Wheaton Precious Metals Corp (WPM) 2013 Q1 法說會逐字稿

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2013 first-quarter results conference call.

All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be question-and-answer session. (Operator Instructions). I would like to remind everyone that this conference call is being recorded on Monday, May 13, at 11 a.m. Eastern Standard Time.

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

Good morning ladies and gentlemen, and thank you for participating in today's call. I'm joined today by Randy Smallwood, Silver Wheaton's President and Chief Executive Officer, and Gary Brown, Senior Vice President and Chief Financial Officer.

I'd like to bring to your attention some of the commentary in today's call may contain forward-looking statements. There can be no assurances 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 in Silver Wheaton's Form 40-F on file with the US Securities and Exchange Commission. Annual information form sets out the material risk factors that could cause actual results to differ, including the absence of control of our 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 would like to turn the call over to Randy Smallwood, our President and Chief Executive Officer.

Thank you Patrick. Good morning ladies and gentlemen. Thank you for dialing into our first-quarter 2013 conference call.

We are pleased to report that Silver Wheaton has had a good solid start to 2013. Strong performance from our portfolio mines puts us well on track to reaching this year's forecast production level of 33.5 million silver equivalent ounces.

The addition of the Sudbury and Salobo streams from Vale in the first quarter has added to what is already one of the strongest growth profiles in the sector. With relatively modest and, more importantly, fixed capital commitments, we are forecast to grow our production by over 80% to 53 million ounces per year in 2017.

We also announced that we have amended our dividend policy in order to reduce the volatility of our payout. We originally created this unique dividend policy at the end of 2011 in order to provide our shareholders with a meaningful and sustainable dividend but have not been pleased with the resulting volatility, largely a result of quarterly changes in the produced but not yet delivered volumes. This change in calculation methods should add stability to these benefits as well. As a result, we are pleased to announce that our second quarterly dividend of 2013 will be $0.12 per share.

With respect to the first quarter, we are proud to announce that we have started 2013 with substantial year-over-year gains in silver equivalent production and sales. In the first quarter, production was 8 million silver equivalent ounces, 20% higher than the first quarter of 2012. And silver equivalent sales were 13% higher than a year ago, coming in at 6.9 million ounces. As a result, revenues and cash flow in the quarter exceeded the same quarter of 2012 despite the average realized silver price being down almost 9%. Gary Brown, our Chief Financial Officer, will provide more detail on this shortly.

Turning to our dividend policy, in 2011, we introduced a dividend policy where 20% of the previous quarter's operating cash flow is distributed in the form of a quarterly dividend back to our shareholders. Having the dividend linked directly to operating cash flows gave our shareholders a direct connection to both the price of silver and to our industry-leading growth profile. However, as we've all seen, quarterly changes in our produced but not yet delivered volumes have also added to some undesirable volatility. So Silver Wheaton has amended this policy in order to decrease the volatility associated with our quarterly distributions. While we will still pay out a sustainable 20% of operating cash flow, we are now using the average of the trailing four quarters' operating cash flow.

It is important to note that our first reference quarter will be the fourth quarter of 2012, so for this payout it will be averaged over the last two quarters, the next quarter over three, and then four after that. We believe this measure should dampen the volatility of the distribution caused by timings of sales and extreme movements in commodity prices. As a result of this amended policy, our second quarterly dividend of 2013 will be $0.12 per share. Under the previous policy, the dividend would have been $0.09 per share.

On the corporate development front, we remain very focused and confident about the coming year. There continues to be a strong trend of expanding capital needs in the mining industry. However, funding options remain constrained for most mining companies with traditional forms of capital, such as debt and equity, either unavailable or highly dilutive at current prices. In this environment, our streaming model offers a very attractive funding solution and our corporate development team remains extremely busy pursuing value enhancing transactions and acquisitions.

As Gary will discuss shortly, we do have the capacity for additional deals given our current capital structure. However, we do want to stress that, given the volatility we've seen recently in the commodities in financial markets, we will proceed at a very measured and cautious pace when it comes to new acquisitions. We will not add financial risk to our business model.

