Wheaton Precious Metals Corp (WPM) 2016 Q2 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2016 second-quarter results conference call.

(Operator Instructions)

I would like to remind everyone that this conference call is being recorded on Thursday, August 11 at 11 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, operator. 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 on 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.

In addition to our financial results' cautionary note regarding forward-looking statements, please refer to the section entitled Description of the Business Risk Factors in Silver Wheaton's annual information form and the risks identified under risks and uncertainties in Management's discussion and analysis, both available on SEDAR, and in Silver Wheaton's form 40-F and Silver Wheaton's form 6-K, both on file with the US Securities and Exchange Commission. The annual information form, Q2 2016 Management's discussion and analysis, and press release from last night set out the material assumptions and risks that could cause actual results to differ, including, among others, fluctuation in the price of commodities, the outcome of the challenge by the CRA of Silver Wheaton's tax filings, the absence of control over mining operations from which Silver Wheaton purchases silver or gold, and risks related to such mining operations.

It should be noted that all figures referred to in today's call are in US dollars unless otherwise noted. Lastly, I would like to point out that we will be referring to the slide presentation currently found on Silver Wheaton's home page titled Salobo Transaction Presentation towards the end of this call which also includes forward-looking information. 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 in to a conference call to discuss our second quarter of 2016 results. I am pleased to announce that Silver Wheaton delivered yet another solid quarter, led by strong results from Salobo and our newest cornerstone asset, Antamina.

In the second quarter we produced 7.6 million ounces of silver and over 70,000 ounces of gold. From a sales perspective we sold over 7 million ounces of silver and over 70,000 ounces of gold. This does represent record gold sales volumes for the second consecutive quarter.

This quarter exemplifies the value of having a diversified portfolio backed by four cornerstone assets, all providing a secure foundation for the Company. Shortfalls from San Dimas and the Penasquito mines were offset by strong performances from the Salobo and Antamina minds. With respect to Salobo, we are very excited to have added an additional 25% of the gold coming from this cornerstone asset just last week.

I will discuss this acquisition in more detail at the end of this call. For the second quarter of 2016, quarterly silver production increase by 5% and gold production increased by 40% from the previous year. Silver sales volumes increased by 28% and gold sales volumes increased by 16%.

And for the first time in a while I am pleased to report that our average realized sale prices for silver and gold are actually up year over year, with silver and gold prices up 5% and 6%, respectively. As a result, Silver Wheaton's revenues increase by 29%, net earnings were up 12%, and operating cash flows increased 23% compared to the second quarter of 2015. With the increase in commodity prices, our cash operating margins for silver and gold were strong, at around 70% resulting in operating cash flows of over $130 million during the quarter.

With regards to cash flows, our quarterly dividends continued to deliver 20% of the average cash generated by operating activities in the previous four quarters. Despite the volatility of this commodity market, our dividend policy continues to prove its sustainability, as evidenced by our quarterly dividend payment of 2016 of $0.05 per share for the second quarter. With our organic growth profile and the recent strength we have seen in precious metal prices, having a dividend policy linked directly to cash flow should bode well for higher dividends in the very near future.

In the second quarter of 2016, Silver Wheaton closed an equity financing, with net proceeds of just over $600 million. This added capacity positioned us well to evaluate and pursue new streaming opportunities. And as such, subsequent to the quarter we announced that on August 2 Silver Wheaton's wholly owned subsidiary, Silver Wheaton Caymans Limited, agreed to acquire from us a subsidiary of Vale, an additional amount of gold equal to 25% of the life of mine gold production from the Salobo mine in Brazil.

I will be discussing the Salobo acquisition in more detail following Gary's report on our operations and financials. As always, Silver Wheaton continues to focus on acquiring accretive new streams from high quality low cost mines. There is still a number of additional tangible opportunities that we are busy assessing and we do hope to pull some of these over the line in the very near future.

In summary, in the second quarter was an exceptional example of the unparalleled quality of Silver Wheaton's portfolio. By acquiring streams with attractive economics during the downturn, we're now beginning to reap the robust cash flows when the commodity prices turn.

Our production and fully funded growth are founded on the highest quality portfolio of streams in the industry, which is underpinned by very low cost mining operations. We are also optimistic about our ability to capitalize in the favorable corporate development environment, and to add additional top-tier assets to our portfolio.

