Wheaton Precious Metals Corp (WPM) 2017 Q1 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2017 First Quarter Results Conference Call. (Operator Instructions)

Thank you. I would like to remind everyone that this conference call is being recorded on Wednesday, May 10, at 11:00 a.m. 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 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.

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 U.S. Securities and Exchange Commission.

The Annual Information Form Q1 2017 Management's Discussion and Analysis and the press release from last night, set out the material assumptions and risk factors that could cause actual results to differ, including, among others, fluctuations 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 and continued operations of Silver Wheaton counterparties.

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

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

Thank you, Patrick, and good morning, ladies and gentlemen. Thank you for dialing into our conference call to discuss our first quarter of 2017 results.

I am pleased to announce that Silver Wheaton had a solid start to the year, with strong results from our gold business once again. In the first quarter of 2017 Silver Wheaton's gold production and sales volumes climbed over 35% relative to the first quarter of 2016, putting the company on track to meet or exceed full year production guidance.

On the Silver side, first quarter production and sales were impacted by a strike at the San Dimas mine, which has subsequently been resolved. Our 2017 guidance for silver remains unchanged, however, as we already had factored in the impact of this strike.

Gary Brown, our Senior Vice President and Chief Financial Officer, will now provide more details on our results. Gary?

Thank you, Randy, and good morning, ladies and gentlemen. Prior to reviewing Silver Wheaton unaudited financial results for the 3 months ended March 31, 2017, 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 produced 6.5 million ounces of silver and 84,900 ounces of gold in the first quarter of 2017. Relative to the first quarter of the prior year, this represented a decrease of 14% in silver production and an increase of 37% in gold production.

The lower silver production was primarily attributable to lower production associated with San Dimas, and Antamina, with results of San Dimas being adversely impacted by a strike at the mine site during latter half of the quarter. While the increase in gold production was primarily due to the 25% increase in the gold interest relative to Salobo, combined with gold production at Sudbury and Minto increasing by 7,200 ounces and 6,000 ounces respectively.

Sales volumes amounted to 5.2 million ounces of silver and 88,400 ounces of gold in Q1 2017, representing a 31% decrease for silver and 36% increase for gold, relative to the first quarter of 2016. The decrease in the silver sales volumes was attributable to the decreases in production, coupled by negative changes in the balance of payable silver produced but not yet delivered to Silver Wheaton. The increased gold sales volumes were attributable, primarily, to the increased gold production.

As at March 31, 2017, approximately 3.9 million payable silver ounces and 51,500 payable gold ounces had been produced but not yet delivered to the company, representing an increase during the quarter of approximately 600,000 ounces of silver and a decrease of approximately 8,100 ounces of gold. We estimate a normal level for ounces produced but not delivered to equate to approximately 2 months' worth of payable production, with the balances of March 31, being very close to this expectation.

Revenue for the first quarter of 2017 amounted to $198 million, representing a 6% increase relative to Q1 2016, with the increase in gold sales volumes, combined with a 19% increase in the average selling price for silver, offsetting the decreased silver sales volumes. Of this revenue, 46% was attributable to silver sales, while 54% related to gold.

Gross margin for the first quarter of 2017 increased 27% to $76 million. Cash-based G&A expenses amounted to $7 million in the first quarter of 2017, representing a $3 million decrease from Q1 2016, due primarily to differences related to the accrued expenses associated with the company's outstanding performance share units, or PSUs. The company continues to estimate that non-stock-based G&A expenses, which exclude expenses relating to the value of stock options granted and PSUs, will be approximately $33 million to $35 million for 2017.

Interest costs for the first quarter of 2017 amounted to $6 million, resulting in an effective interest rate on outstanding debt of 2.3%, as compared to $7 million of interest costs at an effective an interest rate of 1.94% incurred in Q1 2016.

