Wheaton Precious Metals Corp (WPM) 2017 Q3 法說會逐字稿

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Wheaton Precious Metals' 2017 Third Quarter Results Conference Call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded on Friday, November 10 at 11:00 a.m. Eastern time.

I will turn the -- 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 here 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 6K, both on file with the U.S. Securities and Exchange Commission.

The Annual Information Form Q3 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 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's 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 third quarter of 2017 results.

I am pleased to report today that Wheaton Precious Metals continues to deliver solid financial results from our portfolio of high-quality, low-cost assets. In the third quarter of 2017, we produced 7.6 million ounces of silver and 96,000 ounces of gold. From a sales perspective, we sold 5.8 million ounces of silver and 83,000 ounces of gold. These results are in line with our forecasts, and we remain on track to meet full year production guidance. We continue to generate strong operating margins, resulting in over $370 million in cash flow year-to-date. And with regard to cash flow, our quarterly dividend is -- now delivers 30% of the average cash generated by operating activities in the previous 4 quarters. We now provide the highest dividend yield in the precious metal streaming space.

Gary Brown, one of our Senior Vice President and our Chief Financial Officer, will now provide more detail on these results. Gary?

Thank you, Randy, and good morning, ladies and gentlemen.

Prior to reviewing Wheaton Precious Metals' unaudited financial results for the 3 months ended September 30, 2017, I'd like to remind everyone that all monetary figures discussed are denominated in U.S. dollars unless otherwise noted.

The company's precious metal interests produced 7.6 million ounces of silver and 95,900 ounces of gold in the third quarter of 2017. Relative to the third quarter of the prior year, this represented a decrease of 1% and 15% in silver and gold production, respectively, with the lower gold production being in line with the expectations and attributable primarily due to the decreased attributable percentage of gold that the company now gets from the 777 mine and lower production from Minto. The company is reiterating its production guidance for the year of 28 million ounces of silver and 340,000 ounces of gold.

Sales volumes amounted to 5.8 million ounces of silver and 82,500 ounces of gold in the third quarter of 2017, representing a decrease of 6% and 3% for silver and gold, respectively, relative to the third quarter of 2016. The decrease in the silver sales volume was attributable primarily to the buildout during the quarter of payable silver produced but not yet delivered to Wheaton Precious Metals. The decrease in the gold sales volumes was attributable to the decreased gold production, partially offset by positive changes in the balance of payable gold produced but not yet delivered to the company. As at September 30, 2017, approximately 5.3 million payable silver ounces and 57,200 payable gold ounces have been produced but not yet delivered to the company, representing an increase during the quarter of 1.1 million payable silver ounces and 8,200 payable gold ounces. We estimate a normal level for ounces produced but not delivered to equate to approximately 2 months' worth of payable production with the balances at September 30 being consistent with this expectation.

The revenue for the third quarter of 2017 amounted to $203 million, representing a 13% decrease relative to Q3 2016, with the decrease being primarily attributable to a 14% decrease in the average realized silver price and a 6% decrease in the number of silver ounces sold. Of this revenue, 48% was attributable to silver sales while 52% related to gold.

Gross margin for the third quarter of 2017 decreased 16% to $83 million, attributable primarily to the lower silver prices.

Cash-based G&A expenses amounted to $8 million in the third quarter of 2017, virtually unchanged from Q3 2016. The company currently estimates that non-stock-based G&A expenses will be approximately $32 million to $34 million for 2017.

Interest costs for the third quarter of 2017 amounted to $6 million, consistent with the comparable quarter of the prior year, resulting in an effective interest rate on outstanding debt of 2.75%.

Net earnings amounted to $67 million in the third quarter of 2017 compared to $83 million in Q3 2016. Basic earnings per share decreased 20% to $0.15 compared to $0.19 per share in the prior year.

Operating cash flow for the third quarter of 2017 amounted to $129 million or $0.29 per share compared to $162 million or $0.37 per share in the prior year, representing a 20% decrease on a per share basis.

