Wheaton Precious Metals Corp (WPM) 2011 Q4 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2011 year-end results conference call. (Operator Instructions). I would like to remind everyone that this conference call is being recorded on Friday, March 23, at 11 AM Eastern time.

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

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 (technical difficulty) Gary Brown (technical difficulty) Chief Financial Officer.

I'd 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 titled 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 U.S. 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.

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

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

Thank you, Brad, and good morning, ladies and gentlemen. Thanks for dialing in to our year-end 2011 conference call.

Here in the early part of 2012, Silver Wheaton is stronger than it's ever been. We have one of the strongest organic growth profiles in the precious metals space with fixed capital commitment taking us to 43 million silver equivalent ounces of production by 2015.

We have a unique dividend policy that gives our shareholders direct linked to the price of silver. We have a strong balance sheet which opens many other opportunities for us to add to that growth profile through new, high-quality silver streams, and we have a very motivated management team, recently strengthened with the addition of Haytham Hodaly as the Senior Vice President of Corporate Development. I am very excited about 2012 and the future of our Company going forward.

First, I'm proud to announce that we finished 2011 with our strongest-ever quarter of silver equivalent production and sales. In the fourth quarter, production and sales reached all-time high 6.9 million and 5.9 million silver equivalent ounces, respectively.

We experienced new record revenues with operating cash flows increasing 30% compared to a year earlier. This strong fourth-quarter production resulted in Silver Wheaton achieving record annual production of 25.4 million silver equivalent ounces and led to record financial results in 2011, including a near doubling of revenues, earnings, and operating cash flows. Gary Brown, our Chief Financial Officer, will provide a bit more detail shortly.

2011 was also the year that Silver Wheaton started paying a dividend to our shareholders. We started with a $0.03 per share dividend in the first quarter of 2011, but in the fourth quarter Silver Wheaton announced a unique and more importantly a very sustainable dividend policy, where 20% of the previous quarter's operating cash flows are now distributed to our shareholders in the form of a quarterly dividend. This new policy results in a tripling of our dividend in the fourth quarter to $0.09 per share and better alliance our dividend yield to that of our peers.

Having the dividend linked directly to operating cash flows also gives our shareholders a direct link to the price of silver. And this of course leaves 80% of our operating cash flow (technical difficulty) for current commitments and new streaming opportunities.

With respect to 2012, Silver Wheaton anticipates another year production growth climbing to approximately 27 million silver equivalent ounces. Most of this growth will come from Goldcorp's Penasquito mine reaching its design production capacity, expected by the end of this first quarter of 2012. We expect seven million ounces of silver production from Penasquito this year and are very excited about the ongoing potential of this world-class asset.

We are also giving our five-year-out 2016 production target guidance of 43 million silver equivalent ounces, a 65% increase in production over the next five years. The bulk of this growth of course comes from Barrick's flagship Pascua-Lama mine, which is well on its way to beginning production by mid-2013. Pascua-Lama will deliver about 9 million ounces of silver per year to our credit once it begins operations.

I want to highlight that this growth is organic and does not account for any additional acquisitions of silver streams. Assuming current silver and gold prices, Silver Wheaton will generate approximately $700 million of operating cash flow over the course of 2012. When you combine this with our cash on hand of $840 million and a fully undrawn $400 million revolving credit facility, we are ready and able to act quickly to make strategic acquisitions to our portfolio of partnerships.

Through 2011 and the early part of 2012, we have seen an increasing number of silver stream opportunities. We are now in an environment of slightly lower and more stable silver prices compared to 2011. In addition, most mining companies are facing tighter debt and equity markets, depressed equity valuations, and increasing capital cost pressures.

All of these factors increase our acquisition growth opportunities as silver streaming is a very compelling form of project funding. And with the strongest balance sheet in our Company's history and continued robust growing operating cash flows, we are very favorably positioned to support mining companies who require financing to fund their growth.