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, 2016, I would like to remind everyone that all monetary figures discussed are denominated in US dollars unless otherwise noted. In addition, all prior-year comparisons that are referenced are to the second quarter of 2015 unless otherwise noted.

The Company's precious metal interests produced 7.6 million ounces of silver and 70,200 of gold in the second quarter of 2016. With respect to silver, this represented an increase of 5% relative to the prior year, with production from the recently acquired Antamina stream being largely offset by decreased production from San Dimas and Penasquito.

Gold production increased 40% relative to the prior year, with increases being observed from all of the Company's gold interests. Sales volumes amounted to 7.1 million ounces of silver and 70,800 ounces of gold in Q2 2016 representing a 28% increase for silver and a 16% increase for gold relative to the prior year. As of June 30, 2016, approximately 2.6 million payable silver ounces and 28,500 ounces of gold had been produced but not yet delivered to the Company, representing a decrease during the quarter of approximately 400,000 ounces of silver and 5,200 ounces of gold.

It is important to remember that we estimate a normal level for ounces produced but not delivered to equate to approximately two months worth of payable production. As a result, our expectation is that this balance will grow over the remainder of 2016, with production being more heavily weighted towards the latter half of the year. Revenue for the second quarter of 2016 amounted to $212 million, representing a 29% increase from 2015 due to the increased sales volumes combined with average selling prices increasing by approximately 5% to 6%.

Of this revenue 58% was attributable to silver sales while 42% related to gold. Gross margin for the second quarter of 2016 amounted to $77 million, representing a 22% increase relative to the prior year despite operating margins decreasing 2% due to higher depletion rates per ounce of silver, attributable primarily to the recently acquired Antamina silver interest.

Cash based G&A expenses amounted to $9 million in the second quarter of 2016, representing a $2 million increase from 2015 due primarily to higher legal costs. The Company continues to estimate that non-stock-based G&A expenses, which exclude expenses relating to the value of stock options granted in PSUs, will be approximately $31 million to $34 million for 2016.

Interest costs for the second quarter of 2016 amounted to $5 million, resulting in an effective interest rate on outstanding debt of 2.2%. All of this interest was expensed in the calculation of net income. This compares to $3 million of interest costs incurred in the prior year, all of which was -- $2 million of which was capitalized with the remainder being expensed.

Net earnings amounted to $60 million in the second quarter of 2016, compared to $54 million in Q2 2015, with the higher operating income being partially offset by higher G&A and interest costs. Basic earnings per share increased to $0.14, compared to $0.13 in 2015.

Operating cash flow for the second quarter of 2016 amounted to $134 million, or $0.31 per share, compared to $109 million, or $0.27 per share in the prior year, representing a 14% increase on a per share basis, once again, highlighting the accretiveness of the Company's acquisitions over the past year. Based on the Company's dividend policy, the Company's Board has declared a dividend of $0.05 a share payable to shareholders of record on August 24, 2016. Under the dividend reinvestment plan, the Board has elected to offer shareholders the option of having their dividends reinvested in newly issued common shares to the Company at a 3% discount to market.

The operational highlights for the second quarter of 2016 included the following. Attributable production relative to the San Dimas mine amounted to 1.6 million ounces representing an 11% decrease relative to Q2 2015, with this decrease being due to lower throughput and grade, partially offset by there being no sharing of payable ounces produced at San Dimas during the second quarter of 2016, compared to approximately 400,000 ounces of sharing in the prior- year. This is due to the 6 million ounce annual threshold not being achieved in 2016.

Sales volumes in Q2 2016 relative to San Dimas amounted to 1.4 million ounces of silver, an increase of 13% relative to the prior year, with the lower production being more than offset by positive changes in payable ounces produced but not yet delivered to Silver Wheaton. Penasquito generated 0.9 million ounces of attributable silver production and sales in Q2 2016, representing a 55% and 38% decrease respectively from 2015. Primarily as a result of lower ore grade and recovery from the upper transitional ore and low grade stockpiles in 2016, compared with 2015 when ore was being sourced from the heart of the deposit.

Additionally, production declined as a result of a shutdown for 10 days for plant maintenance, and a longer than anticipated period that ramped the plant up to full production due to a variety of restart issues. The plant has operated normally in July.

