Wheaton Precious Metals Corp (WPM) 2011 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2011 second-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 Monday, August 8, at 11 a.m. Eastern Time.

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

Great. Thanks, Melissa, and good morning, ladies and gentlemen, and thank you for participating in today's call.

I am joined today by Randy Smallwood, Silver Wheaton's President and Chief Executive Officer; Gary Brown, Senior Vice President and Chief Financial Officer; and Frazer Bourchier, Vice President Business Development and Technical Services.

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. Lastly, it should be noted that all figures referred to on today's call are in US dollars unless otherwise noted.

Now I would like to turn the call over to Randy Smallwood, our President and Chief Executive Officer.

Thank you, Brad, and thank you, ladies and gentlemen for dialing into our conference call, our Q2 of 2011 conference call. We are pleased to report that Silver Wheaton has delivered another quarter of record financial results and our fifth consecutive quarter of increasing operating cash flows.

Silver Wheaton's average realized silver equivalent selling price in the quarter was at an all-time high of $38.35 per ounce, with the silver price being supported by, as we see even today, continued global economic and political uncertainties. This resulted in another quarter of exceptionally strong operating cash flows for our Company.

Operating cash flows increased 151% compared to the second quarter of 2010 to a record $168.3 million. At quarter-end cash on hand exceeded over $700 million; and when combined with our $400 million undrawn revolving debt facility of robust future operating cash flows, Silver Wheaton remains very well positioned to execute on its growth strategy of acquiring additional accretive silver stream interests.

Gary Brown, our Senior Vice President and Chief Financial Officer, will provide a much more detailed financial overview just shortly. But suffice it to say we have had record revenues, net earnings, and cash operating margins in the second quarter of 2011.

These record results were achieved despite silver sales continuing to lag our quarterly production. Unfortunately, we experienced yet another quarter of increased payable silver equivalent ounces produced but not yet delivered by our partners. This silver inventory increased by over 500,000 ounces in the second quarter, resulting in a total of approximately 3.5 million payable ounces in inventory at the June 30, 2011, date.

This was primarily due to a continued build-up in concentrate inventories at the Penasquito mine, as it continues to advance towards filling its concentrate shipping circuits, as well as at the Yauliyacu mine, which continues to experience an irregular concentrate shipping schedule.

As many of you are aware, since mid-2009 concentrate shipments from the Yauliyacu mine have been affected by the shutdown of the Doe Run Peru smelter, which was historically the largest buyer of the bulk concentrates produced at the mine that contained all our silver. Since that time, Glencore has had to make alternate smelting arrangements for its stock-piled bulk concentrates at Yauliyacu. This has led to an inconsistent delivery schedule and for the last several quarters has resulted in Silver Wheaton reporting fewer sales than anticipated.

I am happy to report that during the second quarter in 2011 Glencore began producing separate and much more marketable copper and lead concentrates, which replace the original bulk concentrate. The consistency and quantity of these new concentrates are expected to increase in future quarters, and we anticipate more consistent silver deliveries to Silver Wheaton as these concentrates fill their respective shipping pipelines.

As at June 30, 2011, the silver inventory at Yauliyacu stood at approximately 1.3 million ounces in inventory. Approximately 900,000 of these ounces are attributable to the bulk concentrate, while 400,000 are tied up in the new copper and lead concentrates that were produced during the second quarter but not yet shipped.

Roughly half of the remaining bulk concentrate -- of the 900,000 ounces contained in the remaining bulk concentrate is expected to be sold in the fourth quarter of this year. And Glencore has given us guidance the remainder will be sold in 2012, so we should clear that bulk concentrate inventory out within 2012.

Glencore has stated that testing and discussions with potential offtakers regarding the new copper and lead concentrates are ongoing, and they expect to secure new offtake agreements and to commence sales in the latter part of 2011. So we definitely see some improvements out of the Yauliyacu, on that side.

On the production side, production this quarter increased 5% to the second quarter of 2010 to 6.2 million silver equivalent ounces. Second-quarter production was impacted by operational challenges at some of our partners' mines.

This included lower than anticipated quarterly throughput at the Penasquito mine in Mexico, which continues to ramp up production levels, and additionally impacted by a now-resolved one-month-long mill workers' strike at the San Dimas mine in Mexico.

As reported on July 28 Silver Wheaton's 2011 attributable silver equivalent production guidance has been reduced, primarily due to the just-noted slower than anticipated production ramp-up at Penasquito which is now forecasted to reach full production in early 2012. In spite of these unexpected events, which led to a slight lowering of short-term production, Silver Wheaton's long-term 2015 attributable production guidance remains unchanged at approximately 43 million silver equivalent ounces, including 35,000 ounces of gold. Our production growth profile remains one of the strongest in the entire precious metals industry and maintains our position as an industry leader.

