802 ounces of gold in the second quarter of 2010 with total silver equivalent production amounting to 429,000 ounces with silver equivalent sales totaling 542,000 ounces.

Silver equivalent production is down relative to the previous two quarters primarily due to throughput constraints being experienced at the tailing filter plants. We understand these constraints are being addressed during Q3 and production levels are expected to increase accordingly. The Cozamin Mine produced 286,000 ounces of silver in the second quarter of 2010, with silver sales of 412,000 ounces. The difference between production and sales is attributable to the timing of concentrated shipments with Q2 sales reflecting the shipment of concentrate stockpile during the prior quarter. Production was lower at Cozamin during the second quarter due partially to ground condition challenges as well as brief shutdown of operations. In order to improve production additional stopes have been opened and commenced production in July. As a reminder, both Minto and Cozamin agreements were part of the Silverstone acquisition that closed in May of 2009.

During the first quarter of 2010, approximately 697,000 ounces of attributable silver was produced relating to Silver Wheaton's interest in the Barrick Mines with silver sales amounting to 717,000 ounces. With respect to the construction of the Barrick Dome Penasquito project from which Silver Wheaton entitled to 25% of the related silver production, detailed engineering and procurement is nearing completion and the project on track to enter production in the first quarter of 2013. Attributable silver production from other mines amounted to 1.2 million ounces in the second quarter of 2010 representing a 55% increase from the prior year attributable to increased production related 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 897,000 ounces in the second quarter of 2010, representing a 48% increase from Q1, due primarily to shipment during Q2 of the significant amount of concentrate that had been stockpiled at Campo Morado in previous quarters.

During the second quarter of 2010, $6.7 million of interest capitalized for the cost of the Barrick and Keno Hills silver interest. Of this amount, $6.3 million relates to interest accreting on discounted future payments due to Barrick with the remainder attributable to bank debt which bore and interest rate of just over 1% in the quarter. As reminder the Company expects to capitalize all interest costs associated with currently outstanding interest bearing obligations untile the Pascua- Lama Mine achieves commercial production. The Company generated $9 million from financing activities during the second quarter with $15 million of proceeds being received from the exercise of stock options and $7 million of outstanding debt under term debt facility being repaid.

Leaving a principal balance of $121 million outstanding as of June 30th, 2010. Approximately, $33 million of cash was dispersed relative to investing activities during the quarter with approximately $12 million being advanced upon the construction of Keno Hill project in the Yukon and $20 million being invested in the private placement of units of Ventana Gold Corp. for which Silver Wheaton was granted a right of first refusal over any silver streams relating to all of Ventana's Colombian properties.

Overall the Company cash balance increased by $43 million, in the second quarter of 2010, resulting in cash on hand as of June 30th of $323 million. This cash balance, combined with the $400 million of available credit under the Company's revolving credit facility, continues to position 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 will open it up for questions operator.

Okay, thank you.

(Operator Instructions)

Your first question comes from John Flanagan from Fundamental Equity. Your line is open.

Peter could I ask if there is anything new between the agreement between your government and the Cayman Islands so far as the economic relationship?

It's Gary Brown here, there is no formal agreement between our Company and the government of Caymans. There is a tax information exchange agreement that has been documented and is still awaiting ratification by the Canadian government which is expected to happen later this year. So there has been positive advancements in that regard.

So that would mean once it's ratified, it means that earnings in Caymans can be brought back to Canada tax free.

That would be very positive for future dividends, Peter.

Yes. I think you are probably right, there.

Okay. Thanks.

Your next question come from Brian Gilbert, shareholder, your line is open.

Thank you.

I just had a very quick question. I just wanted to know if you believe that the current share price of Silver Wheaton, I'm a Canadian investor, reflects what seems to be a double production figure two or three years out.

My view is it partly reflects it, but not significantly. I think investors now a days are tending to be fairly short-term in their vision and I don't think it reflects the fact that production is going to double a few years from now. I think analysts' targets do reflect that, but we are significantly off analysts targets at the moment.

I just wanted to compliment you, by the way, in running what I feel is one of the most interesting and greatest companies for a investor to be involved in.

Wonderful, thanks, it's nice to here that. We certainly try to maximize shareholder value.

You've done so in my opinion, thank you very much.

Thanks.

Your next question comes from the Jeffrey [Shock] from BMO Capital, your line is open.