Goldcorp has indicated that 15% of the total freshwater relating to the Northern Well Field project was commissioned by June 30, and the project is on track to be completed during the third quarter. Antamina continues to exceed our expectations, generating over 1.7 million silver ounces of attributable production and 2.2 million ounces of silver sales in Q2 2016, with this stream having been added in the fourth quarter of the prior year.

Other silver interests generated attributable silver production and sales of 2.7 million ounces and 2.1 million ounces respectively in the second quarter of 2016 consistent with prior year. The Sudbury mines produced almost 15,000 ounces of attributable gold during Q2 2016, representing and 82% increase from the prior year attributable to higher grades and recoveries.

Sales volume relative to Sudbury amounted to 11,400 ounces of gold, representing a 9% decrease relative to the prior year, with the increased production being offset by changes in gold ounces produced but not delivered to Silver Wheaton during the relative periods. Salobo produced almost 36,000 ounces of attributable gold during Q2 2016 an increase of 28% from the comparable quarter of the prior year, with such being attributable to a combination of higher grades and recoveries.

The two lines operated at an average rate of approximately 87% of capacity during the second quarter of 2016. Sales volume relating to Salobo exceeded 45,000 ounces of gold, an increase of over 40% relative to Q2 2015, with such being attributable to a combination of increased production and changes in gold ounces produced but not delivered to Silver Wheaton during the relevant periods.

Other gold interests generated almost 20,000 ounces of attributable gold production in Q2 2016, 40% higher than the prior-year with increased production from Minto, Constancia, and 777. Sales volumes from other gold interests amounted to 14,000 ounces in Q2 2016, representing a 14% decrease relative to the prior year, with the increased production being more than offset by a buildup in ounces produced but not yet delivered in Q2 2016 compared to the significant reduction in such balances in Q2 2015.

During the second quarter of 2016, the Company completed a bought deal equity financing, generating net proceeds of $607 million. These proceeds, together with cash flow generated from operating activities, were used to repay $665 million of debt outstanding under the Company's revolving facility.

In addition, the Company dispersed $37 million in dividends and made the initial $2 million up-front payment relative to the Cotabambas early deposit agreement. Overall net cash increased by $38 million in Q2 2016, resulting in cash and cash equivalents at quarter end of $124 million. This, combined with the $706 million outstanding under the revolving facility, resulted in a net debt position as of June 30, 2016 of $582 million.

Subsequent to June 30, 2016, the Company announced that it had amended its agreement with Vale to acquire an additional 25% of the gold from Salobo in return for an additional upfront cash payment of $800 million and adjusting the strike price relative to the $10 million currently outstanding warrants to $43.75 per share from $65.

The adjustment to the warrants is estimated to result in an additional $25 million of consideration relative to this transaction. On a pro forma basis based on the balance sheet as of June 30, 2016, the Company would be in a net debt position of approximately $1.4 billion following the closing of this transaction, leaving over $600 million of immediately available capacity under its $2 billion revolving facility. Given the strength of the Company's operating cash flow, the Company can comfortably comply with the financial covenants associated with the revolving facility, even at significantly lower commodity prices.

The Company's cash position, strong forecast, future operating cash flows combined with available credit capacity under the revolving 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. Finally, with respect to the status of the dispute with the CRA, we continue to work diligently with counsel to advance the case and are currently in the discovery phase. Although it is difficult to accurately predict the timing associated with the various phases of the case, we have instructed our counsel to continue to seek an expeditious resolution with a view to completing a trial next year.

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

Thank you, Gary. We will now move on to a discussion of Salobo -- the recent Salobo transaction. As Patrick noted at the beginning of this call, I will be referencing a slide presentation that is currently found on Silver Wheaton's home webpage.

It's titled 2016 Salobo Transaction Presentation. I will be referencing page numbers as we turn through this presentation itself. I'm going to start off with slide 3.

Basically Salobo -- one of the huge attractions to this is of course the immediate cash flow and expanding on a good strong asset for us, but definitely accretive on all metrics. A strong enhancement of the growth profile -- production growth profile by adding another 50% of production, or increasing our production from Salobo by 50% from 50% to 75%. Salobo gold production is now expected to average about 300,000 ounces per year between 2016 and 2020.

With that we get 75% of that total production; very, very strong asset, good cornerstone foundation for our Company. This asset is I would argue probably the best quality asset in our portfolio. It is definitely high-quality ounces coming into this portfolio and definitely lots of expiration and expansion potential on this asset.