Let me give a bit of an update on Pascua-Lama, the cornerstone development asset in our streaming portfolio right now. Once in production, Pascua-Lama is forecast to be one of the largest and lowest cost gold mines in the world, with an expected mine life in access them 25 years. In its first full five years of operation Silver Wheaton's attributable silver production is expected to average 9 million ounces annually.

As recently reported by Barrick, capital costs for Pascua-Lama have been impacted by continued inflationary effects on costs for the key consumable input and labor. As mentioned, this is not unique to Pascua-Lama. Mining projects around the world are suffering through this right now. But -- something the entire metals and mining industry is facing.

Despite the increased capital costs, the economics of the projects have increased considerably given that gold and silver prices are substantially higher than what was originally forecast during the project studies. We remain very pleased with the development progress made to date by Barrick. Over 40% of the preproduction capital budget has been committed, with the engineering design approximately 90% complete.

In Chile, earthworks are more than 80% complete with significant infrastructure development in Argentina also advancing significantly. Preparations are underway to commence pre-strip mining in the fourth quarter of 2011.

It has to be noted that this 40% increase in capital costs that Barrick recently reported for Pascua-Lama -- of that 40%, 15% of that is increased expenditures so that Barrick can keep the targeted mid-2013 production startup. On our review, it looks -- we remain very confident that they are going to achieve this schedule. We look forward to this cornerstone asset arriving at full production in a couple years' time.

With one of the strongest cash operating margins in the sector, Silver Wheaton has the ability to offer its shareholders meaningful long-term growth both through capitalizing on the many silver streaming opportunities that lie ahead and a capacity for meaningful dividend growth. I will now take a moment to talk about the dividends.

We of course have just announced again our third quarterly dividend payment for 2011, again at $0.03 per common share. As we have previously stated, our goal is sustainable long-term dividend growth. With our robust operating margins, we not only have the capacity to fulfill this commitment, but also over time to offer a dividend yield in excess of what is typically received in the precious metals industry.

I am pleased to report that a new taxation agreement, or TA, was entered into force between Canada and the Cayman Islands. That came into force as of June 1, 2011. With this agreement Silver Wheaton is now able to repatriate tax-free any exempt surplus earned by our Cayman subsidiary as of January 1, 2011.

As a result, Silver Wheaton can now pay its dividends from the profits contained in our Cayman subsidiary. We will likely revisit our dividend payout towards the end of this year or early in 2012, the primary catalyst being the Penasquito mine approaching full production capacity.

On the corporate development front, our team is very active in pursuing and studying opportunities for additional accretive growth within Silver Wheaton. In these times, with the mining industry as a whole once again finding itself facing significant inflationary pressures on both capital and operating costs side, there are opportunities.

It is worth reminding everyone about the benefits of our fixed-cost business model where our $4.00 fixed operating cost gave us record operating margins of $34.21 per ounce and no exposure to capital cost increases. As the capital and operating requirements for mining companies continue to materially increase and funding via equity and debt becomes more and more challenging, Silver Wheaton is seeing more and more opportunities where it can offer a very attractive form of financing.

While the timing of completing new silver stream acquisitions can be very difficult to predict, I would like to stress that our corporate development team remains fully committed to seeking out accretive streaming opportunities and are very active in pursuing further strategic partnerships. I am confident these efforts will bear fruit.

To summarize, when combining one of the strongest growth profiles in the precious metals industry, protection from inflationary costs on the operating and capital side, and a dividend yield with the potential to grow, Silver Wheaton continues to be the premier investment vehicle for investors desiring exposure to silver. We remain confident in further developing Silver Wheaton's already dominant position in the metal streaming industry, and we very much look forward to your continued and expanded involvement as we move this Company forward.

Now I would like to pass the call over to Gary Brown, our Senior Vice President and Chief Financial Officer, to review our financial results in much more detail.

Thank you, Randy, and good morning, ladies and gentlemen. Prior to reviewing Silver Wheaton's unaudited financial results for the three months ended June 30, 2011, I would just like to remind everyone that all monetary figures discussed are denominated in US dollars unless otherwise noted.

In addition, as 2011 is the first year that the Company's results have been prepared in accordance with International Financial Reporting Standards, some of the comparative figures have changed from what had been previously disclosed under Canadian GAAP.

Silver Wheaton reported record levels of revenue, net earnings, and operating cash flow for the second quarter of 2011 driven by an increase in the price realized on the sale of silver. Silver Wheaton's precious metal interests generated 6.2 million silver equivalent ounces of attributable production in the second quarter of 2011, representing a 5% increase from the comparable period of the prior year.