So, in summary, Silver Wheaton has one of the strongest organic growth production profiles in the precious metals industry, with over 65% growth anticipated over the next four years. Our silver equivalent production guidance for 2012 is 27 million ounces and our five-year-out 2016 guidance is 43 million ounces of silver production -- silver equivalent production.

Our cornerstone assets continue to advance as anticipated, with Penasquito forecast to reach full production capacity by the end of this quarter and with Pascua-Lama on track for a mid-2013 start.

Our first priority remains growth, and in 2012 we will vigorously pursue our goal of further expanding our portfolio of high-quality income-generating assets. With one of the strongest balance sheets and highest market capitalizations in the industry, more silver reserves than any other silver company in the world, and a strong and motivated management team focused on continued growth, we believe we continue to offer the premier investment vehicle for silver, if not precious metals, investors worldwide.

With that, I would like to turn the call over to Gary Brown, our Senior Vice President and Chief Financial Officer, to provide a bit more detail. Gary?

Thank you, Randy, and good morning, ladies and gentlemen. Prior to reviewing Silver Wheaton's audited financial results for the three and 12 months ended December 31, 2011, I would like to remind everyone that all monetary figures discussed are denominated in U.S. 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 Reporting standards, some of the comparative figures have changed from what had previously been disclosed under Canadian GAAP.

As mentioned by Randy, Silver Wheaton ended 2011 with another strong quarter, marked by record silver production and sales volumes. The Company's precious metal interests generated over 6.9 million silver equivalent ounces of attributable production in the fourth quarter of 2011, with payable silver equivalent ounces produced but not yet delivered by our partners increasing by about 300,000 ounces in the fourth quarter, resulting in a total of approximately 4.1 million ounces at December 31, 2011.

This strong fourth-quarter production profile translated into record sales volumes of 6 million silver equivalent ounces, generating $192 million of revenue, 28% higher than the prior year.

Earnings from operations amounted to $150 million, compared with $111 million in 2010, with the operating margins increasing by 4%. Cash G&A expenses were $4.6 million in the fourth quarter of 2011, representing a slight decrease from the comparable period in prior year, primarily attributable to lower performance bonus in 2011.

Under IFRS, the Company's warrants issued with a 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 $57 million loss for the fourth quarter of the prior year and a cumulative loss of $133 million for the entire 2010 fiscal 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, and for purposes of comparison we included reference to adjusted earnings for the prior year, which simply neutralizes the impact of this adjustment on net earnings.

Net earnings in fourth quarter of 2011 increased by 20% to $145 million, compared to the adjusted net earnings for the comparable period of the prior year. Similarly, operating cash flow increased by 31% to $164 million in Q4 2011, relative to the comparable period of the prior year.

In accordance with our new dividend policy, this operating cash flow translated into a dividend of $0.09 per share relative to the fourth quarter of 2011. Basic earnings per share increased by 17% to $0.41 relative to adjusted earnings per share of $0.35 from the prior year. Operating cash flow per share amounted to $0.46 for the fourth quarter of 2011, an increase of 28% relative to the comparable period of the prior year.

During the fourth quarter of 2011, the value of the Company's long-term investment portfolio of shares and other publicly-listed mining and mineral exploration companies increased by $11 million. Accordingly, a $2 million deferred tax expenses was recorded in connection with this unrealized gain, and it's important to note that both the unrealized gain and the deferred tax expense are reflected in the statement of other comprehensive income.

The strong fourth quarter completed a record-setting year with the Company achieving new records across virtually every measurable financial metric. Attributable silver equivalent production rose to record 25.4 million ounces, consistent with the Company's most recent guidance and representing a 7% increase relative to 2010.

This contributed to record sales of 21.1 million silver equivalent ounces, representing a 3% increase relative to the prior year, with silver ounces produced by our partners, but not yet delivered to Silver Wheaton, growing by 1.9 million ounces, primarily due to the build-up of silver-bearing concentrate at Penasquito and Yauliyacu.

Revenue was a record-setting $730 million, compared with $423 million in 2010, with the 73% increase being attributable to the combination of a 3% increase in silver equivalent sales volumes and a 68% increase in the average realized selling price of silver.