The terms of the deal are summarized and were summarized by Gary, but just to reiterate $800 million in cash paid upon closing, and an adjustment to the warrants that were previously issued on the very first transaction on Salobo. In addition there is some adjustments to the payments if Vale decides to move forward with an expansion at the asset. Those range anywhere between $113 million to $953 million depending on both the scale and the size of the -- and the timing, the scale and the timing of the actual expansion.

The entire 75% is now guaranteed by Vale SA and by Salobo Metais, which is the direct mine owner of Salobo. It does apply to the entire stream, and production payments were also -- the acceleration or the inflation accelerator was extended to January 1 of 2019, and that was adjusted for the entire 75%.

All in all good strong terms, and we are very happy with that. The balance sheet itself as you can see --

Yes, sorry, I am on page 5. We're just going to talk briefly about the financing of the acquisition. As previously stated, the Company will fund the upfront payment related to the stream primarily by drawing down on the $2 billion revolving credit facility.

At June 30, 2016 the Company was in a net debt position of $582 million. Following the closing of this transaction, the Company would be in a net debt position of just under $1.4 billion. We are very comfortable with this level of debt for a number of reasons.

First, it is important to remember how attractive a form of capital this is, costing us just over 2% per year currently. Secondly, at current commodity prices our high quality portfolio of streaming assets should generate close to $700 million of operating cash flow annually.

As can be seen from the next slide on slide 6, we can easily comply with financial covenants underlying our revolving credit facility, which has a current maturity date of February 27, 2021. The first covenant requires that we maintain a net debt to tangible net worth ratio of less than 0.75. As can be seen from the graph, after paying for Salobo III, we are far below this level.

The only other financial covenant requires that we maintain a minimum interest coverage ratio of greater than 3 times. Again, on a pro forma basis we expect this ratio to be far above the required levels. In summary, we are very comfortable financing this with -- this acquisition with debt and do not anticipate raising any additional capital in conjunction with this transaction.

Thank you, Gary. If you turn to slide 7, as you can see all the way across the board here significant increases in forecast cash flow reserves and resources and ultimately production. So this is definitely -- it adds over 10% to our production and cash flows over the next 10 and 20 years and almost 12% to our total reserves.

In fact on the gold reserves and resources as you can see a 37% climb in gold reserve ounces and strong increases also in the measured and indicated and inferred resources. We now have 12 million ounces of gold reserves within Silver Wheaton as a total.

Slide 9 highlights the position of Salobo during the 2016 operating year. I want to highlight that this is during 2016 when they are still finishing off the ramping up of the second line. And so we expect these costs even further to improve and push this asset further down this cost curve itself.

A good strong high-quality asset, as I mentioned earlier, one of the strongest in our portfolio. One of the reasons I'm most excited about Salobo is the exploration potential. On slide 10 we've got a cross section here that shows some gravity, some deep gravity surveys that Vale completed recently.

And as we have said before, this deposit was only drilled up to about 1 billion tons, and then Vale decided to move this asset forward. So there's still plenty of potential for this asset to grow beyond the current reserves and resources itself. We look forward to Vale moving in the drills hopefully sometime soon to try and ultimately define the full ore body in this one. We do think there is excellent exploration potential at Salobo itself.

And with that exploration potential and the existing reserve base, at current rates that reserve base runs over 50 years of mine life. All that adds up to an excellent opportunity to expand or lots of support for expanding this. If you look at slide 11, you can see a conceptual study here that Vale has completed or is working on right now in terms of a third line that would expand production levels to 36 million tons per annum. You can see how that is being laid out close to the existing stockpiles in the existing pit itself.

On slide 12 you can see the impact to Silver Wheaton with respect to gold production and how it compares on an overall basis. 42% of our revenue now should be coming from gold this year after the pro forma on this transaction, and over the next five years counting 2016. It averages about 45%.

So we definitely are a precious metals company more so than just a silver company. We see lots of opportunity still in that gold space. Good strong portfolio that is diversified amongst the precious metals.

On slide 13 you can see our updated production profile going forward with Salobo III added in. In 2016 we expect to produce 32 million ounces of silver and just over 300,000 ounces of gold over the course of the year. And if you look at our five-year average, 2016 to 2020, we should be averaging around 31 million ounces of silver and about 330,000 ounces of gold per year.

