Wheaton Precious Metals Corp (WPM) 2014 Q2 法說會逐字稿

Good morning, ladies and gentlemen, thank you for standing by. Welcome to Silver Wheaton's 2014 second-quarter results conference call.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded on Thursday, August 14 at 11:00 AM Eastern time.

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

Thank you, Stephanie. 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; Gary Brown, Senior Vice President and Chief Financial Officer; and Haytham Hodaly, Senior Vice President Corporate Development.

I'd 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 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 sets out the material risk factors that could cause actual results to differ including among 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 and gold prices.

Lastly it should be noted that all figures referred to on today's call are in US dollars unless otherwise noted. Now I'd like to turn the call over to Randy Smallwood, our President and Chief Executive Officer.

Thank you, Patrick, and good morning, ladies and gentlemen. Thank you for dialing in to our second-quarter 2014 conference c all.

We're pleased to report that Silver Wheaton has another -- has had another solid quarter in Q2 of 2014. During the quarter significant progress was made at two of our key growth platforms, the Salobo and Constancia.

The Salobo mine received first production after the recent expansion which doubled the mine's capacity. And the Constancia project is moving forward and was at 85% completion at the end of Q2. We look forward to receiving production from Constancia later this year.

Two of our cornerstone assets are also worth highlighting. Firstly despite water supply continuing to be a limiting factor, Penasquito achieved record production in the second quarter. And secondly, San Dimas completed its expansion to 2500 tonnes per day earlier this year, and Primero [board] recently announced a further expansion to 3000 tonnes per day. Given the progress made at our diversified portfolio of mines and projects, we believe we're well positioned to grow our revenues and earnings even if precious metal prices were to maintain these levels.

Based on current agreements, we forecast 2014 annual production of around 36 million silver equivalent ounces. And by 2018 this is expected to increase approximately 35% to 48 million silver equivalent ounces. This five-year growth will be driven by Hudbay's Constancia project, Vale Salobo and Sudbury mines and the Rosemont project, along with the continued expansion of San Dimas.

In the second quarter, silver equivalent sales volumes were 4% higher than the comparative period last year coming in at 7.5 million ounces. Our production was 4% lower than the comparative period last year at about 8.4 million silver equivalent ounces. And average realized sale price per silver equivalent ounce was 14% lower than Q2 of 2013. However, we once again maintained a healthy cash operating margin with cash flows in excess of $100 million.

Speaking of cash flows, our quarterly dividend continued to deliver 20% of the average cash generated by operating activity in the previous four quarters. Our dividend remained linked to the Company's organic growth profile, our ability to make additional accretive acquisitions and commodity prices. And despite the volatility of the markets, our dividends are sustainable as evidenced by our third quarterly dividend payment of 2014 of $0.06 per share.

Furthermore our recently implemented dividend reinvestment program has been very well received. Gary Brown, our Chief Financial Officer, will provide more detail on this shortly.

Over the past few months there's been renewed optimism in the precious metals space, both for the actual performance of silver and gold and for the share prices of precious metal companies. Our business model is based on the premise of paying low predictable costs for precious metal streams from a diverse portfolio of high-quality mines. So any increases in precious metal prices flow directly to our bottom line.

In the second quarter our average cash costs for silver equivalent ounce was $4.72 per ounce which is easily among the lowest costs in all of precious metals space. As a result, our second quarter cash operating margin was over 75%. These numbers once again show that we can generate some of the highest margins in this industry.

On the corporate development front, our team remains busy pursuing value enhancing acquisitions and we feel we're still in a good market to add to our portfolio. We certainly believe that streaming provides an attractive funding solution for both large and small mining companies, particularly within the current environment of scarce capital.

Our funding option continues to be more widely understood amongst the mining sector and as a result we see a number of high-quality opportunities for Silver Wheaton. And while we look for accretive new opportunities we remain focused on strong operating partners with high-quality assets that are producing in the lowest half of their respective cost curves.

So to summarize, Silver Wheaton has a robust organic production growth profile of nearly 35% anticipated over the next five years. The bulk of this growth will be driven by the startup of Hudbay's Constancia project later this year, continued expansions at Vale, Salobo and Sudbury mines and Primero San Dimas mine, and continued improvement at Penasquito, all expected to deliver over the next couple of years. And of course the Rosemont project now acquired by Hudbay Minerals will help us reach that 48 million silver equivalent ounces of production in 2018.

Our sustainable dividends will continue to provide investors a direct link to our organic growth profile and operating cash flows, and we will strategically search for additional accretive opportunities to complement this organic growth focusing on high-quality low-cost assets. Silver Wheaton remains well positioned given our strong diversified portfolio of streams and we look forward to the coming years as our growth profile continues to crystallize.