Earnings from operations more than doubled to $586 million from $283 million in 2010, representing yet another record for the Company, with margins rising to 80% of revenue in 2011 from 67% in 2010.

Cash flow from operations almost doubled to $626 million, compared to $320 million in 2010, again representing a record for the Company. This translated into operating cash flow per share of $1.77, compared to $0.93 in 2010.

Cash G&A expenses totaled $19 million, coming in below Company guidance, compared with $17 million in 2010, with the majority of the increase relating to personnel costs.

Net earnings were a record-setting $550 million in 2011, representing a 92% increase compared to the adjusted net earnings of $287 million generated in the prior year, with basic earnings per share amounting to $1.56 in 2011, compared to adjusted basic earnings per share of $0.83 in 2010.

For 2012, the Company estimates general and administrative expenses, excluding stock-based compensation, to be in the range of $23 million to $25 million, with the increase from 2011 being largely attributable to the Company's heightened commitment to corporate social responsibility initiatives and giving back to the communities in which it or its partners are involved.

The operational highlights for the fourth quarter of 2011 included the following. Yauliyacu generated 655,000 ounces of silver sales, compared to 470,000 ounces in Q4 2010, with approximately two-thirds of the bulk concentrate inventory produced in prior quarters having been shipped in Q4 2011. As at December 31, 2011, approximately 1.7 million ounces of payable silver has been produced at Yauliyacu, but not yet delivered to the Company. Comprised of about 300,000 ounces contained in bulk concentrate and 1.4 million ounces contained within the new copper and lead concentrates.

Discussions between Glencore and prospective offtakers for the new lead concentrates are ongoing, and until such offtake agreements are established, sales of lead concentrates will continue to have an inconsistent delivery schedule.

Attributable silver production relating to Penasquito was 1.6 million ounces for the fourth quarter of 2011 representing a 30% increase relative to the fourth quarter of 2010, primarily attributable to the continued ramping up of the sulfide mill.

Silver sales in the fourth quarter of 2011 relating to Penasquito amounted to 851,000 ounces, compared with 1.2 million ounces in the fourth quarter of the prior year, with the difference between ounces produced and ounces sold being attributable to the buildup of concentrates inventories with approximately 1.2 million ounces of payable silver having been produced at Penasquito but not yet delivered to Silver Wheaton as at December 31, 2011.

The Cozamin mine produced 433,000 ounces of silver in the fourth quarter of 2011, representing a 29% increase relative to the comparative period of the prior year, with record throughput levels of over 3,300 tons per day being achieved.

During the fourth quarter of 2011, silver production and sales relating to Silver Wheaton's interests in the Barrick mines increased by over 56% to 723,000 ounces and 755,000 ounces, respectively. This increase is primarily attributable to increased production from both Veladero and Lagunas Norte.

Attributable silver production from other mines amounted to 1.4 million ounces in the fourth quarter of 2011, representing a 12% increase from the prior year, primarily attributable to the ramping up of Keno Hill and the increased throughput for Mineral Park. With the fourth quarter of 2011 representing the first full quarter of production since the completion of the phase II (technical difficulty) expansion to 50,000 tons per day.

During the fourth quarter of 2011, $2.4 million of interest was capitalized to the cost of the Barrick silver interest. Of this amount, $2.2 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 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.

Overall, the Company's cash balances increased by $125 million in the fourth quarter of 2011, comprised of $164 million of cash generated from operations, offset by $39 million of cash used in financing activities, comprised of $7 million of debt repayments and $32 million of dividend payments.

As at December 31, 2011, the Company had $840 million of cash and cash equivalent on hand and $79 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 and the anticipation of strong future cash flows, positions the Company well to both sustain its dividend policy, while at the same time executing on its growth strategy.

That concludes the financial summary. And with that, I turn the call back over to Randy.

Thank you, Gary. Operator, we'd like to open up this conference call for questions, please.

(Operator Instructions). John Bridges, JPMorgan.