On an equivalent basis this represents around 55 million to 56 million ounces per year of silver and well over 700,000 ounces per year of gold equivalent ounces. So good strong production profile, continued growth, and some great optionality. As you can see at the end of this production profile in Pascua Lama and Rosemont and other projects good strong assets that with rising gold prices -- or rising precious metal prices will have even more pressure in terms of moving into our production profile.

So on slide 14 in summary, the Salobo III transaction delivers immediate cash flow. It is a first cost-quartile mine already in 2016, even though they're still going through the ramp-up process, and we expect those costs to even dropped further. It is accretive on every metric that we can test it on, it is a good strong asset, we know the asset well.

For that reason we're confident about the exploration and expansion potential of this mine. We do think that there is a strong likelihood that, that will move forward. Of course with our balance sheet the revolver that we have gives us very good flexibility to be able to act on these type of assets and fund it with very low interest debt.

Vale of course is a very strong partner and a very comfortable relationship with them both at Salobo and at Sudbury. In summary, this is I think the best asset in our portfolio. And so to be able to add more high-quality ounces to our portfolio from the best asset in our portfolio, extremely excited about this acquisition.

So operator, with that we're finished our presentation. We'd like to open up the call to questions, please.

(Operator Instructions)

Our first question comes from the line of Dan Rollins with RBC Capital Markets.

Yes, thanks very much. It's nice to see you doing another good deal on Salobo. Randy, I was wondering if you could touch base, we've seen the equity markets improve here, we've seen a number of the larger diversifieds start to shore up their balance sheets or beginning that process.

Where do you see the opportunity pipeline right now? Do we see anything in the $1 billion range, or are we now looking at the $200 million to $400 million range as the more realistic target market for you?

Thanks, Dan, and good morning. The market out there has definitely -- there is not a lot of larger opportunities out there right now. We do see plenty of opportunities, but most of them are below $500 million.

I would say you're probably not too far off in that $200 million to $400 million as a range. That's probably I'm going to say 90% or 95% of what we're looking at is down in that range in terms of scale. So something that we are more than comfortable in working in with respect to our current capacity and the cash flows that we have coming in, we think we are well positioned to work with that.

Of that, not to put rough numbers -- exact numbers but percentage-wise, how many of those opportunities would fit your criteria to be in the first or second quartile cost curves with decent size mine lives?

If I was going to put some, and these are very loose numbers out there, but I'd probably see anywhere between $2 billion to $3 billion in streaming opportunities out there. I think we would only be interested in about half of that.

The rest of them represent higher cost or higher risk assets, political risk jurisdictions, stuff like this and we'd be a little bit hesitant to move into that space. So probably about half of that all told, but that is all varying stages. That's stuff that will probably crystallize over the next 12 to 18 months.

Okay. And then just of that percentage would you say the majority of those are still producing assets, or are you now starting to see some interesting development opportunities?

I have to tell you, Dan, we haven't seen a development asset for a long time. There is a few out there, but it's one of the reasons that I am so bullish about where we're going in this space. Because without investing back into the ground that puts supply-side pressure onto the commodity prices themselves.

Most of what we are looking at is still balance sheet repair. It is still strengthening up balance sheets to pay for past. We're not seeing money get put into the ground yet, and until we start seeing that, we are going to continue to see supply-side pressure on commodity prices.

Okay, perfect. And then just one second question. I always like to ask it with you, given you are generating significant amount of free cash flow now, especially at these prices. And if we do see prices move higher, when do you expect to maybe start to do a blend of growth plus a dividend growth strategy in the Company?

I know as we go through the cycle and the last cycle you were very hesitant to do deals at the top of the market and you used all that cash to basically buy the original Salobo and Sudbury deals. Are we six months out, are we a year out before we start to see that cash flow -- level of cash flow paid out as a dividend start to creep higher?

I think the driving factor there, first off, important to highlight the fact that because our dividend is linked to production and therefore also linked to commodity prices, we will see some growth in our dividend just by virtue of the higher prices. This quarter was at $0.05, but I can tell you there is upward pressure on that dividend and I fully expect if commodity prices stay where they are, we will see some natural growth by the fact that it is directly linked to our cash flows and our cash flows are climbing.

