Wheaton Precious Metals Corp (WPM) 2013 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by and welcome to Silver Wheaton's 2013 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 Thursday, August 15 at 11.00 AM Eastern Time. I will now turn the conference over to Mr. Patrick Drouin, Vice President of Investor Relations. Please go ahead, sir

Thank you, Candace. 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, and Gary Brown, Senior Vice President and Chief Financial Officer. I would like to bring to your attention that 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 the 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. 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 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, and good morning, ladies and gentlemen. Thank you for dialing into our second quarter 2013 conference call. Silver Wheaton's second quarter highlights include another solid quarter of gold and silver production, resulting in record production for both the second quarter and the first half of 2013. Given the strong performance of our mines, we remain well on track to achieving this year's forecast production of 33.5 million silver equivalent ounces. In particular, production from our recently acquired Sudbury and Salobo mines was stronger than expected in the second quarter, and we anticipate continued growth in the second half of this year, especially as Salobo continues to ramp up towards full production.

Our amended dividend policy has again smoothed out the volatility in our dividend payout, resulting in a third quarterly 2013 dividend of $0.10 per share. Going back to our Q2 2013 mine performance, we are proud to announce that we have started 2013 with substantially year-over-year gains in silver equivalent production and sales. In the second quarter, production was 8.6 million silver equivalent ounces which is 28% higher than the second quarter of 2012. Silver equivalent sales was 4% higher than a year ago, coming at 7.2 million ounces of silver equivalent production. While both production and sales were higher in the second quarter, the average realized silver equivalent price was 20% below the second quarter of 2012 resulting in lower revenue, earnings and cash flow. Our average sales price for silver sold in the second quarter of 2013 was $23.05 per ounce, well below the 2012 silver price average of $30.17 per ounce. Gary Brown, our Chief Financial Officer, will provide more detail on our financial results shortly.

With respect to dividend policy, earlier this year we amended our dividend policy in order to reduce the payout volatility, a result of rapid moves in the silver price and quarterly fluctuations in our produced but not yet delivered ounces. Our amended policy provides investors with sustainable and now more stable dividends, that are still directly tied to both our organic growth and commodity prices. As a result of the new policy, our third quarterly dividend of 2013 will be as mentioned $0.10 per share, over 40% higher than what the dividend would have been as payable under the old dividend policy.

With respect to our portfolio of mines, over the second quarter we saw a number of developments with some of our key assets. As most of you are aware, regulatory issues at Pascua-Lama have resulted in a forecasted delay in start-up until the middle of 2016. We have been and continue to be in close communication with Barrick, and remain very confident in their ability to bring this world-class mine on stream. That being said, we have structured our contract with Barrick, so that we are well-compensated for delays in start-up, and we will continue to receive silver from three of Barrick's other operating mines until the end of 2015. To reflect the delay at Pascua-Lama, Silver Wheaton did recently revise its 2017 production forecast from 53 million, down to 49 million silver equivalent ounces. We have also extended the minimum completion date by one year to the end of 2016 at Pascua-Lama, although we are confident that this low-cost world-class gold and silver mine will be in production before that date.

At Penasquito, we are very encouraged by Goldcorp's recent announcement regarding the identification of a new water well field within their currently permitted basin. This northern well field is expected to be ready in the second half 2014, and is reported to have sufficient water to continue to the plant ramp up to full design capacity of 130,000 tons per day. Our current five-year guidance is based on Goldcorp operating Penasquito at only 110,000 tons per day, and with monthly production numbers in June reaching higher than 120,000 tons per day, we believe Penasquito still has plenty of opportunity for continued improvements. At Sudbury, we saw excellent production results, but sales are taking longer than expected to work through the whole material process. This is Silver Wheaton's first agreement with a partner that mines, smelts and refined its precious metals. And this whole process has resulted in an increase in our produced but not yet sold quantity during the second quarter. It should be noted that this pipeline only has to fill up at the start of our contract, and we are now seeing regular gold deliveries from Sudbury, moving these impressive productions results into sales in the coming quarters.

And finally, we have been very pleased by developments at Hudbay's Constancia project down in Peru. As announced in their second quarter financials, the development of this project is over 40% complete. Significant progress has been made at Constancia. The mine fleet has been secured, and Hudbay has completed the pouring of the principal foundations of the ball and SAG mills. In the second quarter, Hudbay reached $500 million in capital spending which triggered our payment, our second payment of $125 million. Constancia continues to advance, and we look forward to a start-up in 2000 -- in late 2014.