Good morning, everybody. Congratulations on the dividend. I was very pleased to see that. I just wondered if I could dig a little bit deeper into the thought process that came up with the 20% number. Obviously, you're enthused by the opportunities out there, but 20% is still quite low. Any thoughts of moving that, changing that over time?

John, I think it's probably a reflection of the number of opportunities that we see in terms of continuing to grow our Company, and so wanting to still keep our primary focus on being well positioned to add accretive silver streams.

What I do see as this Company matures, that 20% will obviously climb, and we've got plenty of capacity. By my calculations, just sort of loose calculations, we need about 15% of our operating cash flow to just replace what we mine every year. So as you can see, the math sort of lays out that we still have opportunity to grow, but we thought 20%, it puts us in with our peers. We still are focused on growth, so we thought it was the best balance.

Okay, okay. And then, maybe, if I could just ask if you have any sense as to when things are going to stabilize with the silver coming out of Yauliyacu. I know they are in negotiations, but any sense from them as to when there might be some stability?

Their official guidance to us is that they're going to continue to negotiate throughout the course of this year, but do spot sales as the opportunities arise on the lead side.

Of course, they do have the copper concentrate. They've got offtake agreements in place for that. The lead concentrate market has been sort of going through a bit of upheaval over the last four to six months in terms of some of the TCRCs that are being charged. I think that's what they're trying to work their way through.

So we're pretty confident that through the course of the year, but we cannot assure in terms of which quarter it will happen, but through the course of the year they'll get to that point.

The TCRCs have been coming down, haven't they?

Yes. It has to do with some of the other charges assigned to it that we've seen. There is some extra charges. I think it has to do with the discrepancy about treatments within China versus outside of China, and the overall industry finding a balance with those discrepancies.

Okay. Many thanks for the color. Congratulations on the results.

David West, Salman Partners.

Good morning, guys. Randy, you mentioned the increasing capital cost pressures across the industry, and obviously there has been a significant amount of upward pressure in the operating costs for producers as well pretty much across the board. How much pressure is there for you to maybe increase the cash costs per ounce for feature deals above that $4 mark and is that something that you're open to at this point?

Yes, I mean, we're open to it. Obviously, the more we pay downstream, the less we can pay up front. There is only so much value in an ounce of silver, and so it's always a negotiable item.

We do see those pressures. I do point out that most of our silver comes from true byproduct situations where there is not a lot of costs associated, direct costs associated to the silver (technical difficulty) wind up with a -- I mean, in a copper mine there is nothing that they do to produce that silver. It truly comes along for the ride.

So without any real costs associated with that, I'm still comfortable with the $3.90 as covering the hard real costs of producing silver from copper and lead zinc operations.

Great, thank you.

Steven Butler, Canaccord.

Just on the M&A front, obviously you guys claim that you're still -- and I'm assuming, obviously, you are still quite busy searching for the next right one, and it's been a while since you done last big one, and silver prices always will be volatile, and it's rocketed up through $48 and now we're at $32, but is the bid-ask coming more in line between you and your other counterparties? And are you also thinking about what kind of deal size are you -- would you like to do to consider the impact on moving the Dow on the share price on the market cap of the Company?

The expectations have definitely come down, but it's still quite a volatile market. We've seen that in the last three weeks in terms of silver climbing up over $35 an ounce and then working its way back down. It's up again today. So there's still quite a bit of volatility in it.

Usually it's the sentiment of the day that -- the expectations of the day that's [re] dictate in terms of how successful we are, but there is no doubt that we've had a little bit of a decrease in expectations in terms of long-term value. And at the same time, we're prepared to step up a little bit more than we have in times past.

The size of the deal I can say that the next deal we do will be the most expensive silver we buy just because the silver market has climbed that much over this time. But we are still looking at good-sized acquisitions. It could be upwards of $1 billion. We've got plenty of capacity. There's all sorts of streams out there.

