Wheaton Precious Metals Corp (WPM) 2010 Q3 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2010 third 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) Thank you. I would like to remind everyone that this conference call is being recorded on Tuesday, November 9 at 11 AM Eastern Standard Time. I will turn the conference call over to Mr Brad Kopp, Vice President of Investor Relations. Please go ahead.

Thanks, Christopher and good morning, ladies and gentlemen. Thank you for participating in today's call. I am 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 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 this action entitled description of the business, risk factors in Silver Wheaton's annual information form, which is available on CDAR and in Silver Wheaton's Form 40-F on file with the US Securities and Exchange Commission. The annual information form sets up 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. Lastly, it should be noted that all figures referred to on today's call are in US dollars unless otherwise noted. Now, I'd like to turn the call over to Peter Barnes, our Chief Executive Officer.

Thanks, Brad and good morning, ladies and gentlemen. This was another strong quarter for Silver Wheaton with record production and earnings. Production for the third quarter was in-line with our forecast of 5.9 million in silver equivalent ounces, an increase of 41% over last year. Silver equivalent sales of 4.7 million ounces for the quarter lagging production, due primarily to the build up of concentrate inventory as the Penasquito mine ramps up production, as well as timing of concentrate shipments from the Yauliyacu and Campo Morado mines. As of September 30 we had approximately 2.2 million silver equivalence ounces, which had been produced at the various mines and will be recognized in future sales as they are delivered to us under the terms of the contracts.

It is interesting to note that our average realized silver price in the third quarter was just under $20 an ounce. Silver is now selling at over $28 an ounce. In fact, this lag of production turning into sales has actually created quite a bit of extra shareholder value for our shareholders. At today's silver prices, our inventory will provide future cash flows of over $50 million. The 29% increase in our average realized silver price during the quarter, combined with essentially an unchanged cash costs lead to a 42% increase in our operating margins. This demonstrates our strong leverage to silver price. Net earnings more than doubled to a record $69 million, while operating cash flows increased by 55% to $70 million.

Our production growth continues to be driven by the ramp up of Penasquito, one of our world class cornerstone assets. During the quarter, Goldcorp announced completion of commercial production at Penasquito with ramp up to full production anticipated in the next few months. In what promises to be a another year of significant production growth for Silver Wheaton for 2011. Our world-class Pascua-Lama project also remains on track to enter production on time in the first quarter of 2013, with detailed engineering and procurement nearing completion and earthworks well underway. As a result, we remain in line with our production guidance of 23.5 million silver equivalent ounces for this year, growing to approximately 40 million ounces by 2013.

The further positive development during the quarter was Goldcorp's sale of its San Dimas mines Primero Mining and the emerging mid-tier gold producer. In conjunction with this, we were able to amend our silver purchase agreement, which continues to provide Silver Wheaton with a Goldcorp guarantee that extends the agreement from a fixed term to a life of mine and, most importantly, it incentivizes Primero to increase silver production at this high quality, low cost mine. San Dimas remains a key asset within our portfolio and we are confident that the amended silver purchase agreement will create additional long-term value for our stakeholders.

Lastly, in terms of the future, over the months ahead, I believe that we will continue to see good opportunities to grow our business in an accretive manner. Our increasing cash flows and strong balance sheet position us extremely well to take advantage of these opportunities as they arise. Now, I will 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 third 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 third quarter of 2010, achieving record levels of silver equivalent production and earnings. The Company's precious metal interest generated 5.9 million silver equivalent ounces of attributable production in the third quarter of 2010, representing a 41% from the comparable period of the prior year. This increase in production is primarily attributable to the ramp up of Penasquito's milling operation and the inclusion of a full quarter's attributable silver production from the Barrick silver interest, which was acquired in September of 2009.

For the third quarter of 2010, Silver Wheaton generated $93 million of revenue from the sale of 4.3 million ounces of silver at an average price of $19.51 per ounce, and 7,000 ounces of gold at an average price of $1,323 per ounce. This represented an increase of 33% in revenue relative to the third quarter of 2009, driven primarily by an increase in the average realized selling price of silver and gold. As of September 30, 2010, approximately 2.2 million silver equivalent payable ounces had been produced by our partners, but will be delivered and recognized in Silver Wheaton's revenue in future periods. This represents an increase of about 800,000 ounces from the previous quarter, with the most significant increases being attributable to Yauliyacu and Penasquito. Earnings from operations for the third quarter of 2010 amounted to a record setting $61 million, representing a margin of 66% of revenue, compared with $38 million or 54% of revenue for the third quarter of 2009, with the increase in margin being consistent with the increase in the average realized selling price, combined with lower depletion rates.