Given current market conditions, we recognize the current volatility in the commodities market can prove frustrating as it relates to share price performance. We would like to reiterate the strength of our business model. It is to deliver precious metals with low predictable costs from high-quality, reliable mines. In the first quarter of 2013, our average cash cost for each Silver equivalent ounce was less than $4.40, easily among the lowest in all of the precious metals space. This means that even under current commodity prices, Silver Wheaton is able to generate significant earnings and cash flows.

So, in summary, Silver Wheaton has one of the strongest organic growth -- production growth profiles in the precious metals industry with over 80% growth anticipated in the next five years. Complementing this organic growth, we will be prudent and measured in our pursuit of additional accretive opportunities. We feel we are in an ideal market to further add to our portfolio of high-quality assets with strong operating partners. With our amended dividend policy, we provide investors with sustainable and now more stable dividends that are directly tied to both our organic growth and to commodity prices. And finally, given that we have more silver reserves than any other silver company in the world, an industry-leading organic growth profile, and a strong track record of accretive growth, we believe that we continue to offer the premier investment vehicle in the precious metals space.

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 unaudited financial results for the three months ended March 31, 2013, I would like to remind everyone that all monetary figures discussed are denominated in US dollars unless otherwise noted.

The Company's precious metal interest generated over 8 million silver equivalent ounces attributable production in the first quarter of 2013, 20% higher than production from the comparable period of the prior year, due primarily to the production generated from the recently acquired 777 Sudbury and Salobo gold interests with the contributions from these new sources of production being partially offset by lower production at Penasquito and other silver interests.

Payable silver equivalent ounces produced but not yet delivered by our partners amounted to 4.1 million ounces as of March 31, 2013, an increase of about 300,000 ounces over the quarter, with increases at Yauliyacu, 777, Sudbury and Salobo being largely offset by a reduction at Penasquito. Silver equivalent sales volumes amounted to 6.9 million ounces in Q1 2013 with 86% of this relating to silver and 14% relating to gold, representing a 13% increase from Q1 2012 driven primarily by the gold deliveries relating to the 777 mine.

Revenue for the first quarter of 2013 amounted to $206 million, representing about a 3% increase from the comparable period of the prior year despite the average realized selling price per silver equivalent ounce sold decreasing by 9% to $29.72 per ounce.

Earnings from operations for the first quarter of 2013 amounted to $151 million, representing a decrease of 4% relative to the first quarter of 2012 with operating margins decreasing by 6% to 73% in the first quarter of 2013, due to a combination of lower commodity prices and higher cash costs and depletion rates associated with the recently acquired gold interests.

Cash-based G&A expenses were $8.4 million in the first quarter of 2013, representing an increase of $2.5 million from Q1 2012 with the increase being primarily attributable to higher personnel costs and higher professional fees.

Net earnings amounted to $133 million in the first quarter of 2013 compared to $147 million in the comparable period of the prior year, with basic earnings per share decreasing by 10% to $0.38 per share from $0.42 per share with the decrease being primarily attributable to the decrease in commodity prices.

Operating cash flow for the first quarter of 2013 amounted to $166 million, a slight increase from the prior year, representing $0.47 per basic share. Based on the Company's modify dividend policy whereby the next dividend is based on the average operating cash flow generated for the prior two quarters, the Company's Board has declared a dividend of $0.12 a share payable to shareholders of record on May 23, 2013. For clarity, based on the modified policy, the next dividend will be based on 20% of the average operating cash flow generated for Q4 2012 and Q1 and Q2 of 2013, gradually moving to a rolling average of the prior four quarters' operating cash flow. Again, the intention of the modify dividend policy is to mitigate some of the volatility in the amount of the quarterly dividend.

During the first quarter of 2013, the value of the Company's long-term investment portfolio of shares in other publicly listed mining and mineral exploration companies decreased by $25 million, which has been reflected in the statement of other comprehensive income.