With that I'd 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, 2014, I would just like to remind everyone that all monetary figures discussed are denominated in US dollars unless otherwise noted.

The Company's precious metal interest generated 8.4 million silver equivalent ounces of attributable production in the second quarter of 2014, 4% lower than production from the comparable period of the prior year due primarily to lower production levels from Keno Hill, 777 and the Barrick and Sudbury mines with such being partially offset by a significant increase in production from Penasquito and Salobo. Of the overall production, approximately 25% was gold with the remainder being silver.

While attributable production in the second quarter of 2014 was lower than that in the first quarter, this decline was anticipated and we expect to see an increase in production through the third and fourth quarters of 2014. Payable silver equivalent ounces produced but not yet delivered by our partners amounted to 6.3 million ounces as of June 30, 2014, a decrease of about 100,000 ounces over the quarter with reductions at 777, Penasquito, Sudbury and Salobo being offset by a significant increase at Yauliyacu, although a significant amount of silver was delivered from Yauliyacu immediately following quarter end.

Silver equivalent sales volumes amounted to 7.5 million ounces in Q2 2014 with 70% of this relating to silver and 30% relating to gold, representing a 4% increase from Q2 2013, attributable to increased silver deliveries from Penasquito and increased gold deliveries from Sudbury and Salobo partially offset by decreased silver deliveries from Yauliyacu and the Barrick mines.

Revenue for the second quarter of 2014 amounted to $149 million, representing an 11% decrease from the comparable period of the prior year, with increased sales volumes being more than offset by a 14% decrease in the average realized price per silver equivalent ounce sold, with such being $19.83 during the most recent quarter. Earnings from operations for the second quarter of 2014 amounted to $75 million, representing a decrease of 18% relative to the second quarter of 2013 with operating margins decreasing by 4% to 50% in the second quarter of 2014, due primarily to lower commodity prices partially offset by lower depletion rates.

Cash based G&A expenses were $8.3 million in the second quarter of 2014, representing an increase of $1.3 million from Q2 2013, with such being primarily attributable to an increase in the expense relating to potential payouts under the Company's performance share unit program, partially offset by lower expenditures on consulting. The Company continues to expect non stock-based G&A expenses of $31 million to $34 million for 2014 with such expense excluding expenses relating to the value of stock options and PSUs granted.

Net earnings amounted to $63 million in the second quarter of 2014 compared to $71 million in the comparable period of the prior year, with basic earnings per share decreasing by 10% to $0.18 per share from $0.20 per share, with the decrease being primarily attributable to the decrease in commodity prices.

Operating cash flow for the second quarter of 2014 amounted to $103 million compared to $125 million in Q2 2013. This translates into operating cash flow per share of $0.29 and results in a dividend of $0.06 being payable to shareholders of record on August 27, 2014.

Under the dividend reinvestment plan that the Company recently implemented, the Board has elected to offer shareholders the option of having their dividends reinvested in newly issued common shares of the Company at a 3% discount to market. For the dividend dispersed on May 30, 2014, shareholders owning approximately 21% of the outstanding common shares of the Company elected to have their dividends reinvested generating $5.2 million of proceeds.

During the first quarter of 2014, the value of the Company's long-term investment portfolio of shares and other publicly listed mining and mineral exploration companies increased by $19 million, which has been reflected in the statement of other comprehensive income.

The operational highlights for the second quarter of 2014 included the following. During the second quarter of 2014, San Dimas contributed 1.1 million ounces of silver production and 1.2 million ounces of sales, including 375,000 ounces being received directly from Goldcorp relating to their four-year commitment to deliver 1.5 million silver ounces per year, which ended on August 6 of this year.

In addition, Primero recently announced that they will be expanding mill throughput capacity by 20% from 2,500 tonnes per day currently to 3,000 tonnes per day by mid-2016.

Penasquito generated record attributable silver production of 2.1 million ounces during the second quarter of 2014, representing a 43% increase from the comparable quarter of the prior year, with such increase being primarily attributable to significantly higher grades combined with better recoveries. Silver sales for the second quarter of 2014 relative to Penasquito amounted to 2 million ounces, representing an 85% increase relative to Q2 2013.

As of June 30, 2014, approximately 1.3 million ounces of payable silver had been produced at Penasquito but not yet delivered to Silver Wheaton, representing a decrease of approximately 100,000 ounces of payable silver. Goldcorp has indicated that initial permits for the Northern Well Field project were received during the second quarter of 2014, allowing construction to commence with completion expected by mid-2015.

Salobo produced nearly 8,500 attributable ounces of gold or 551,000 silver equivalent ounces during the second quarter of 2014, representing a 34% increase from the comparable period of the prior year, with the expansion of mill throughput capacity from 12 million to 24 million tonnes per annum being completed during the most recent quarter, and the first production of copper concentrate from Salobo II being achieved on June 5, 2014.