On the corporate development front, we remain very busy. The mining industry has a constant need for funding, and Silver Wheaton remains uniquely positioned to capitalize on this need. Streaming has proven to be a very effective method of converting non-core assets into much-needed capital for the mining industry. And with -- our combination of existing cash, ongoing cash flows, and credit available underneath our -- or under our revolving facility, we are well-positioned to fund all outstanding commitments, and to pursue value-enhancing precious metal streams. However, we want to stress, once again, that given the recent volatility in commodities and financial markets, we will proceed at a very measured and tempered pace when it comes to new acquisitions. There is a new reality out there for precious metal prices, and we will only -- we will continue to only make accretive acquisitions in the context of the current market.

We recognize that the current volatility in commodities markets can prove frustrating as it relates to share price performance. And while precious metal prices have retreated since the beginning of this year, it is important to reemphasize one of the key strengths of Silver Wheaton's business model. That is low, predictable costs for both sold silver and gold production. In the second quarter, our average cash cost for silver was $4.14 per ounce, and for gold it was $391 per ounce. These are easily amongst the lowest costs in the precious metals space. And even at current commodity prices, Silver Wheaton is still able to generate significant earnings and cash flows. It is also important to highlight the quality of these ounces. In 2013, over 85% of our production will come from mines that produce their principal products, within the lowest respective quartile of these cost curves. These are mines that should be able to survive the lows of the commodity price cycle, and continue to deliver silver and gold to us through all stages of that price cycle.

So in summary, Silver Wheaton continues to have one of the strongest organic production growth profiles in the precious metals industry, with over 65% growth anticipated in the next five years organically within our current portfolio. And while we are in an ideal market to add to our portfolio of high-quality assets, we remain prudent and measured in our pursuit of additional accretive opportunities. And finally, with this industry-leading organic growth profile, a strong track record of accretive growth, and more silver reserves than any other silver Company in the world, we believe that we continue to offer the premier investment opportunity within 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 June 30, 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 interests generated record attributable silver equivalent production of over 8.6 million ounces in the second quarter of 2013, 28% 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.

Approximately 74% of this production related to silver, with the remainder relating to gold. Silver equivalent sales volumes amounted to 7.2 million ounces in Q2 2013, representing a 4% increase from Q2 2012, with such increase being attributable to gold deliveries relating to 777 Sudbury and Salobo, with such being partially offset by decreased silver deliveries from Yauliyacu and Penasquito. Payable silver equivalent ounces produced but not delivered by our partners amounted to 5 million ounces as of June 30, 2013, an increase of about 1 million ounces over the quarter, with the most significant increases being attributable to Penasquito, Sudbury and Salobo.

Revenue for the second quarter of 2013 amounted to $167 million, representing a 17% decrease from the comparable period of the prior year, with the average realized silver equivalent selling price decreasing by 21% to $23.05. Earnings from operations for the second quarter of 2013 amounted to $91 million, representing a 40% decrease relative to the second quarter of 2012, with operating margins decreasing by 21% to 55% in the second 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 $6.5 million in the second quarter of 2013, representing an increase of $800,000 from Q2 2012, with the increase being primarily attributable to higher personnel costs, with a number of full-time employees increasing by 22% with 28 employees at June 30, 2013.

Interest costs for the second quarter of 2013 amounted to $7.2 million, resulting in an effective interest rate on outstanding debt of 2.6%. $4.7 million of interest incurred was capitalized to the Pascua-Lama and Constancia mineral interests, resulting an interest expense reflected on the income statement of $2.5 million. Of the $7.2 million in total interest costs incurred, $2.3 million was attributable to the amortization of upfront costs and one-time fees. The interest rate on outstanding debt ignoring these nonrecurring costs, was 1.8%. Other expenses amounted to $6.9 million for the second quarter of 2013, which reflected the expensing of the remaining $4.5 million of deferred upfront costs associated with the bridge facility, which was refinanced during the quarter. Net earnings amounted to $71 million in the second quarter of 2013, compared to $141 million in the comparable period of the prior year, with basic earnings per share decreasing by 50% to $0.20 per share from $0.40 per share, with the decrease being primarily attributable to the decrease in commodity prices.