For the second quarter of 2011, Silver Wheaton generated revenue of $195 million from the sale of 4.9 million ounces of silver and 5,700 ounces of gold, slightly lower than the silver equivalent sales reported for the comparable period of the prior year. Silver was sold at an average price of $38.38 per ounce, and gold was sold at an average price of $1,509 per ounce, representing increases of 108% and 24%, respectively, relative to Q2 2010.

Earnings from operations for the second quarter of 2011 amounted to $159 million, representing a margin of 82% of revenue compared with $59 million or 62% of revenue for the second quarter of 2010, with the increase in margin being consistent with the increased selling price.

Cash G&A expenses were $4.4 million in the second quarter of 2011, consistent with the $4.1 million for the comparable period of 2010. Excluding non-cash stock-based compensation, the Company expects G&A expenses to be in the range of $20 million to $21 million for 2011.

Under IFRS the Company's warrants issued with an exercise price denominated in Canadian dollars are treated as financial liabilities on the balance sheet and are remeasured at fair value on a quarterly basis, with all fair value changes being reflected in net earnings. This fair value adjustment resulted in a $37 million loss for the second quarter of the prior year.

As all warrants with a Canadian dollar exercise price were exercised or expired prior to December 31, 2010, there was no fair value adjustment affecting the 2011 results. This fair value adjustment has no impact on cash flow. For purposes of comparison, we have included reference to adjusted earnings for the prior year, which simply neutralizes the impact of this adjustment on net earnings.

Silver Wheaton generated net earnings in the second quarter of 2011 of $148 million, representing an increase of 181% compared to the adjusted net earnings of $52.7 million for the comparable period of the prior year.

Similarly, operating cash flow increased by approximately 151% to $168 million in Q2 2011 relative to comparable period of the prior year. Basic earnings per share for the second quarter of 2011 amounted to a record-setting $0.42 compared with adjusted earnings per share of $0.15 from the prior year. Operating cash flow per share amounted to $0.48 for the second quarter of 2011 compared to $0.20 for the comparable period of the prior year.

Breaking down the operating results further, during the second quarter of 2011, silver production sales relative to San Dimas totaled approximately 1.2 million ounces, consistent with the second quarter of 2010 but about 30% lower than the first quarter of 2011. The decrease relative to the previous quarter was due primarily to the mill workers' strike that hampered production during the second quarter and, to a lesser extent, the fact that Primero had exceeded the 3.5 million ounce annual threshold above which Silver Wheaton receives only 50% of the payable silver produced. It is important to note that this threshold resets on August 6.

Zinkgruvan produced approximately 410,000 ounces of silver during the second quarter of 2011, representing a 14% decrease from the comparable period of the prior year. Production during the second quarter of 2011 was lower as a result of processing less lead zinc ore, combined with the removal of waste from the underground to provide additional in-mine flexibility for mining and ore handling activities going forward.

Silver sales for the second quarter of 2011 relating to Zinkgruvan totaled 401,000 ounces, compared to 313,000 ounces in the second quarter of 2010 with the differences between ounces produced and ounces delivered relating to the timing of concentrate shipments.

Yauliyacu produced 674,000 ounces of silver in the second quarter of 2011 and delivered 471,000 ounces to Silver Wheaton during the quarter. The difference between silver produced and sold is due to the inconsistent concentrate shipments schedule previously discussed by Randy.

Attributable silver production at Penasquito rose by 48% to 1.3 million ounces in the second quarter of 2011 relative to the second quarter of 2010, reflecting the commissioning of line number two as well as better grades and recoveries. Silver sales in the second quarter of 2011 relating to Penasquito amounted to 960,000 ounces compared with 656,000 ounces in the second quarter of the prior year, with cumulative payable silver produced at Penasquito but not yet delivered to Silver Wheaton amounting to approximately 900,000 ounces as at June 30, 2011.

The Cozamin mine produced 414,000 ounces of silver in the second quarter of 2011, an increase of 45% relative to the second quarter of the prior year, with the higher production being primarily due to the resumption of mining activities in the Avoca regions of the underground mine. Silver sales during the second quarter of 2011 relating to Cozamin amounted to 281,000 ounces, with the difference between ounces produced and sold being primarily attributable to the timing of concentrate shipments.

During the second quarter of 2011, silver production and sales relating to Silver Wheaton's interest in the Barrick mines amounted to 741,000 ounces, which was slightly higher than the comparable period of the prior year, with silver sales of 726,000 ounces in the most recently completed quarter being consistent with the prior year.

The Minto mine produced 6,512 ounces of gold during the second quarter of 2011 compared with 7,975 ounces in the comparable period of the prior year, due to the mining of lower grade material from the latter stages of the main pit. Gold sales for Q2 2011 amounted to 5,674 ounces compared to 7,584 ounces in Q2 2010.