Gold sales relating to Salobo were just shy of 12,000 ounces during the second quarter, with gold ounces produced but not shipped being reduced by almost 4,000 ounces during the quarter. As at June 30, 2014, approximately 5,000 ounces of payable gold or approximately 300,000 silver equivalent ounces had been produced at Salobo but not yet delivered to Silver Wheaton.

The Sudbury gold interest produced about 6,100 ounces of gold or 394,000 silver equivalent ounces in Q2 2014. This represented a 30% reduction compared to Q2 2013, reflecting the impact of planned annual maintenance at some of the surface facilities. Gold sales relative to Sudbury amounted to 6,700 ounces or 435,000 silver equivalent ounces, representing a 61% increase from Q2 2013 with a prior-year sales reflecting a significant buildup of ounces produced but not shipped.

As at June 30, 2014 approximately 10,000 ounces of payable gold or 600,000 silver equivalent ounces had been produced but not yet delivered to Silver Wheaton relative to the Sudbury mines. Vale has indicated that the mines in Sudbury which are the bottleneck to the regions operations, continued to operate and stockpile ore and concentrate during the periods of planned maintenance in the first half of 2014. As a result, Vale anticipates an increase in production from the Sudbury region during the second half of the year.

Overall the Company's cash balances increased by $57 million in the second quarter of 2014 with $103 million of operating cash flow being partially offset by $45 million of dividend payments, representing cash dividends for two quarters. As at June 30, 2014 the Company had $139 million of cash and cash equivalents on hand and $1 billion of debt outstanding under the non-revolving term loan.

The Company's current cash balance and strong future cash flows combined with the $1 billion of credit capacity available under the revolving credit facility, positions the Company well to satisfy it's funding commitments, sustain it's 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 Canada Revenue Agency. 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 the call for questions, please.

(Operator Instructions)

Trevor Turnbull, Scotiabank.

Randy, I was wondering with respect to Salobo, you talked about how they've tied in the second line which will take them eventually to a doubling of the throughput capacity. But I was trying to have a better understanding of how that throughput ramps up now that they're tied in. It seems like Vale was talking about achieving that full 24 million tonnes per annum sometime in 2015 and I just wasn't clear what your expectations were for production increasing between now and full capacity.

Yes and you've got it right on. The second line, they expect to get the full capacity towards the latter half of 2015. These are pretty big scale expansion.

And so it's got to work its way all the way back to the system in terms of mine operations being able to deliver and work their way all the way through. So it'll be a slightly faster ramp up than what we saw with the first line which is still getting close to 100% but not quite there yet. But it'll take about 1 1/2 years for them to -- or a little bit more than a year, between 1 year and 1 1/2 years to get it up to full capacity.

Okay. And the other question was with respect to Yauliyacu, and it's more a background history question. But I recall in the past, they changed the nature of the concentrates they were making partly to make offtakes easier.

At one point they went to a bulk concentrate and then it seems like they've gone back to, or sorry they want away from a bulk concentrate now as I understand it they may be back doing that. Can you remind us what their situation is for shipments?

Well some of it has to do with the -- with smelter they're sending their feed to because there's, I can't remember the name of the smelter, there's a smelter right in the area are down there (multiple speakers). It's owned by [Delrun] or used to be run by Delrun. And it used to accept a bulk concentrate. And when that smelter went through shutdown for a while, then they had to separate it into the separate land and copper concentrates and so that's why they were producing that.

The have switched back and forth. It's owned by Glencore which of course is also one of the largest concentrate traders in the world. And so I think what they have at Yauliyacu is a processing facility that has the flexibility to satisfy where they see the best demands and the best returns on the concentrate market.

And so it's actually flip back and forth between the three concentrates down to the bulk concentrate plus the zinc. And it's one of the reasons that sometimes we have some pretty decent produced but not yet sold numbers there. And it sometimes gets very lumpy in terms of the actual sales.

So do you see that getting less lumpy? Will they settle on something with longer term offtakes or is it always going to be a little bit ad hoc in terms of how they place that?

Indications I see right now that it's probably going to be a little bit ad hoc, we're going -- it's going to be lumpy. We didn't have any significant shipments during Q2 but shortly after the end of Q2 we had a very large shipment. Again, with the company the size of Glencore and the amount of concentrate that they market and trade around the world, this is something that they use to probably adjust and take advantage of certain opportunities when they see them.

Perfect. Okay. Thank you, Randy.

Duncan Lai, Macquarie.

Randy, a question, so looking at the MD&A I see that the cumulative payable is silver equivalent ounces produced but not yet delivered have been growing compared to a year ago. So can you explain if this will be reversed or this will be a continued trend going forward?