Cash G&A expenses were $3.6 million in the third quarter of 2010, consistent with $3.3 million incurred from the comparable period of 2009. Excluding non-cash stock based compensation, the Company expects G&A expenses for 2010 to be in line with previous guidance. Net earnings for Silver Wheaton's third quarter of 2010 were record-setting $69 million, representing an increase of over 100% from the prior year. Included in net earnings is a $7.9 million mark-to-market gain on warrants held as long term investments, as well as a $4.8 million future income tax recovery. The non-cash future income tax recovery recorded in the most recent quarter is directly related to $49 million increase in the value of the Company's long-term investments reflected in other comprehensive income. This increase in value resulted in a future income tax expense of $4.8 million being reflected in the statement of comprehensive income. As the Company has significant unrecognized future income tax assets that can be used to offset this future tax liability and offsetting income tax recovery was reflected in the statement of operations.

Operating cash flow increased by 55% to $70 million in Q3, 2010, relative to the comparable period of the prior year. Basic earnings per share amounted to be $0.20 for the third quarter of 2010, representing a record for the Company, with basic cash flow per share also amounting to $0.20. This compared with basic earnings in cash flow per share of $0.11 and $0.14 for the comparable period of the previous year, with the average number of shares outstanding increasing by 10% from the comparable period.

The sale of the San Dimas mine from Goldcorp to Primero Mining Corp closed during the third quarter of 2010. 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. It is important to note that the results for San Dimas for the third quarter reflect an additional 250,000 ounces of silver production and sales relating to Goldcorp's commitment to deliver 1.5 million ounces of silver per annum to Silver Wheaton for four years following the closing of the sale of San Dimas to Primero. The information relating to Los Filos and San Martin are now reflected in other silver interests.

Breaking down the operating results further, during the third quarter 2010, silver production and sales relative to San Dimas totalled 1.3 million ounces, consistent with the prior year comparables. Silver sales relating to Zinkgruvan were 635,000 ounces during the third quarter of 2010, exceeding ounces produced by 127,000 ounces, reflecting the delivery of ounces produced in prior quarters. Silver production in the third quarter of 2010 exceeded the prior-year figures by over 20%, with the increase being primarily attributable to the mine moving to a continuous mining operation.

Yauliyacu produced 633,000 ounces of silver in the third quarter, while related sales amounted to only 87,000 ounces. This difference between ounces produced and sold is attributable to the timing of concentrate shipments, with shipments in Q4 expected to largely clear out stockpiled concentrate.

Attributable silver production at Penasquito exceeded 1 million ounces in the third quarter of 2010, an increase of 27% relative to the immediately preceding quarter, reflecting the operation achieving commercial production during the quarter with peak daily throughput rates reaching 105,000 tons per day. Silver sales in the third quarter of 2010 relating to Penasquito amounted to 692,000 ounces, representing an increase of over 260%, compared with sales of 190,000 ounces in the third quarter of the prior year. With prior-year sales reflecting ounces produced solely from the Heap Leach operation.

The Minto mine produced 46,000 ounces of silver and 700,000 ounces of gold in the third quarter of 2010, with total silver equivalent production and sales amounting to about 450,000 ounces. Silver equivalent production is down relative to recent quarters, primarily due to the continued presence of water in the main pit, which effected mining operations during the quarter, resulting in a greater reliance in processing stockpiled ore. We understand this issue has been addressed and a return to higher production levels is expected in Q4.

The Cozamin mine produced 381,000 ounces of silver in the third quarter of 2010, with silver sales totaling 306,000 ounces. Production returned to more normal levels in the third quarter as ground condition challenges that affected Q2's production are being addressed with notable improvements.

During the third quarter of 2010, approximately 682,000 ounces of attributable silver was produced relating to Silver Wheaton's interest in the Barrick mines, with silver sales amounting to 533,000 ounces, with the difference between production and sales relating to the timing of Doray shipments. The Barrick-owned Pascua-Lama project, from which Silver Wheaton is entitled to 25% of the related silver production, remains on track to enter production in the first quarter of 2013 with detailed engineering and procurement nearing completion and risk works underway.