The operational highlights for the first quarter of 2013 included the following -- Yualiyacu produced 624,000 ounces of silver during the first quarter of 2013, representing a 13% increase from the comparable quarter of the prior year. However, silver produced but not delivered relative to Yualiyacu increased by approximately 400,000 ounces during Q1 2013, resulting in silver sales only 149,000 ounces. This was 348,000 ounces lower than the silver sales recognized in Q1 2012. As at March 31, 2013, payable silver contained in concentrate that has been produced but not shipped relative to Yualiyacu amounted to approximately 1 million ounces.

Penasquito generated attributable silver production of 1.1 million ounces during the first quarter 2013, representing a 20% decrease from the comparable quarter in the prior year with such decrease being attributable primarily to the scheduled mining of lower-grade material. However, silver sales for the first quarter of 2013 relative to Penasquito amounted to 1.5 million ounces with the difference between ounces produced and sold being attributable to a reduction in payable silver produced but not delivered to Silver Wheaton. Although production at Penasquito continues to be affected by water shortages, process plant throughput increased by 5% quarter-over-quarter to about 104,000 tons per day in Q1 2013.

Goldcorp has reconfirmed the studies to develop a long-term water strategy for the Penasquito district are expected to be completed in the second quarter of 2013. In addition, a new water source has been identified within the Company's current permitted basin with the potential to supply sufficient fresh water to continue the plant ramp up to full design plant throughput. This new well field is expected to be in production by the end of the second quarter of 2014.

Other silver interests, which now include Zinkgruvan and Cozamin, generated 2 million ounces of silver production, a 12% decrease from the comparable period of the prior year primarily due to the temporary suspension of mining operations at Campo Morado during the quarter. Mining operations did resume at Campo Morado at the beginning of the second quarter.

Other silver interests generated silver sales of 1.7 million ounces during Q1 2013, representing an 8% decrease from Q1 2012. The 777 generated attributable silver equivalent production of 1.1 million ounces during the first quarter of 2013, comprised of 17,000 ounces of gold and 157,000 ounces of silver. However, precious metals produced but not delivered to Silver Wheaton due to the timing of off-take arrangements increased by approximately 400,000 silver equivalent ounces during Q1 2013, resulting in silver equivalent sales of 9000 ounces of gold and 86,000 ounces of silver.

The newly acquired Sudbury and Salobo gold interests generated attributable silver equivalent production of 654,000 ounces comprised of 12,000 ounces of gold. While this production level is in line with our expectations as these assets ramp up over the next three years, due to the timing of base metal concentrate shipments, little of this production translated into sales in the quarter, but rather increased the quantity of payable silver equivalent ounces produced but not delivered by approximately 560,000 ounces.

Overall, the Company's cash balances decreased by $703 million in the first quarter of 2013, driven by the $1.9 billion upfront payments relating to the closing of the Vale transaction, offset by net debt proceeds of just over $1 billion and cash generated from operations of $166 million.

As at March 31, 2013, the Company had $76 million of cash and cash equivalents on hand and $1.09 billion of debt outstanding under the bridge facility. Subsequent to March 31, 2013, the Company reduced the available credit under the bridge facility by $410 million, and repaid $500 million of said facility with proceeds drawn from the $1 billion revolving facility. Following this, the Company has $590 million outstanding under the bridge facility and $500 million outstanding under the revolving facility, leaving $500 million of available credit under the revolving facility. The Company is currently evaluating debt financing alternatives for refinancing the remaining debt outstanding under the bridge facility. The Company's strong future cash flows combined with available credit under the $1 billion revolving credit facility positions the Company well to satisfy its funding commitments, sustain its dividend policy while at the same time providing flexibility to consummate additional accretive precious metal purchase agreements.

Lastly, there has been no substantial change in the status of the tax audit of the Company's taxation years 2005 to 2010 by the CRA.

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

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

(Operator Instructions). Andrew Kaip, BMO.

Look, I've just got a couple of questions. Thanks for providing the additional information on movement of debt. Just can you remind us, first of all, on the revolver, what are the interest payments, and when are they -- when do we expect them?