If there is opportunities in front of us that are reasonably priced, then our principal focus is to try and take advantage of those opportunities. As commodity prices climb, some of those opportunities become a bit too expensive. And that's the point that we start shifting more towards the dividend side.

If you go back, that is when we actually implemented the last bump up in our dividend policy was during the peak of the commodity price cycles when it didn't make sense for us to put money into the ground. We don't like buying at the top of the cycle, our preference is to try and make acquisitions near the bottom of the quantity price cycle.

Really what drives that is what happens with commodity prices. If we see real strength in silver and gold prices over the next six months to a year, then it's going to make it tougher for us to close new acquisitions, but that is the point that we start looking at our cash flows and start contemplating increasing the dividend and moving forward.

It is really driven by commodity prices in terms of how that goes, but I do want to highlight the fact that we do have a linked dividend that ties to our cash flows. There will be upward movement as long as commodity prices keep their current trends going. There will be upward movement in our dividends.

Perfect. Thanks very much and enjoy your weekends that are coming up.

Thank you, Dan. Good talking to you.

Your next question comes from John Flanagan from Fundamental Equities.

Gary, including the recent offering, what is the total common share count now?

It's disclosed in our MD&A. It is about 440 million common shares.

Gary, how would that compare with four or five years back in terms of total additional equity that you have sold? And where I'm going is are you confident that the ROE and that has been acceptable?

I think if you look at the cash flow and earnings per share growth that we have had over that period, it is hard to say it wouldn't be acceptable. We have only done two equity financings over that period.

One was back in 2009 and then we did one earlier this year. And we funded about $5 billion of acquisitions primarily using cash flow from operations. So we are very happy with the way that we have executed on our growth strategy.

John it's Randy here. I would just highlight, about $1.5 billion in financings and over $5 billion in acquisitions. When you look at the results compared to as you say the last four or five years, there has been downward pressure on the commodity prices. What we've delivered over that period I think has definitely set us up very well for what we see here in the future.

Yes. Okay. Thanks a lot.

Thank you, John.

Your next question comes from Trevor Turnbull from Scotiabank.

Good morning, Randy. I had a question with respect to the expansions you mentioned at Salobo. They have obviously cashed themselves up to a certain degree.

You've still got the capital participation agreements that you mentioned with respect to the scale and the timing of perhaps a third or even additional lines at Salobo. So now that they have laid out what they would potentially do with a third line, do you have any sense of what they need to make those decisions, and what happens in terms of timing for them to actually start moving ahead on a third line at Salobo?

Well, they've got conceptual studies in place for this third line. And from my perspective, I think one of the things that I think is probably a wise move on their part would be to bring the drills in and try and fully define the ore body, to try and understand what the full capacity of this ore body is.

There has been some discussions on their side in terms of bringing the drills in; it hasn't been finalized, but they are talking about doing that. In terms of any expansion it is always good to have a relatively firm framework in terms of what you are working towards.

With great exploration success that third line may not be the last expansion potential. It may drive a decision to even go larger than that in terms of the expansion. To me one of the most important things that Vale could do is actually get in there and fully define this and ore body, or try and show how much bigger the potential is on this ore body.

With a 50-year mine life it seems like a third line obviously makes a lot of sense going forward. But you are saying that in terms of layouts you need to look even a bit further down the road, and perhaps with drilling they can better assess what the full life of mine potential is?

Yes. The capital participation agreement that we have with them is a one-time event. And so they have to make a decision in terms of how much support they want from Silver Wheaton as to what the scale is. That is a pretty key factor in terms of that.

If they do a third phase but then they see the potential for a fourth phase, they may want to hold off before exercising this capital participation right and wait for that fourth expansion if that comes to play. And so they've got to go through the process. This is still early stages conceptual studies on their side, but as you said with a greater than 50-year mine life it just begs for it, especially with the operating margin.

It's one of the reasons that we really put a lot of focus on the bottom half of the cost curve when we are making investments. These are the assets that our partners are driven to reinvest into and to try and expand and spend the exploration dollars on because they are the ones -- these assets are the ones that deliver the best profits back to their partners, to the operators.

And so this is a good example of Vale, which their focus right now of course is finishing off the S11D iron ore operations. But I can tell you Salobo is just begging for some further investment on their side.

Yes, it seems like it. Thanks, Randy. That's all I had.