Attributable silver production from other mines amounted to 1 million ounces in the third quarter of 2010, representing a 31% increase from the prior year, attributable to increased production relating to most of the underlying mining operations. Silver sales relating to other mines amounted to 710,000 ounces in the third quarter, representing a 9% decrease from Q3 of 2009. The difference between silver ounces produced and delivered is attributable, primarily, to the timing of concentrate shipments relating to Campo Morado and represents ounces that will be delivered in future periods pursuant to contract terms. During the third quarter of 2010, $6.7 million of interest was capitalized with the cost of the Barrick and the Keno Hill silver interests. Of this amount, $6.4 million relates to interest accreting on the discounted future payments due to Barrick, with the remainder being attributable to bank debt, which for an average interest rate of just over 1% in the quarter. 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 generated $7 million from financing activities during the third quarter with $14 million of proceeds being received from the exercise of stock options and warrants, and $7 million of outstanding debt under its term debt facility being repaid, leaving a principal balance outstanding of $114 million as of September 30, 2010. During the third quarter of 2010, $145 million of cash was dispersed relative to investing activities, primarily composed of the scheduled annual installment of $137.5 million being paid in respect to the Barrick silver interest and $6 million being paid in respect to the Keno Hill silver interest. As of September 30, 2010, $275 million in payments remain to be made pursuant to the Barrick silver purchase agreement and $17 million remains to be paid in relation to Keno Hill. Overall, the Company's cash balance has decreased by $68 million in the third quarter of 2010, resulting in cash on hand as of September 30 of $255 million. 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 it's growth strategy. That concludes the financial summary, and with that I turn to call back over to Peter.

Thanks, Gary. I will now open it up for questions, Operator.

Thank you. Ladies and gentlemen, we will now conduct the question and answer session. (Operator Instructions) There will be a brief pause while we compile the Q&A roster. Your first question comes from the line of David Haughton from BMO Capital Markets. Please go ahead.

Yes. Good morning, Peter and Randy. I got a question for you with regard to the 2.2 million ounces of inventory build up. How much of that we do expect to be deliverable in the fourth quarter?

David, that is hard to say. Obviously, Penasquito is continuing to ramp up and will always be delays if that happens. Then, of course, there will always be steady state inventory when it is in constant production. Certainly, we didn't really get anything from the Yauliyacu in the third-quarter. They are expecting to ship two loads in the fourth quarter. If nothing else changes, we're, hopefully, a million ounces higher in sales than we were in Q3. Campo Morado, we got a shipment in the first week of this quarter. It is hard to predict sales, which is why we went to forecasting production. Once it has been produced, it is going to be sold and it normally happens the following quarter. I do not get too hung up on it, to be honest with you.

Right. So, I guess doing some of that math there, then Yauliyacu could be more than 1.2 million ounces in the fourth quarter, which would be a pretty strong result for it?

Right.

The other question I have relates to Primero. The agreement you have with them has a start date of around about the sixth of August, there about. Have you thought about changing that to match a quarter or year end instead of that funny kind of commencement date and balance date?

We have not, but now I know what is top of my list of things what to do.

I am sure there are other things, but it ends up with a very peculiar lumpy kind of profile because in the case of Primero, they get the fourth quarter as they balance up really.

We will probably -- joking a part, we will talk to them at some stage about it and see if it makes sense to change. It does not really matter from our point of view, but we will probably talk to them at some stage about it.

Right. Briefly, very strong silver price-performance, particularly with it's [met about] performance of gold of late. How is the new business side of things unfolding? Is it any easier or tougher to find new projects in this current environment?

Dave, it's Randy here. The way to describe that is there is still lots of interest in our side in terms of our financing options. I am as busy as I have ever been in terms of new opportunities. Expectations are, of course, high and getting higher as silver keeps moving forward. It still works in our case, most of our business comes from the base metal side. From gold miners and base metal miners and we still have value to add to these equations. There are still lots of opportunities on our plate going forward.

Okay. So, should we expect to see some additional improvements on your 40 million-ounce forecast by 2013?

I personally -- there's assets within our current portfolio that may provide some of that benefit going forward with some permitting success. Yes, I would have a hard time believing that we would still be at 40 million-ounces by 2013.

All right. Thank you, very much.

Thank you.

Your next question comes from the line of Steven Butler from Canaccord Genuity. Please go ahead.