It's going to continue. I'd like to characterize it as basically as our production profile grows, so will that produced but not yet delivered. It typically represents about 2 to 2 1/2 months of our production. And so as our annual production climbs or yearly production rates climb, that's produced but not yet delivered will also climb.

Okay.

And where it's really impacted is when we have new projects coming on that produce concentrates. The assets that produce dore tend to deliver much rapid -- there's not as much of a pipeline in terms of delivering the product.

And the concentrates of course when you sit and look, Salobo's ramping up, Penasquito is ramping up, Constancia coming on produces a concentrate. And so those are the assets, those are the types of assets that we'll add to that produced but not yet delivered.

Okay. So I guess when I see mines that produce a concentrate produce more (inaudible) a new project coming then I can expect to see that having that bump going forward?

Right. Yes and I think the best way to estimate it is essentially look at the production rates and consider it as the number will typically be somewhere between 2 to 2 1/2 months of our overall production.

Okay, (inaudible) 2 to 2 1/2 months of (inaudible), okay.

And my second question is with the recent royalty transaction was Chesapeake, I know it's a small one, but does this imply that Management will now consider royalty deals and not just streaming deals going forward?

No, not at all. We think streaming's actually much more advantageous for both parties, for both us and for the operators themselves. The advantage there was that there was royalty already in place that we wound up and we wound up getting access to the right of first refusal on further financing on the Metates project.

And it's a project that I know well, I've spent enough time in Mexico and what I can tell you is there's a lot of metal in that hill. So we were quite excited about getting the right of first refusal on being able to help finance the project going forward.

All right. Thanks, that's all I have for now.

(Operator Instructions)

[John Brannigan, Fundamental Equities].

Could you guys characterize the current supply-demand balance in the silver market? There was a story here in Chicago this morning about weakness in retail demand in India and China during Q2, and I wonder if you've seen that.

We haven't seen it directly. There's going to be seasonal fluctuations especially in India mainly because consumption is so tied to the different festivals. And so you do get a lot of seasonal fluctuations especially out of India from that side, so we haven't seen the effect of that.

When we look at silver, obviously we're exposed to both silver and a bit of gold, we like the silver sector better. We think it's got better potential here.

Everywhere we look in the silver space, we see on the industrial side, we see increasing applications and they're in areas that are growth areas, high-efficiency electronics, it's antibacterial applications. These are areas that are just becoming more and more important on a worldwide basis.

So as the world -- and you talk about India and China, you talk about even our part as living standards continue to improve and continue to increase, it's going to require silver. And so we definitely feel very comfortable about silver in the long run. You're going to get fluctuations on a shorter term basis when it comes to the retail side, mainly as I said one of the things that we do see a lot is the different festival seasons out of India always have an impact.

Thanks.

Dan Rollins, RBC Capital Markets.

A couple questions. First of all Randy, when Constancia starts getting up and running, what type of lag do you expect to see between production and sales at that mine?

It always -- the guidance I used to give is 2 to 2 1/2 months for the concentrate. It's a little bit longer because in the Company overall, it usually balances off by the shorter lag time on assets that produce dore.

So -- but anytime an asset starts up, you've got to get that pipeline in place in terms of delivering concentrate to the smelters and get through that whole process. And so we don't anticipate any sales in 2014. We expect production. We may be surprised with a few sales, but we don't have anything scheduled into our forecast for 2014 from a sales side.

Excellent. And then maybe, I'm not sure if you're able to answer this because a lot of the information be coming from one of your streaming partners, but there's a significant a lot of optionality that's starting to show up in your portfolio. And I guess the main would be outside of what we saw at San Dimas, but at Penasquito the CEP process with the pyrite leach, with potentially some of the development of the skarns to underneath the open pit. Have you guys looked at what type of lift is potential there for you guys on a silver basis if all that were to happen?

Yes. In fact, Goldcorp the operator has come out with their own forecast and so the possible benefit to us would be around 1 million ounces a year, a little over 1 million ounces a year silver production. And that would be our portion of it. So it is pretty attractive. I have to say they continue -- that asset just continues to improve every quarter. And Goldcorp and that operating team is doing a fantastic job of maturing that mine into a great asset.

Perfect. Well thanks, guys, that's all I have. Good quarter.

Thank you, Dan, and thanks, everyone, for dialing in. Just a couple of closing comments. The second quarter we did see a lot happen in our Company, of course Salobo [Dosc], Constancia moving forward, Salobo II starting up, Penasquito having a record quarter and the Rosemont project of course changing hands. So as we approach our 10th anniversary of the founding of Silver Wheaton and the creation of the streaming model, we are confident that our large and diverse portfolio will provide the foundation under which we'll continue to grow our Company and strive towards being the best investment in the precious metals industry. So thanks again, everyone, for dialing in and I do hope that you enjoy the rest of the summer. Thank you.

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