Attributable silver production from Other mines amounted to 1.2 million ounces in the second quarter of 2011, consistent with the prior year, with increased production at Mineral Park, Stratoni, and Keno Hill offsetting lower production at Campo Morado. Silver sales relating to Other mines amounted to 862,000 ounces in the second quarter of 2011, compared to 943,000 ounces in Q2 2010, with the difference between silver produced and sold in the most recent quarter due primarily to concentrate buildup at Stratoni.

During the first quarter of 2011 $4.6 million of interest was capitalized to the cost of the Barrick silver interest. Of this amount, $4.3 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 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 mina achieves commercial production.

Overall, the Company's cash balances increased by $137 million in the second quarter of 2011, comprised of $168 million of cash generated from operations, offset by $17 million of cash used in financing activities, and $14 million of cash outflows relating to investing activities. Financing activities were comprised of $7 million of debt repayment and $11 million of dividend payments, while the investing activities related to the Company's investment in shares of Wildcat Silver Corporation.

As at June 30, 2011, the Company had $701 million of cash and cash equivalents on hand and $93 million of debt outstanding under the term debt facility. 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'd turn the call back over to Randy.

Thank you very much, Gary. Operator, we will open up this conference call to questions please.

(Operator Instructions) Haytham Hodaly, RBC Capital Markets.

Good morning, everybody. How are you? Good, just a couple questions. First of all I appreciate the insight on the Glencore inventory sales; that does help going forward.

Can you give us some sort of similar outlook for Penasquito? What is the typical inventory level that you would expect to maintain at Penasquito?

Well, as they ramp their way up to the 130,000 tonnes per day, it should get to the point of being neutral at, I don't know, about 1 million ounces of silver plus or minus a couple hundred thousand depending on shipping schedules. Again, a lot of it comes down to shipping the lead concentrates, which aren't as rigidly scheduled as the zinc and such.

So you are going to get bumps up and down every quarter. I think I have said it in the past, Haytham, the fourth quarter will always probably see a depletion of inventories, and the first quarter will always see a climb of inventories. I think that is typical throughout the mining industry. But it should be about 1 million ounces.

How much is there right now from Penasquito of the overall 3.5 million ounces produced but not delivered?

We're about 900,000 ounces.

Okay.

A little bit over that, maybe.

Okay, fair enough. Then I guess with regards to San Dimas agreement, with Primero, I think they are forced to deliver the first 3.5 million ounces of silver that they produce. The San Dimas agreement I guess indicates that.

But only about 2.9 million has been delivered to date. I am just curious, Gary. You said that in the lesser part it was because of the 3.5 million ounce threshold being met.

You have to remember it is August 6 to August 6.

Oh, I'm sorry. Okay, that makes sense then. All right, perfect. Thanks. That's it, gentlemen. Thank you.

John Flanagan, Fundamental Equities.

Randy, could you remind me what the accounting treatment is for these inventories? In the sense -- are they priced always at the date of delivery? And do your costs take into account any carrying costs for these inventories?

I will let Gary take that one.

Sure, I am not sure -- if I don't answer your question just let me know, but we don't actually recognize the silver that is in concentrate that has not yet been delivered to us in any way, shape, or form in our financial statements.

They are not recorded as an asset. They have not yet been reflected in revenue in any manner. We just track what our partners have produced and are holding in their own concentrate inventory.

This basically makes up the difference between what we have in reserve and resource. This is material obviously produced, but we haven't seen the financial benefit of that yet, and that is why it is not tracked anywhere on that side.

Well, then why does the -- when is the price determined?

Determined under the partners' offtake agreements. And that varies by agreement, so usually those are determined based on a quotational period that usually runs two to three months after. It is based on the average price of silver during a two- to three-month period following delivery of that concentrate to the offtaker.

John, every contract -- every offtake agreement that the partners have is slightly different in terms of that schedule and so there is no consistent framework. Keep in mind that this is only related to concentrates. Dore is a much more efficient system where we actually get paid much, much more rapidly.

But there is always -- all the offtake agreements are slightly different in terms of how they go about setting the price. What I can assure you is that we have actually gained significantly with this inventory, because as this inventory has built up, so have the prices of silver, the commodity itself.

That was going to be my follow-up. Have you ever made an estimate? I mean in a rising market this is good for you, right? Have you ever made an estimate of how good?

Yes, we did it last quarter; and I hate to say it but we didn't update it this quarter in terms of how much we have gained on that. But I mean we are definitely ahead of the game.

Yes, thank you.

Great, John. Well, thank you very much everyone for calling in today and look forward to continued building forward in this silver market. Enjoy watching the markets over this summer and thanks again. Bye.

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