Net earnings amounted to $61 million in the first quarter of 2017 compared to $41 million in Q1 2016, with the increase being primarily attributable to the higher silver prices combined with higher gold sales volumes, partially offset by the lower silver sales volumes. Basic earnings per share, increased 36% to $0.14 compared to $0.10 per share in the prior year. Operating cash flow for the first quarter of 2017 amounted to $120 million or $0.27 per share compared to $114 million or $0.28 per share in the prior year, representing a 4% decrease (sic) [5% increase] on a per share basis. Based on the company's dividend policy, the company's board has declared a dividend of $0.07 a share payable to shareholders of record on May 25, 2017. Under the dividend reinvestment plan, the board has elected to offer shareholders the option of having their dividends reinvested in newly issued common share of the company at a 3% discount to market.

The operational highlights for the first quarter of 2017 included the following. Attributable silver production relative to the San Dimas mine decreased 33% to 600,000 ounces, with production at San Dimas being negatively impacted during Q1 2017 by a strike initiated by the unionized employees at the mine on February 15, 2017. The strike was successfully resolved on April 13, and Primero has reported that they expect significant productivity gains by reducing the daily shift change from 3 to 2, which will reduce the total time loss by commuting to and from the working phases, and by adding nearly 80 operating days per year.

Silver sales volume in Q1 2017 relative to San Dimas, decreased 41% to 800,000 ounces, as a result of the lower production coupled with negative changes in payable ounces produced but not yet delivered to Silver Wheaton. Peñasquito generated 1.3 million ounces of attributable silver production in Q1 2017, virtually identical to Q1 2016. Silver sales volumes in Q1 2017 relative to Peñasquito decreased 10% to 900,000 ounces, due to negative changes in payable ounces produced but not yet delivered to Silver Wheaton.

Goldcorp has reported that they expect increased production throughout 2017 due to various initiatives that they're undertaking, although they expect to be processing lower grade ore in the second half of the year. In addition, pre-stripping activities at the Chile Colorado pit have begun ahead of schedule, with the mining of ore expected to commence in 2018.

Finally, the construction of the Pyrite Leach project was 6% complete by the end of the first quarter of 2017, with engineering being 81% complete. As a part of this project, a carbon pre-flotation facility is being constructed, which will allow ore which was previously expected to be uneconomic to be processed.

Q1 2017 attributable silver production, relative to Antamina amounted to 1.5 million ounces, while sales amounted to 1.2 million ounces, a decrease compared to Q1 2016 of 28% and 38%, respectively. The mine site was reportedly well prepared for the major floods and mudslides that affected Peru during the month of March, with no long-term impact to production expected in 2017. Meaning that Antamina remains on track to meet the 6 million ounces silver forecast for the 2017 fiscal year.

The other silver interests generated 2.5 million ounces attributable to silver production during Q1 2017, a decrease of 7% relative to Q1 2016. During Q1 2017, silver sales relative to these other silver interests, declined 26% to 2 million ounces, due to primarily to negative changes in payable ounces produced but not yet delivered to Silver Wheaton.

The Sudbury mines produced 15,100 ounces of attributable gold during Q1 2017, representing an increase of 91%, attributable primarily to higher grades and recoveries. However, sales volume relative to Sudbury decreased by 24% to 6,900 ounces of gold, as the production gains were more than offset by negative changes in gold ounces produced but not yet delivered to Silver Wheaton. Vale has reported that Sudbury's production in the second quarter will be impacted by furnace #2 being taken offline in March for the 3 months rebuild to expand its capacity, in order to allow Sudbury to transition to a single furnace in the fourth quarter of 2017. Also in the second quarter, Sudbury will shut down the surface plant for 3 weeks for scheduled maintenance.

Salobo gold production of 53,200 ounces represented an increase of 38% in Q1 2017 relative to comparable quarter of the prior year. Primarily due to the increase in the company's attributable gold interest from 50% to 75%, effective July 1, 2016, partially offset by lower grades. For the second straight quarter the 2, 12 million ton per year lines operated at approximately 98% of capacity. Sales volume in Q1 2017 relative to Salobo amounted to 63,000 ounces of gold, an increase of 78% relative to Q1 2016, due to the increased production coupled with positive changes in gold ounces produced but not delivered to Silver Wheaton.