Thank you, Trevor.

Your next question comes from John Tumazos from John Tumazos Very Independent Research.

The previous question was exactly the one I wanted to ask. Thank you.

Thanks, John.

Your next question comes from Cosmos Chiu from CIBC. Your line is open.

Hi, Randy, Gary, Patrick, and team. Congrats on a good quarter.

Thank you.

Just a few questions here, Randy. You sort of touched on this, but could you maybe elaborate a little bit more in terms of how you have enhanced your security on the entire Salobo stream and how that is different from what it used to be?

Yes, I'm going to let Gary provide that detail.

Yes, Cosmos. In doing the third tranche relative to Salobo on top of what we had normally obtained, which was a parent company guarantee, we also now have a guarantee from the company that owns the Salobo mine. And there are additional restrictive covenants around indebtedness associated with that company to further protect us.

Very similar to what we had structured relative to Antamina. And that structure is important to understand. It applies to the entire 75% of the gold coming from Salobo.

Great. And then maybe on Salobo as well, maybe also a question for Gary here. In terms of that expansion payment that you've talked about, the capital participation right to Salobo, how has that payment changed? If I were to have taken your old matrix and grossed it up to 75% ownership, would I get the numbers that are displayed today?

No. It's Randy here. When it comes to evaluating that matrix its value is based on the context of the price of gold at the time that we make those adjustments, right.

So it isn't just a direct multiplier up, each agreement -- this is Salobo III, so there has been previous two and they've all been priced in the context of the market that those deals were closed in. It is not a direct multiplier, it is adjusted to reflect the value associated with each 25% and then it's all cumulative together into the matrix itself.

Got you. And maybe switching gears a little bit. Certainly Sudbury had a very good Q2 and certainly had a very good first half of 2016. Is that indicative of the future production potential at the asset?

We've always felt Sudbury has got excellent upside potential. Vale, we really like having Vale as on operating partner. We think they do a very good job at operations.

We also find that they're quite realistic when it comes to what they expect to do, and they're forecasting is something that we're comfortable working with. We do see some upside potential in Sudbury. We did when we made the original acquisition back in 2013, and we see this as reaping its way through.

The focus in that camp, it's a camp with a very long history, obviously Sudbury, but the focus in that camp has never been gold. It's always been nickel and copper and so on. And when we look at it that's one of the reasons that we like going after non-core byproducts is that we try and find some opportunity in these non-core byproducts, and I think Sudbury is a great example of that, where there hasn't been as much focus on that side because Vale is a nickel and copper company in their Sudbury operations and so we do see that upside potential and hopefully it continues.

Of course. And maybe on to Yauliyacu here, I noticed that the cost per ounce this past quarter was $8.74 per ounce. I think that stream was restructured late last year. Could you remind us again how that works?

And then there is a participation right whenever silver is higher than $20 an ounce. How does that work? Is that based on the average price, that it could be over $20 if the average price in the quarter is over $20 an ounce then that participation right kicks in? How does it work?

So what we did with Yauliyacu was -- it's a Glencore owned asset in Peru. So that's well over 150 years of operating history. So it's got a very, very extensive history. We signed the original transaction there back in 2006.

It had a 20-year term to it. So we came back and sat down with Glencore and said we would like to convert this to a licensed mine agreement. This is an asset -- a district that has shown the ability to continue to replace reserves and resources going forward.

It's a series of dominant structures that continue on to depth. It's got very good infrastructure. One of the key things is that water issues are not a problem. They've got an excellent system set up there for managing groundwaters. And so it does give very, very long-term potential.

Our interest was in converting it to a life-of-mine type agreement. We wanted to make this asset around -- part of Silver Wheaton for a very long time. Their interest was to try and bring up their production payments on a per ounce basis and help that move forward.

So what we came up with is an agreement with Yauliyacu that has a number of different triggers on it. I'm not going to go into the detail here, but we'd be happy to provide it shortly. It is basically a sharing thing that incents them to continue moving the project forward, investing into the project, and we get the benefit of not only incentives during the next -- the remaining 10 years of this contract or nine years of this contract, but we also now get to call it a life-of-mine contract and it runs well beyond the original nine-year term.