On the revolver, interest payments are made whenever (technical difficulty) the LIBOR loans mature under the revolver. So we'll enter into 30-day, 60-day, 90-day, 120-day LIBOR loans. And whenever those mature, we will pay the interest associated with them. Interest rates are driven by a grid which is based upon our leverage ratio. And that ranges from 120 basis points over LIBOR to 220 basis points over LIBOR.

Okay. All right. And then similarly with the bridge facility, how do we look at that?

The bridge facility should be -- the remainder of the bridge, the $590 million that's outstanding currently, we would expect to have that repaid before the end of this month.

Okay. All right. And then just remind me. I guess we were somewhat expecting that you would be delivering approximately $125 million to Hudbay in the quarter. Doesn't seem to -- it didn't happen. I'm just wondering when you're expecting that call to be made to you.

Very shortly, Andrew. They were at $480 million committed at the end of their Q1, and so commitment versus expenditures is slightly different, so that's where the difference is. But we do expect that first payment to be coming here within the next month or two.

All right. And then just on the revolver, can you give us an indication of what kind of I guess key covenants you would be looking at with respect to the revolver?

There's really only one financial covenant under the revolver, and that is that our leverage ratio needs to remain below 3.5-to-1, so that's your debt-to-EBITDA covenant. And that -- following major acquisitions for six-month periods, the ratio that we need to comply with rises to 4.5-to-1 to give us some latitude to consummate significant transactions. We are well below that level currently.

Yes. Thanks very much guys.

(Operator Instructions). Chris Lichtenheldt, Dundee Capital Markets.

Good morning everyone. Thanks for taking my question. I just wanted to ask on the landscape of opportunities you see out there. Obviously you mentioned the financing constraints there for a lot of companies. Has this changed anything in terms of what you might be looking at? Historically, it's obviously been mostly primary gold mines, primary base metal mines. Has there been any new opportunities in perhaps primary silver mines or alternatively have you considered looking at any base metal streams, different streams?

We will always be focused on the precious metals side with a strong bias towards the silver space. What we have seen is probably some more opportunities coming up where we actually would be participating within the M&A type transactions as one of the supporting parties. And we're seeing a lot more interest that way. As you can see, there's a lot of companies that are suffering through the equities right now. So, we've seen a bit of a focus in that direction.

The last two transactions we've done have been with base metal operating partners. We do think that's where it adds the most value in terms of the equation. It's supporting the base metal side and that is where more silver is produced, is the base metal mining industry. So we still strongly -- the majority the opportunities we are looking at are in that sector, but we are definitely seeing some activity there. We do have a couple of silver partners, silver mining partners, currently, but not a lot of opportunities in that space right now.

Okay. That's helpful. Thanks a lot.

Dan Rollins, RBC Capital Markets.

Thanks very much and good morning gentlemen. I guess my first question is more of a housekeeping question. Just regarding the amount of interest to be expensed versus capitalized, is there sort of a ratio we should be assuming up until when Pascua-Lama begins production?

Yes. If you look at the assets that we've got that are in construction, you've got Pascua and you've got Constancia, and Loma de La Plata as well. So if you look at the amount that we have invested relative to those assets -- and we would first allocate any debt to those, and the interest on that debt that's allocated to those assets would be capitalized until they come into production. So, that should give you a pretty good estimate of how much interest will be capitalized versus expensed.

Okay, perfect. And then Gary, while I have you here, I know in the past you've stated you guys could use debt but it doesn't have the same impact on your financials, given your efficient tax structure. Just given the appetite out there for what appears to be high-yield product in some recent deals done in the precious metals sector, what are your thoughts on going after some long -- some higher yield debt, say five, 10, or even a 15-year duration given the fact that you guys do have that sort of fixed and stable cost structure which would be probably of demand for high-yield investors?