Operating cash flow for the second quarter of 2013 amounted to $125 million or $0.35 per share, compared to $173 million or $0.49 per share in the second quarter of the prior year. Based on The Company's modified dividend policy whereby the next dividend is based on 20% of the average operating cash flow generated from the prior three quarters, the Company's Board has declared a dividend of $0.10 a share payable to shareholders of record on August 30, 2013. For clarity, based on the modified policy, the next dividend to be declared will be based on 20% of the average operating cash flow generated for Q4 2012, and Q1, Q2 and Q3 of 2013, with future dividends being based on a rolling average of the prior four quarters' operating cash flow. Again, the intention of the modified dividend policy is to mitigate some of the volatility in the amount of the quarterly dividend.

During the second quarter of 2013, the value of the Company's long-term investment portfolio of shares and other publicly-listed mining and mineral exploration companies decreased by $45 million, which has been reflected in the statement of other comprehensive income. The operational highlights for the second quarter of 2013 included the following, San Dimas produced 1.2 million ounces of silver attributable to Silver Wheaton during the second quarter of 2013, including 375,000 ounces received from Goldcorp. Although this production level was consistent with the second quarter of 2012, it represented a decrease of 583,000 ounces from the prior quarter, attributable to Primero having achieved the annual 3.5 million ounce threshold, above which they are entitled to retain 50% of silver production. Primero will continue to be entitled to retain 50% of production until August 6, 2013, which represents the end of the annual threshold period.

Yauliyacu produced 668,000 ounces of silver during the second quarter of 2013, representing a 10% increase from the comparable quarter in the prior year. Silver sales relating to Yauliyacu amounted to 559,000 ounces in Q2 2013, compared to silver sales of 1.2 million ounces in Q2 2012, with the prior year sales volumes reflecting the sale of over 600,000 ounces of silver relating to concentrate which had been produced at Yauliyacu in prior periods. As of June 30, 2013, there was approximately 1.1 million ounces of payable silver contained in concentrate that has been produced but not shipped relative to Yauliyacu. Penasquito generated attributable silver production of 1.4 million ounces during the second quarter of 2013, representing a 21% decrease from the comparable quarter of the prior year, with such decrease being attributable primarily to the scheduled mining of lower grade material.

Silver sales for the second quarter of 2013 relative to Penasquito amounted to about 1.1 million ounces, compared to 1.8 million ounces in the comparable period of the prior year, with the payable silver ounces produced but not yet delivered to the Silver Wheaton increasing by over 200,000 ounces during the most recently completed quarter to just over 1 million ounces. Although production at Penasquito continues to be affected by water shortages, process plant throughput increased to 105,500 tons per day in Q2 2013, with the month of June averaging nearly 121,000 tons per day due to the greater than expected water availability. Goldcorp recently announced that a new water source referred to as the Northern well field has been identified within Penasquito's current permitted Cedros basin, that is expected to provide the flexibility to resume ramp up to the design throughput of 130,000 tons per day. This new water source is expected to be available in the second half of 2014.

The 777 mine generated attributable silver equivalent production of 1.2 million ounces during the second quarter of 2013, comprised of 17,000 ounces of gold and 156,000 ounces of silver, consistent with prior quarter. However, due to a reduction in precious metal produced but not delivered to Silver Wheaton during the quarter, silver equivalent sales relating to 777 amounted over 1.6 million ounces. The recently acquired Sudbury gold interest produced over 8,000 ounces of attributable gold during the second quarter of 2013 consistent with prior quarter, with related sales volumes of just over 4,000 ounces of gold, with payable gold produced but not yet delivered to Silver Wheaton amounting to approximately 12,000 ounces or 700,000 silver equivalent ounces as of June 30, 2013.

The recently acquired Salobo gold interest produced over 6,000 ounces of gold during Q2 2013, an increase of 36% from the prior quarter due to a combination of higher throughput and recoveries, with such being attributable to the continued successful ramping up of milling operations. However, gold sales relating to Salobo amounted to just under 3,000 ounces, with payable gold produced but not yet delivered to Silver Wheaton increasing to approximately 7,000 ounces or 400,000 silver equivalent ounces as of June 30, 2013.