So like all of our transactions this is in our eyes a win-win. We gain because it is now converted to life of mine. We do think that this is an asset that's going to be producing for a very long time. And for that we pay a little bit to be able to do that type of a transaction and not put capital upfront, but to make it as part of the operating costs is something that is very attractive to us.

We've got better places to put our capital right now in terms of doing that. If we can supply growth like that without having to put capital upfront right now it is also very attractive to us. So yes, the costs have gone up, but that is how we're paying for what I would call the incredible extra potential we've got out of this mine now.

Yes, of course. Thanks, that's all I have. Congrats again.

Okay. Thanks.

Our next question comes from the line of Mike Jalonen from Bank of America.

Hi Randy and team. Just had a question I guess it goes back to the mine tour there at Salobo in May, which was a great tour. Thanks again for organizing it.

Thank you.

Production 300,000 ounces you expect between 2016 and 2020, but a question I wanted to ask on the tour but there wasn't a chance because their presentation made by the mine staff didn't touch on it, but what would happen to production of gold post 2020, assuming that it stays at 24 million tons a year?

It holds pretty relatively flat. The ore body itself. I don't have that profile right in front of me here, but this is not an asset that has a lower grade. The ore body itself maintains pretty consistent grades all the way down.

We don't see -- we're not chasing lower grade marginal material. And Mike, you know I've talked about certain assets out there that have low grade material that tends to swing back and forth.

Salobo is not one; it's got a very, very well defined grade base that is consistent pretty well all the way down. So I wouldn't see that changing. I don't have the long-term production profile here in front of me, but I would say it's right along the same lines.

Mike, this is Patrick here. It does in the very tail end of the year, probably the last 10 or 11 years, it does drop down as they currently are processing just stockpile material. Prior to that though again, it's not far from the numbers that are in the news release.

In other words 2050 or something like that.

Well, that all depends what they find with the drilling. I tend to believe it will be farther out than that.

Maybe just one question on the cost curve. I assume they're cash costs since it's in copper and it is net a byproduct [cardits]. Is that based on the gross revenue for gold, or is it based on what they receive for the stream?

I believe what we referenced here is the Mackenzie Hunt -- or Wood Mack cost curve. I'm just looking at it. And therefore it's done comparable to everything else, which it wouldn't have the stream impact in it.

Okay. Thank you.

Thank you, Mike. Operator, one more question please.

Our next question comes from the line of Andrew Kaip from BMO.

Congratulations on a good quarter. I'm wondering if you can provide a bit of detail on your other streams. In particular what performed better this quarter versus where you see it -- saw some of the streams that were lower than their quarterly run rate? You've got some fairly material streams in that other category, including Constancia, and I'm wondering if you can provide any more details in that regard?

Sure. As mentioned, Antamina hit it out of the park again, three quarters in a row now. That was an asset that we were pretty comfortable with its ability to outperform. So we're quite happy with that acquisition.

Constancia is doing relatively well. I don't have the exact details here on a numbers basis, but again Hudbay is doing relatively well on that asset moving forward.

We have had some challenges on San Dimas. That's been pretty public. Primero has gone through a drive on the safety initiative, which we fully support in terms of Primero moving that forward. That's impacted -- their production capacity is down there and so at that stage they're moving their way forward.

Lagunas Norte is doing very well for us on the Barrick side. Of course that one does expire in a couple of years unless Barrick decides to extend it. It is a compensation one that we get for Pascua Lama being delayed.

Minto is also doing relatively well. They're getting into some nice high grade in that I think it's called the Minto North zone. So it's actually done relatively well. Beyond that, I think most of the details will be in our quarterly report.

Thanks very much.

This concludes the Q&A portion of today's conference call.

Thank you everyone for dialing in today. Just reinforcing that Silver Wheaton is on track for another record year of production and sales here in 2016. We continue to believe that Silver Wheaton offers the best option for gaining exposure to precious metals for a number of reasons.

Firstly we are 100% focused on precious metals. 100%.

Secondly, we have strong tangible organic growth as we have seen and delivered on. We've got a very proven, strong and proven track record of making accretive acquisitions. The recent Salobo transaction really highlighted that.

And finally, the optionality that we deliver to our shareholders; we measure it in ounces not acres. We've got some very strong optionality with these higher commodity prices. We're pretty excited about some of the projects that may come into our production portfolio or production profile here over the near term.

So thank you again for dialing in today, and we do look forward to speaking with you all again very soon.

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