Randy, I guess you thought I was in in the queue. Anyway, you probably answered it, Peter, vis-a-vis production guidance versus sales guidance. That is probably the point, on a production basis looks like 23.5 million ounces is doable. On a sales guidance perhaps, or a sales number, perhaps, it might be a bit of wishful thinking. You might not make any comments there, but are there any comments?

No. Remember that production does not equal sales. Typically, you would expect if things were working perfectly, about 90% of production would turn into sales because there is always some slippage through the processes and payable factors and so forth. I don't know. It really depends. The good thing about Q4 is I would think most of our partners are going to try to push as much through as possible as well, because it is their year end as it is ours. Maybe at quarter end people don't focus so much on getting the shipments out, I would think at year end they probably do. I think that works in our favor.

Again, I don't lose any sleep over the lack between production and sales. As I mentioned before, it is actually working in our favor here and we will probably get $8 an ounce or more extra margin for our shareholders, having had that lead from Q3 to Q4. That is pretty good value creation.

Right. Randy, any comments you would make positive, negative, or surprised, or not on some of the other categories when you lump in Filos, San Martin, La Negra, Mineral Park, et cetera, et cetera, any sort of pleasant surprises you are seeing in the operating performance of those smaller assets?

Adjusting the Los Filos agreement to include [Bermahal] and sort of having San Martin drop-off, Bermahal has actually performed quite well. We are pretty impressed with how that is working. It is small-scale on the overall basis, but it sure simplifies things from our -- both the Los Filos and the Bermahal, or it gets stacked on the same [HB] patterns. So, it has always been a bit of an accounting challenge in terms of tracking that and having that all combined together to benefit -- Bermahal has actually outperformed our expectations and I know it's doing well for Goldcorp on the gold site, too.

Campo Morado has had a great track record that has some great exploration success down there. The other one that is coming up is [Deltino] with Calexico up in Yukon, which is just in the commissioning phase. Not so much in terms of Q3 results, but things look very promising up there. I am quite excited about that one coming into place. It is a very high-grade operation and they have had great success in the exploration side too.

Okay. Thanks. Lastly, on the corporate development side, to follow-up to Dave's questions, can you still do deals with $4 strike price or $4 purchase price plus inflation and/or do you stress higher the upfront payments in the context of sort of where spot silver prices are?

The reason people want to do these deals is not for the $4 an ounce, it's for the upfront payment.

Right.

We are not going to be paying spot silver price, because not many people expect that to go for the next 30, 40, 50 years. I think there are still deals to do that work for both sides. Clearly, we are in a beautiful position. We have one of the best growth profiles out in the space. We don't need to do deals, but we are also in a great position to do them if they make sense. We will only do deals if they make sense for us and, of course, for the other party. I think there is still a lot of opportunity to grow our business doing that.

Steven, I would add one thing. Most of our silver, not all of our silver comes as a byproduct from other metals. The real cost of producing it in a copper mine or in a lead/zinc mine, should be pretty easily handled in a $4 operating cost. So, it's not a lost position for the operators because the silver rides along with the lead in a lead/zinc mine, it rides along with the gold in a gold mine, it rides along with the copper in a copper mine. So --

Okay. Thank you, very much. That is it.

Your next question comes from the line of [David Meeker] who is a private investor. Your line is now open.

Thank you. Do you have any policy on dividends or any thought of when or if you might have some dividends?

I thought this would be the first question we got today, but is only the third. Yes, listen, we do not have a policy on dividends, but here is my thoughts. I think that there's two things that are important to investors nowadays. One is dividends and one is growth. Clearly, over the last six years we have gone from zero to 12 billion market cap and our share price has done very well. We have been very successful and that has been driven by growth. We still have a lot of growth in our portfolio.

I think a lot of growth companies do not pay dividends because obviously they are reinvesting their cash flows in their growth. A lot of dividend-paying companies do not have a lot of growth. I think Silver Wheaton is first getting to the stage where we can actually do both, keep the growth going and start paying, maybe, a small dividend and increase it over time. The reason I think that is because we are getting to a pretty critical mass now and are well on our way to 40 million ounces of production every year. Our cash flow is getting to be pretty significant, especially at the strong silver prices. I think we can actually do both, which very few companies do. I think we will probably be looking at that early next year.

Thank you.

Your next question comes from the line of [David Madelow]. Your line is now open.

My question was just answered. Thank you.

All right. Listen, ladies and gentlemen, thank you for calling in. Thank you, Operator, and we look forward to speaking to you at year end.

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