I mean, the unique thing about silver streaming is that it doesn't have to be big. Once these contracts are in place, they're very easy and very cost efficient to manage. And so, we don't have to go big. We can stay at the 1 million ounce a year production profile. We can go for the 5 million or 6 million or 9 million ounce a year production profile.

So, we're open to the full range. We're looking at stuff all through that range.

Right, and I guess, are -- any of the reserve updates we're waiting for? Obviously, clearly, the obvious one is Primero next week. Any other updates that would affect your reserve base, apart from San Dimas?

We haven't seen Capstone's reserves -- reserve and resource update yet, and so I believe that is expected by the end of this month.

I don't know if there's going to be -- I know they've had great success down at the Cozamin mine and, of course, ongoing success up at Minto. So I don't know. It's tough to predict what the impact is going to be in terms of growth or in terms of how the reserves and resources change year over year, but basically the two outstanding ones for the year-end is, of course, San Dimas and Capstone with Minto and Cozamin.

Yes. Randy, on Penasquito, we saw, of course, Goldcorp reduce reserves modestly -- slightly more material than modest. And that was obviously costs were the reason for that, wrote off out of reserves anyway, reclassified some ounces.

What about any discussions with Goldcorp? I know we haven't had a lot of dialogue with Goldcorp on their conference calls vis-a-vis the depth potential and underground potential, but obviously maybe it's still too far off to be thinking about it, the depth potential, underground potential at Penasquito, or are you have any discussions with them on that?

They are working, moving that whole concept forward. They have done some additional drilling work over the course of 2011 and some additional modeling and such.

So it's definitely -- when you sit and look at it, the grades and the thicknesses of everything that we've seen down there definitely looks very promising in terms of being a high-grade supplement to the Penasquito operations.

In terms of the timing, I think most of the focus at Penasquito has been just getting it up to that design and production rate right now, which they're very close to. Once that's -- you know how these things are. You get it up and running, and then you sort of catch a breath, and then you tackle the next one. I think the next one will probably be trying to look at different ways to improve that, and one of the options they've got is that underground high-grade.

Thanks very much.

[Andy Shopick], private investor.

I'm wondering, Randy, whether you have any observations or comments you wish to share concerning the general political environment in South America relating to taxation and issues of government, changes in government, whether there are any particular concerns that you may have in any of these geographies.

There are definitely places that we don't invest in South America, but they're getting fewer, in my eyes.

I think one of the ones that has been in discussion over the last year is Peru, and what we've seen is actually quite a dramatic improvement in terms of that structure. Of course, our silver streams are secure from that, to a certain extent, in the sense that taxes are the responsibility of our operating partners in these jurisdictions, and so -- and we don't invest into assets unless they're robust enough to handle these kind of pressures. So we have secured it from that perspective.

But when I look at (technical difficulty) has done in Peru over the last (technical difficulty), this is one where I think there's been dramatic improvement.

Argentina, of course, is going through some pretty dramatic inflation internal inflation issues in terms of labor costs, specifically. And this is something that we've seen a lot. We like Argentina. We think it's got fantastic potential in terms of going forward, and so we're quite excited about the way both Pascua-Lama and we think Navidad has got a great opportunity here, a great chance of getting its permits moving forward, too.

So outside of that, one of the things that we always do, it's one of the factors that we always do in our due diligence when we're investing into places, is the political risk side. So I can tell you that there are places in South America we don't invest, but there's also some places down there that we're very comfortable with investing, including those that we have invested in, both Peru, Chile, and Argentina.

How about Mexico, where the environment clearly is more friendly and where there seems to be quite a silver boom? Is that a country in which you are more actively focused on looking for new silver streams?

Oh, definitely I mean Between Mexico and Peru, you've got a substantive portion of worldwide silver production, so obviously it's an area that has got great interest to us. We have numerous operations in Mexico. We -- Mexico has always been very, very rich in terms of mineral potential, and so we're definitely still excited about opportunities within Mexico.

Thank you.

Thank you very much, operator, and thanks for dialing in everyone. Until we next talk, goodbye. Thank you.

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