Yes. I would hope that we are not viewed as high-yield market players. We are looking at all our debt financing alternatives right now. But as I've been quite vocal in the past about with the strength of our operating cash flows, bank debt tends to be the most efficient form of debt for us to pursue. It eliminates the cost of negative carry whereby we inevitably would have periods of time if we had long-term debt outstanding on our balance sheet where we would have significant amounts of cash on hand earning very little interest in carrying the debt, whereas bank debt allows us to apply the cash as it is built up to repay any outstanding debt and eliminate that negative carry. So although we have not finalized the decision at this point, we would lean towards bank market term debt at this juncture.

Perfect, that's great. And then maybe Randy, you mentioned sort of the M&A side of looking at future opportunities. Outside of those potential mandates on some of the existing ones you're looking at, obviously the bid has come off over the last three months with the price of silver dropping and gold. But on the ones you're looking at, would you view it as sort of the final financing piece of the pie for these guys, or would you be looking at being sort of a financing -- part of the financing package? Because one thing you guys haven't done in the past which I like a lot, you're usually the last money in on deals.

Yes. I don't see much of a change in that space. We don't put money into a project until we are confident about the financing on that project going forward. Every development project that we've had has got those kind of requirements in it. So, we always look for that confidence whenever we invest into any type of a development project, and that's not going to change. The market in terms of how it's changed over the last while has definitely tightened up in terms of some of our thoughts on longer-term projections and stuff. So, we are measured in this. We all want to see stability in the market, and that's not something we've seen much of in the last few months.

Okay. Maybe one last question, just on the Sudbury stream, obviously historically the numbers coming out have been better than planned. I know it's very, very early, but initial thoughts on sort of any good surprises coming out of Sudbury with regards to either recovery on the growth side?

Yes. It's in a growth phase right now, so what we're seeing is ramping up in one operation and then Tauton coming on in a couple of years. And so what we see, we've been very impressed with Vale in terms of the efforts that we've seen on that side. So, we're pretty excited about that asset.

Salobo of course is also starting to shape up quite nicely. We are seeing continued growth. Every month is exceeding the previous month's production and sort of continuing to ramp up all the way through, so overall pretty happy with that acquisition.

Great, thanks very much guys, and congrats.

Steven Butler, Canaccord Genuity.

Hey Randy, good morning. In terms of -- thank God earnings season is almost done. In terms of Sudbury and Salobo on the gold side where you produced 12,000 odd ounces, but of course we are expecting sales to be quite limited, will sales be pretty much caught up, if you will, on a run rate in the second quarter or should we expect still some additional delays on the sort of ramp up of capacity there, or the inventory, if you will?

What we will likely see is, as the overall production continues to ramp up at Salobo, the size of the -- I call it the concentrate pipeline will have to be larger. So there probably will be continued sort of growth in that space. We always sort of talked about that as being a two to three-month window of (technical difficulty) of course that's more concentrate, that two to three-month window grows. So there probably will be a bit of inventory or produced but not yet delivered material from the Salobo asset itself.

Sudbury should get pretty constant here. There is -- it is -- there is a lot of different products that come out of the Sudbury camp in terms of concentrates and some Doray that goes through a mint and such. So there may be a bit more of a catch up on that, but it would be very minimal. The bulk of the gold that is produced in Sudbury is contained in the concentrates, and that's definitely tightened up now, so probably a bit more growth on that value on the Salobo side.

Okay. Any other of the assets where you had your 4-odd million ounce fuel pipeline buildup? Or again should we expect maybe more of a Q4 cleanout, Randy, as opposed to anything in term throughout the year?

We didn't deliver -- there was a lot sold out of the Yauliyacu asset. It continues to be very bumpy, very up and down. So, it's one that we sort of wait and see as it moves forward. But generally, if you have a quarter that's light at Yauliyacu, it means the next quarter is going to be heavy. And so I would say that we probably have something there. It seems to follow a bit of a different cycle. But then, as you've heard me before, Steve, our fourth quarters are always good for cleaning out, and the first quarters, as we've just seen, tends to be an inventory build-up again.

Thanks Randy.

Thank you everyone for dialing in, and we look forward to talking to you again in a couple of months.

This concludes this conference call for today. Thank you for participating. Please disconnect your lines.