Morning. Thanks for explaining why the other category increases substantially this quarter, is this a type of level we could expect going forward?

Yes. I mean, there is a few of the smaller projects, it's Randy Smallwood here, a few of the smaller projects that are going through project development expansion, there will probably be a bit of growth there just like the rest of our portfolio.

Okay.

Production side, sales would always go up and down depending on timing of shipments.

Right, I was talking about production.

Just one more question. You guys have been in the past extremely successful in striking agreements with operators in some of the largest deposit in the world. Now that these have been done, how do you feel about the opportunities that are out there now, and how small would you go to strike a silver screen deal.

Listen, that's a good question and I don't know the answer. I mean, our target is to do deals over 1.5, 2 million-ounces of silver production a year. But would we look at something smaller if we had massive growth opportunities? We would.

I think we've hardly scratched the surface yet of some of the larger deals. There is a lot of base level companies that not necessarily from one mine but from two or three or four mines, produce a significant amount of by-product silver, and our focus is to target those and do deals that are good for them and good for us. So I think we don't need to go small to continue to grow the Company. I think there is still some very attractive targets out there.

Thanks very much.

Your next question comes from Andy Schopick from Nutmeg Securities, your line is open.

Thank you and good morning.

Peter, I would like to ask you whether it's becoming any more or less difficult in looking at potential deals, to do them at fixed costs of around $4 an ounce where you have been able to do a lot of your deals, any general comment about that?

I mean I don't think people's focus is typically on the $4 an ounce, the focus is on how much cash we give them up front. So we don't really see pressure on the $4 an ounce number.

I think deals, --the nature of deals is changing, a couple of years ago, companies-- a lot of companies were desperate to pay down debt and they were looking at deals, I think that's changed with stronger metal prices across the board. But I think the opportunities are still good out there, very good out there to help people finance growth in the Company, either by M&A or by building new assets. And again, their focus in each of those cases is the up front cash versus the on going payments.

How focused are you as a Company, at trying to do these deals structured in a form that's similar to what you already done around this $4 an ounce area.

Our focus is adding shareholder value and we look at all sorts of ways of doing that. We are not focused on the $4 an ounce. I think it's a good number, especially on good deposits, but our focus is purely creating shareholder value and you can't just try the old cookie cutter approach all the time, turning out more of the same. You've always got to be creative in the way you look at things and I think if you look at our track record, we have been able to do that.

Oh, for sure. Peter, on another matter I would like to ask you for a general opinion. Given the recent proliferation of silver ETFs, do you think that this is affecting the supply/demand dynamics or pricing dynamics of the silver market in general? Is this something that is having any kind of a measurable effect, or something that could be temporary in nature, any thoughts about these silver ETFs?

I think ETFs are sometime a double edge sword, but I think overall they are very positive for not just silver but for gold too. Silver is always been a bit of a poor cousin to gold, and when investors think of precious metal they typically think of gold first. I think one of the things that the ETFs has done for silver, it has kept silver prices strong and I think they are going to continue to be strong for a long time.

Part of it will be driven by people buying ETFs or buying silver in another form as investments, but part of it is also going to be driven by industrial demands coming back around the world. But I think one of the big byproducts for silver, in my view, is that it's actually brought silver to a lot of investors' attention, and I think that's very positive because people realize that it's actually a good way of investing in precious metals. It isn't just gold, and often, typically, silver will actually outperform gold in the rising markets.

I'm well aware. Thank you.

Next question comes from David Christie from Scotia Capital. Your line is open.

Good morning. Or are we in the afternoon, or not quite?

Just on the balance sheet, quite a bit of cash sitting there, wondering what your thoughts are on dividends going forward, I know you had talked before about waiting until you reached a certain production plateau, maybe you could remind us what that might be and where you think you are on dividends.

I would have been shocked if we didn't have a dividend question, we get one every time we talk to people.

Yes, I think our view hasn't changed. We do have a fair bit of cash in the Company. Of course, we also got a lot of growth opportunities, and the Barrack deal, $625 million was the biggest we've ever done. I would certainly like to do something bigger than that for the right opportunity, so that cash could disappear fairly quickly.

On the other hand, I think as we continue to go through this huge growth period over the next few years, certainly our cash flows are getting stronger and stronger and stronger, and I think there is going to be-- we've got to look at the ability to do both at once, growth and pay dividends.