The Company's net debt position increased by approximately $94 million in the second quarter of 2013 to $1.1 billion, with $125 million of operating cash flow being offset by the $125 million payment to Hudbay relative to the Constancia silver interest, and $92 million of dividend payments being made during the quarter. During the second quarter of 2013, the Company entered into a $1 billion non-revolving loan for a three-year term with a syndicate of banks. The proceeds received under this facility were used to repay the remaining balance outstanding under the Bridge Facility, with the remainder being used to repay debt outstanding under the $1 billion five-year revolving facility, with the Bridge Facility being terminated following such prepayment.

As of June 30, 2013, the Company had $36 million of cash and cash equivalents on hand and $1.145 billion of debt outstanding, with $1 billion of debt relating to the non-revolving term loan, and $145 million relating to the revolving credit facility. The Company's strong future cash flows, combined with the $855 million of available credit capacity under the Revolving Facility positions the Company well to satisfy its funding commitments, sustained 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 audit of the Company's taxation years, 2005 to 2010 by the CRA. And with that, that concludes the financial summary. And I turn the call back over to Randy.

Thank you, Gary. Candace, we would like to open up the call for questions.

Thank you.

(Operator Instructions)

And your first question comes from Cosmos Chiu with CIBC. Your line is now open.

Good morning, and thanks for hosting the call.

Hi, Cosmos.

Just got a few questions here. Maybe first off, I noticed that Q1 production was restated a little bit. I guess in Q1 it was 8 million ounces, and yesterday's press release, it became 8.3 million. Is that just a function of the underlying assumptions for gold and silver, and a gold silver ratio?

No, Cosmos. Sometimes when we release our results, we don't have all the production, final production data from our partners. And so, we make the best estimates we can based upon information that we have. And we will go back and adjust those numbers to reflect the actual reduction, once all of our partners have released. So you will see from quarter to quarter, and we state that in the MD&A to the financials, that those types of adjustments will commonly be made.

Okay. At least it is a good adjustment, it went up. So that's a good thing. (Laughter). Randy, you talked about the new Vale streams and how shipments are going to catch up to production. But could you give us maybe a little bit more color in terms of how shipments -- what percentage of production could translate into sales in Q3? I assume it is going to be higher than Q2, but I am just wondering what kind of --?

Well, definitely. Yes, Cosmos, what has happened at, especially with Sudbury where a lot of our gold is -- comes from the nickel concentrate which runs through their nickel smelter. This is the first agreement that we got with a Company that actually goes from mine to smelter to refinery. And of course, we get sales when Vale sells the gold. And so takes a lot longer than our normal concentrate process. So by the end of -- I mean, we are now receiving regular concentrate, or sorry regular goal deliveries from Sudbury.

So Q3, we have sort of filled that pipeline, and hopefully now we should get pretty consistent deliveries. Now there is different recoveries and payable amount depending on nickel and copper concentrate, and there is a -- that is going to change over time. But we are now to the point where that pipeline in Q3 we shouldn't see much of an impact in terms of that. We think we filled up our pipeline now.

Okay, great. That's all I have. Thank you.

Thanks, Cosmos.

Your next question comes from Chris Lichtenheldt with Dundee Capital Markets. Your line is now open.

Good morning, everyone. Just to follow up quickly on your comment about filling the pipeline, does that mean that we should probably expect this 5 million ounce level of produced but not sold probably to be steady around the number now?

Yes. it is going to stabilize. I mean what we always see, is in the fourth quarter, companies tend to squeeze that pipeline, and try and squeeze production out. And so, and then traditionally in the first and second quarter, the pipeline kind of expands back out again, and gets to sort of a normal working level. But what happens in fourth-quarter, is everyone is trying to sort of maximize year-end results. And so, I would say that it wouldn't surprise me to see it in this range. There is going to be some fluctuations back and forth. We did have -- we did miss and shipments on Penasquito, and that is pretty normal schedule, so we may make up some of that. But I wouldn't predict a significant drop in Q3, but I would say that there is a good chance it will drop in Q4.

Okay, that's helpful. Thanks. Just on the -- you commented about the deal opportunities and the market being -- there being a lot of opportunities potentially. Is -- has the volatility quieted, the silver price volatility quieted to the point where yourselves and counter-parties are more willing to potentially look at things? Or is it too early still? Or is that even a factor, the volatility?