In the first quarter of 2017 attributable gold production and sales relating to Constancia amounted to 2,430 ounces and 2,315 ounces, respectively, with the 29% decrease in production from Q1 2016, being due to the processing of lower grade ore. Other gold interests generated over 14,000 ounces of attributable gold production in Q1 2017, an increase of 17% relative to Q1 2016. A stronger production at Minto more than offset the fact that Silver Wheaton's attributable percentage of gold relative to 777 decreased from 100% to 50% effective January, 1, 2017; as a result of HudBay successfully satisfying the completion test relating to Constancia. Gold sales relative to other gold interests, amounted to 16,200 ounces, representing a slight increase from Q1 2016.

During the first quarter of 2017, the company repaid $129 million on the revolving facility, and made the third installment amounting to $750,000 relative to the Cotabambas early deposit agreement. Overall, net cash decreased by $9 million in Q1 2017, resulting in cash and cash equivalents at March 31 of $115 million. This, combined with the $1.1 billion outstanding under the revolving facility, resulted in a net debt position, as at March 31, 2017, of approximately $949 million. The company's cash position, strong future -- forecasted 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, there's no material update relative to the company's ongoing dispute with the CRA. We continue to work diligently with counsel to advance the case as expeditiously as possible, with the expectation that the discovery process will conclude by the end of July of this year. That concludes the financial summary.

And with that, I'll turn the call back over to Randy.

Thank you, Gary. As I previously mentioned, with the solid first quarter results, Silver Wheaton remains on track to achieve our 2017 production guidance of 340,000 ounces of gold and 28 million ounces of silver. That being said, we remain focused on adding additional production from the corporate development front. And we continue to see a number of high-quality accretive opportunities. Of note, most of the recent opportunities that we are pursuing are related to project development and growth. This is definitely a shift from the opportunities that we have seen in the last few years. And with -- by far, the strongest free cash flows in the entire streaming space had well over $100 million per quarter and over $1 billion of current capacity. We have plenty of firepower for continued investment opportunities.

As always, we continue to focus on acquiring streams that are accretive to our current shareholders and come from high-quality assets producing in the lowest half of their respective cost curves. As we have grown, especially over the last -- past few years, we have seen a market increase in our gold production. And for the third consecutive quarter, revenue was roughly, evenly split between silver and gold. This balance in production and revenue further supports our proposed name change to Wheaton Precious Metals, which our shareholders will be voting on later today. We look forward to these results, and hopefully, the start of a new chapter for the company.

In summary, the first quarter has provided a solid start to 2017. Our production remains founded on the highest quality portfolio of precious metal streams in the industry, underpinned by very low cost mining operations. And we are also optimistic about our ability to capitalize on the favorable corporate development environment and to add additional top-tier assets to our portfolio.

With that, operator I would like to turn -- to open up the call for questions, please.

(Operator Instructions) Your first question comes from Dan Rollins from RBC Capital Markets.

Randy, I was wondering if you could maybe provide a little bit more color on your commentary around the potential deal flow. You noted that you're seeing a lot more opportunities on the development stage side. And I know in the past that with the early deposit agreement you had decide -- you had only found a couple of projects. So what's changed with the development stage projects from a quality basis that you're now seeing opportunities? Are they new projects coming out from single asset companies, juniors? Or are these new projects coming out of the majors that are looking to either expansions or build new mines?

Dan, I'd say it's actually a combination of both. We've had some good discussions with some of the majors about being part of the funding solution for new capital investments or for expansions of their existing assets. And we've had some great discussions with single asset companies. The streaming model is something that, I think, works the best on that side, because it always improves the project's internal rate of return. And that's one of the -- that return on capital is one of the driving factors behind making decisions to invest in. And there is no doubt that it definitely delivers value. So I would say it's a mix of both these companies -- both types of companies, the majors and the single asset companies. And we're still active on the early deposit side, there is a few that we like out there that we're trying to work our way through and move forward on. We still think that that's a great avenue to supply some long-term growth for our company. And it's always good to have some of that in your back pocket. So still active on that front. But I would say, it's pretty well an even mix between -- in terms of the more advanced projects, an even mix between the large companies and the single asset companies.