And I think if and when we start paying dividends, I can't see it being 2010, I would like to see a good year of Penasquito under our belt at the mill before we start looking at dividends, but I think we will be looking at it in the very near future and I think we can do dividends and acquisitions at the same time because of our strengthening cash flows.

I would agree, your cash flow is going to do nothing but grow. Just on Minto, it seems like you are getting more sales out of that line in a quarter that's supposed to be sort of subdued because of transportation issues (inaudible). Can you explain the issues there?

From an accounting perspective, they will take -- they will presell the minerals in concentrate, and so we-- when the only thing that's left to be done is the loading of the concentrate on a truck, we recognize that as revenue. I'm not sure that Minto does. So, we had $1.6 million of revenue associated with that preselling of concentrate. Does that answer your question?

You are getting cash or you are doing mark to market on those concentrates.

No. We are getting cash. As there was a chunk of concentrate that was sold on June 28, $1.6 million of concentrate, but was presold on June 28.

Perfect.

So we get cash for that.

That's great, thanks.

Your next question comes from Steve Butler from Canaccord Genuity. Your line is open.

Good morning. Peter and you guys alluded to issues with respect to the smelter issues and therefore problems with respect to silver sales versus production. Will you catch up in the third quarter substantially or materially on your silver sales versus production shortfall?

Steve, it's Randy here. One of the things with Yauliyacu and the change, they are selling their concentrates overseas, the pipeline for delivery is a little bit bigger now just because of the length of delivery versus just hauling up concentrates to the La Roya smelter. As that pipeline has filled up, we wound up having to carry a little bit more in inventory between the two. It will probably stay in that range over the near term.

And the shipments have been lumpy -- I think last quarter of last year we had over one million ounces sold. I might be wrong there, but there were two big shipments went down in the fourth quarter last year, so it is going to be lumpy. But those ounces that we show there as inventory we going to get a sale, it's only a matter of when.

Okay. Thanks Peter.

The investment you guys have in Bear Creek is sitting there nicely on the balance sheet, is it your intention ultimately to try to strike a deal with Bear Creek at some point, respecting that they have advanced the project to scoping level?

Yes, Steve, it's Randy again. Both [Caroni and Santana] are, in our eyes, some of the best undeveloped silver deposits out there right now. Very comparable to some of the other projects that have gone to that station. We would love the opportunity to work with Bear Creek, in terms of working toward that in helping them-- them or whoever ultimately develops those assets, in moving those projects into production.

I think it shows that our strategy over the last four or five years has worked. We invested in Bear Creek probably three or four years ago now Randy?

Yes.

We are the largest shareholder in Bear Creek, we own 16% and at the time, a lot of people said, "Why are you investing in a company like this?"

Well, when you are the largest shareholder in the Company, I think it certainly at least gets you a seat at the table in talking about health and finance growth in a Company, and the asset has developed nicely as Randy thought it would and we are looking at all sorts of opportunities and that's one we would like to do a deal on, we will see if we can.

Okay. Thanks, guys.

Okay. We'll just take one more question now.

Your final question comes from Haytham Hodaly from Salman Partner. Morning, glad to hear I made the cut there.

I thought you weren't going to call in today, I thought what is wrong with this guy?

Couple of questions, just simple ones.

Las Filos -- there was no specific break done on how much it actually contributed, but it seemed like it contributed a lot less than you probably expected, what was the level this quarter that it contributed to.

We are digging it up right now.

Okay. Maybe I'll ask another question while you're getting that.

Your production profile of 38 million ounces in 2013, does that include any projects which aren't currently operating?

Well, it includes Pascua-Lama and the fumes that Augusta will get permitted and go in to operation, of course if it doesn't we don't put out the money right.

Right. So Augusta's also in that forecast then, is it?

And then on a smaller note, (inaudible) will also be.

(Inaudible) as well, okay. Alright, good.

That should be in production by the end of this year.

To answer your question on Los Filos, it contributed about 25,000 ounces of production and sales in the quarter, which is consistent with prior quarters.

Very much in line with what we expected.

Okay. Fair enough, thank you gentlemen, keep up the great work.

Thanks.

Okay. Operator, thank you, and thank you ladies and gentlemen for calling in. Goodbye.

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