It's -- I mean, nobody likes making decisions in a volatile time, just because the potential of someone looking off base shortly afterwards. And so what we always want to see is some stability. It helps in sort of the decision-making process, in terms of both buying, from the perspective of both the buyer and the seller. And so, there is no doubt that stabilizing a bit, or even showing some strength what we've seen over the last week or so, helps. The biggest hurdle right now is that -- for spot prices, they dropped to such a low amount. That if you look at the general sentiment for long-term pricing in silver, it is well above the spot price. And that was one of the biggest hurdles that we were facing on the corporate development side, is that long-term expectations are still pretty bullish for the price of silver and the price of gold, relative to where the spot price was. And we just have to be tempered, in terms of how much risk each side is willing to take there.

Okay, that's great. And lastly housekeeping question when do you expect final payment for Hudbay, when are you modeling that?

In discussions with them. It may happen as early as the end of early -- end of this year end of 2013 likely I would say definitely by the end of the first quarter of 2014, in that range.

Okay, that's great. Thanks a lot.

Great. Thanks, Chris.

(Operator Instructions)

And your next question comes from John Tumazos of John Tumazos Very Independent Research. Your line is now open.

Good morning, thank you.

Hi, John.

Could you describe the maturity schedule for the $1.14 billion in borrowings? And, how you will allocate the 80% of cash flows that is other than dividends, in terms of making property payments as companies get their permits and qualify, and paying down the debt and other purposes?

Yes, John, it is Gary here. The -- so we have got two facilities in place right now. One is a three-year non-revolving term loan, where the majority of the debt relates to, and that is a three-year facility that will mature in Q2 of 2016. A bullet maturity, there is no amortization structure underlying that. And the other facility, the five-year non-revolving -- sorry, revolving credit facility. And there is $145 million drawn under that, and that would mature in Q1 of 2018. Again, a bullet maturity there.

Another point to note is that we do have the ability to extend the non-revolving term loan by a year, once a year. And that requires the unanimous consent of the lenders. So hopefully that addresses your first question. With respect to the allocation of 80% of cash flow that is retained, we will make those decisions in light of the opportunities we have in front of us. But we -- we are very comfortable with a level of debt we have -- we are currently carrying, and have no worries about being able to service that.

We are very focused, John, on maintaining a very clean balance sheet. And so, that is something that has always been a real strong drive within this Company.

If all of your operators got all of their permits and fulfilled other requirements tomorrow, how much is the future payments?

There is --

That would come to?

Sure. There is the Rosemont project with Augusta Resources down in Arizona which is a $230 million payment. Those are scheduled payments as construction would commence. And so, there wouldn't be money owing immediately. It would only happen once the project started coming on stream. There is $125 million that still owing to Hudbay, as they get to $1 billion in expenditures on Constancia.

As I mentioned earlier, that is expected probably -- maybe as early as end of this year, but likely the first quarter of next year. And then if Navidad, if Pan American Silver ever decides to move forward with Navidad down in Argentina, I think we have $32.4 million payment there. So all told, well within the capacity of our current revolver, even if it all came up tomorrow. But as I have said, this is all scheduled out over the next couple of years. And of course, Navidad, Pan American has put that one in neutral for now, so easily manageable within our current cash flows and within our current capacity of the revolver.

Thank you.

Great. Candace? I would like to poll for one more, one more poll for questions please?

(Operator Instructions)

And your next question comes from Dan Rollins with RBC Capital Markets. Your line is now open.

Thanks, and congratulations on a good quarter. Gary, I just have a very quick housecleaning question. What should we be assuming for G&A, excluding stock-based comp on a go forward basis quarterly?

Yes, we are still maintaining previous guidance, Dan. And that should be somewhere in the $32 million to $36 million range.

Okay, perfect. And then just -- sorry, one follow-up. What's -- is there a standby fee on the current $1 billion revolver?

Yes, there is. And it varies by leverage ratio that we have got -- I don't have at my fingertips what that is, but it is somewhere --

It is pretty low, like a [0.25] point or maybe?

Yes, it is around there.

Okay, great. Thanks.

Thank you, everyone, and thanks, operator. With that, call this conference call to a close, and we will talk to you again soon. Thank you.

And this concludes the conference call for today. Thank you for your participation, please connect your lines -- disconnect your lines at this time.