And any color around potential size of the upfront deposits on these type of acquisitions, are we talking $100 million to $200 million, or are you still seeing opportunities north of $500 million?

We're not seeing many north of $500 million. I would say that they're probably sub-$400 million, there is definitely some that are up over the $100 million to $200 million, there's a couple up in that range. So I would say the bandwidth is probably from between $100 million and $400 million in terms of what we're looking at.

Okay. And any -- is it -- are you still 100% really focused on streams, any opportunities that they have to add royalties or royalties really just not the focus of the company?

Well, we don't see new royalties -- we don't think that new royalties makes sense, in terms of people looking at that. We think streaming provides a much better avenue in terms of financing. And so we don't see new royalties. Yes, there is always existing royalties being traded around, we watch that, but not something that we're focused on.

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

I have 2 questions, if I may. First, Franco declared almost a 90% dividend payout on their first quarter. And of course, they enjoy a very nice valuation. First question is, whether you think a higher dividend payout could be in the future for Wheaton Precious Metals?

Sure, John. We have raised our dividend by 40% over the last 3 quarters. And so I do think that -- and just as a refresher, our dividend is a function of our cash flow where 20% of our free cash flow averaged over the previous 4 quarters, but it gets handed back to our shareholders. So we have seen that growth as our production has grown. And as we have seen a bit of a bounce back in commodity prices that does get delivered back to our shareholders. And so our dividend over the last 3 quarters has climbed 40%. It was constant this quarter versus last, but it is quite a significant increase over the year. So I think that's a pretty healthy increase.

I'm not complaining and I love you, it's just some of the funds that makes Franco better. Second question, the people at Sandstorm, your former colleagues, decided that mining companies were cheaper than streams and they could buy a mining company and then restructure it and end up with a stream later in their Marianas transaction. Do you think that's a good model? Or as market conditions change, do you think that, we, precious metals might make minor changes to your practices?

Well, John, we've always been about constant improvement. And so we've always added minor changes to try and deliver a better product. I can tell you that what we've delivered over the last few years is a good strong product. I don't really want to comment too much on what Sandstorm's path forward. Time will tell whether he is successful in -- or whether that company is successful in completing that transaction all the way through. I can tell you from my own personal experience that I'd -- that putting a stream in place is not a -- it's not an easy process, it's something that requires a lot of effort, a lot of work, a lot of teamwork. And so I would always be nervous about being able to actually complete a transaction like that. I don't see us stepping into that space. Again, I think the merits of a stream should sell themselves in terms of being able to work our way into, part of any type of a project financing. So I don't see ourselves stepping into that space, and I don't see a need for that.

Your next question comes from my Michael Jalonen from Bank of America.

Gary, you mentioned the discovery process with the CRA will be completed by end of July. What would be the next steps thereafter, and any -- is there any discussions on the settlement? Just curious.

Yes. I mean, once we're through the discovery process that then allows us to set a court date. At this point, we would -- our best guess is that middle of 2018 is when the court date would be set, and between the end of July and that court date, both sides would be preparing to enter court. We are ready to go as soon as possible. We're obviously interested in having our day in court occur as quickly as possible, so that we can bring clarity to the situation. But unfortunately, the best guess at this point is that the court process won't commence until sometime in 2018.

Your next question comes from Steve Butler from GMP Securities.

I wouldn't want put the Llama before the horse. But I guess, I've said this -- asked this before Barrick, but if Lama is the way forward for Pascua, in other words, guys, there could be a subset of 45,000 tons of petty operation. Randy, is there a likelihood that rehashing of the Pascua-Lama deal would be in the works, if it is just a go ahead with Lama-only?

Well, the bulk of the gold in the -- if we combine the Pascua and the Lama together, the bulk of the gold is on the Chilean side of that boundary. And so we're comfortable being patient and waiting for the bulk of that gold, and I would say silver along with it , obviously, because there's a silver stream on this asset. But we're patient in terms of waiting that. I think that anything advance in that project forward is good news. It is incredible optionality for us, this asset on their existing plan, would deliver about 9 million ounces of silver to us on an annual basis. And I would argue that even on a potential Lama plan that goes underground, they're going to be -- they're going to have to because of underground, they have to focus on higher grades. So we're going to see a substantial amount of silver that would come out anything along those lines, even if I was starting up at the 15,000 tons per day. If you remember, the 45,000 tons per day, there's 3 15,000 tons per day lines, and that third line that, take it to 45, that wasn't scheduled to start up until year 3 or 4 of actual production. And so the operation was supposed to start off at about 30,000 tons per day. And what -- the concept they are studying is the potential of Lama running at 15,000 tons per day. I look forward to their studies. I believe Barrick was scheduling sometime in the third quarter to be updating us in terms of what they see on the Lama side. I will tell you that from an exploration potential prospective, we saw a lot better exploration potential on the Argentinian side of the border. There's a number of zones that show great promise in terms of providing additional resources and ultimately reserves. But I haven't seen any activity in Barrick in terms of defining those. And so that does represent some optionality on the Argentinian side. So, yes, we support the project moving forward. We're very, very comfortable with where we are on this one. The project itself is a very high margin when it gets up and operating, it's a very high margin gold project. It has an incredibly healthy silver by-product. And so it's -- it really does fit into our project profile. And we're going to do everything we can to help Barrick get there.

Right. So as you said, it's most gold-rich on the Chilean side, is it equally the opposite? Is it silver-rich on the Argentinian side? Or is it still very -- more equally distributed?

No, I was -- it's metal-rich on the Chilean side. Silver and gold have a very strong correlation there, wherever you see high gold, you see high silver. And so, obviously, their focus is gold. And I was commenting on the fact that they're chasing the gold on the Chilean side. I mean, that's the bulk of the value in this project, silver is the same.

And, Gary, do you have an estimation of what you've received back, so far, from Barrick on the -- as a credit against the other assets that have been delivering you silver?

Yes, we've received almost $345 million to date -- till the end of March.

But considering original payment, it was $625 million. We've received well over half of our money back already. So we're doing relatively well on this. Considering it's -- we haven't seen an ounce yet from Pascua-Lama, we're doing relatively well on this Pascua-Lama deal.

Your next question comes from Anita Soni from Crédit Suisse.

Randy and Gary. So two questions. First one on Peñasquito. Do you have any color or expectations around the second half of the year for silver coming out of Peñasquito?

Yes, they're actually -- we are seeing increasing grades over the next couple of years, it actually climbs a little bit faster than gold does. Gold is expected to, sort of, climb right about the time that they bring on the Pyrite Leach circuit. But we do start seeing some bump ups in grade over the next couple of quarters. The tail end is going to be a wee bit down. I mean, it's definitively volatile over the rest of this year, but it will be climbing up slightly ahead of gold grades climbing up. And not surprisingly -- the gold grades as they climb up that's when Goldcorp expects to have that Pyrite Leach circuit up and running.

And then second question which is -- I was looking for a little bit more color on the guarantee that you provided for Primero, I'm just wondering what your expectations around Primero's production are for 2018?

Well, we think that -- sorry, for 2018?

2018, yes.

I don't know if they've even released guidance on that. So I hesitate to expand beyond that. I mean, I would say that, given the fact that they've had a strike and that they've had the settlement that they've made, I'm going to have to say it's probably an improvement over 2017, but I don't like giving guidance if our partners haven't given guidance. What I would say is that the framework around 2018 looks better, because there's definitely an improvement in terms of the labor negotiations, the productivity at the face is -- it's a pretty significant improvement actually in terms of going with the 2 longer shifts per day and running 7 days a week versus the shorter shifts, that really kept down the cost of travel time back and forth to the face. That is a big district, I mean it's got a breadth of about 40 kilometers in east and west, and about 20 to 30 kilometers north and south. And so travel time is an expensive component. So being able to shift to -- I think Primero did a great job in terms of working their way through that. But -- so I would have to say that the framework is there to have an improvement over what they forecast for 2017, just by virtue of higher productivity and ideally no labor issues over the course of 2018.

Next question comes from Jorge Beristain from Deutsche.

Randy, it's Jorge Beristain with Deutsche Bank. A quick question, just technically on the San Dimas restart, can you -- do you guys gain any extra weeks versus what you had initially budgeted. I thought you had budgeted it being out the entire second quarter, but is there any sort of extra that you're picking up with the strike now over?

We -- and you're correct, we didn't say second quarter, we said 3 months. We felt it was going to be 3 months and that's the approach that we took in terms of our own forecasts. With sort of a shut down and then a stage start up, we're not going to forecast any additional -- obviously, the strike lasted a little bit more than 2 months. But there's a staggered startup, there's new shifts coming in, a new shift style coming in. And so I'd hesitate to expect anything more than what we forecast itself.

Okay. And then, not sure if I missed this earlier, but have you provided an update on HudBay's Rosemond project, and we expect a decision by mid-2017. But given all the changes recently at the EPA, any thoughts as to -- could this move ahead sooner than expected? Or perhaps cost a little less if there's going to be less environmental cost and expense there?

Well, I mean, here's what I'm confident of is, I'm happy to have HudBay as a partner irrespective of what they've done. They have released an updated feasibility study on the project itself. And it did fine tune some of their capital cost, drove that down. They have been pretty clear about wanting a $3 copper price, before they make a decision to go forward. And of course, copper is still well short of $3 a pound. And so -- and that has been a pretty consistent message from HudBay. And so we haven't scheduled anything in. Obviously, we have seen some notifications, both from the regulators and from HudBay earlier this week that have outlined the fact that they're very close to getting their permits. I'm confident that HudBay is going to -- if they receive those permits, they're going to want to take some steps forward in terms of making sure that the project is ready to go when they see that comfortable economic environment. But until there's a $3 copper price, and they have been very consistent in that -- in their messaging, they want to hold off on making a firm commitment on that. Getting the permits in hand will be a significant step forward for this project. It's been a very, very long time. I'm kind of fortunate that we haven't put any capital in yet. And -- but we do look forward to moving on this one. That updated feasibility study really highlighted the strength of this project. When it's up and running, it's going to be a very attractive copper asset. And I do think that it will be one of our great flagships. We expect to see somewhere close to 4 million silver equivalent ounces out of this asset when it's up and running. The bulk of that is in silver. And of course, that's pretty attractive. We don't see a lot of silver opportunities out there. So we're looking forward to this one coming on stream.

Thanks, Jorge, and thank you, everyone, for dialing in today.

Just a few comments. Silver Wheaton, we are on track for another strong year of production and sales here in 2017. We continue to believe that Silver Wheaton offers the best option for gaining exposure to precious metals for a number of different reasons. Firstly, by having some of the highest margins in the precious metal space. Secondly, through our portfolio of long life, low cost, high quality assets. Thirdly, by offering a proven track record of accretive acquisitions. And finally, by delivering our shareholders optionality like Rosemont and Pasqua-Lama, measured in ounces not acres. We are excited about the proposed transition to Wheaton Precious Metals, and are confident that the new name will help reinforce our position as a the leader in the precious metal streaming and better reflect our diverse portfolio of both silver and gold assets. As our annual general meeting is just hours away, we look forward to speaking with you again, very soon. And perhaps, for the very last time, as Silver Wheaton. Thank you, again, for your support.

This concludes today's conference call. You may now disconnect.