Based on the company's dividend policy, the company's board has declared a dividend of $0.09 a share payable to shareholders of record on November 27, 2017, representing a 50% increase from the dividend declared relative to comparable period in the prior year. Under the dividend reinvestment plan, 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.

The operational highlights for the third quarter of 2017 included the following. Attributable silver production relative to the San Dimas mine decreased 17% to 1 million ounces, with Primero stating that production at San Dimas has had been negatively impacted during the third quarter of 2017 by persistent issues with underground equipment reliability, which has impacted development rates and underground stoping activities. Silver sales volumes in Q3 2017 relative to San Dimas, decreased 10% to 962,000 ounces as a result of the lower production. Attributable silver production relative to Peñasquito in Q3 2017 amounted to 1.6 million ounces while sales amounted to 1.1 million ounces, an increase compared to Q3 2016 of 10% and 3%, respectively, with Goldcorp having indicated that the improved results were driven by improvements at Peñasquito's mill as a result of opportunities identified to achieve sustainable efficiencies, including improved equipment reliability and higher recoveries. Goldcorp also reported that the construction of the Pyrite Leach Project was 40% complete by the end of the third quarter of 2017 and is expected to commence commissioning in the fourth quarter of 2018, 3 months ahead of schedule.

Attributable silver production relative to Antamina in Q3 2017 amounted to 1.7 million ounces while sales amounted to 1.5 million ounces, an increase compared to Q3 2016 of 18% relative to production and a decrease of 4% relative to sales, with sales being adversely impacted by negative changes in payable ounces produced but not yet delivered to silver -- to Wheaton Precious Metals.

Attributable silver production relative to the other silver interests in Q3 2017 amounted to 2.6 million ounces while sales amounted to 1.7 million ounces, a decrease compared to Q3 2016 of 5% and 10%, respectively, with the decrease being primarily due to the expiry of the Cozamin agreement on April 4 of this year.

Salobo generated 73,000 ounces of attributable gold production in Q3 2017, an increase compared to Q3 2016 of 7%, primarily due to the mining of higher-grade material. During the quarter, the 2 12 million tonne per year lines operated in excess of design capacity. Gold sales volume in Q3 2017 relative to Salobo increased 34% to 67,200 ounces, with the increase being the result of the increased production, coupled with positive changes in gold ounces produced but not yet delivered to Wheaton Precious Metals.

Sudbury generated 8,400 ounces of attributable gold production in Q3 2017, a decrease compared to Q3 2016 of 22%, with the decrease being primarily the result of lower throughput. Vale has reported that the decrease was primarily due to the full operation of 2 furnaces in Q3 2016, while in Q3 2017, Sudbury transitioned to a single furnace operation. However, Vale has also stated that the transition has gone very well as the newly designed furnace is already exceeding its nameplate capacity. Gold sales volumes in Q3 2017 relative to Sudbury decreased 74% to 3,200 ounces as a result of lower production, coupled with negative changes in gold ounces produced but not yet delivered to Wheaton Precious Metals.

Attributable gold production relative to Constancia in Q3 2017 was in line with expectations and amounted to 2,500 ounces while sales amounted to 2,200 ounces, a decrease compared to Q3 2016 of 33% and 35%, respectively.

Attributable gold production relative to the other gold interests in Q3 2017 amounted to 12,000 ounces while sales amounted to 9,900 ounces, a decrease compared to Q3 2016 of 60% and 49%, respectively, with the decreases being primarily due to 2 factors: first, Wheaton Precious Metals' 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; and second, lower throughput and the processing of lower-grade material at the Minto mine as a result of mine sequencing changes to support the mine life extension.

During the third quarter of 2017, the company repaid $99 million on the revolving facility and dispersed $37 million in dividends. Overall, net cash decreased by $7 million in Q3 2017, resulting in cash and cash equivalents at September 30 of $70 million.

This, combined with the $854 million outstanding into the revolving facility, resulted in a net debt position as of September 30, 2017, of approximately $784 million.

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, there is no material update relative to the company's ongoing disputes with CRA. We continue to work diligently with counsel to advance the case as expeditiously as possible.

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

Thank you, Gary.

As I previously mentioned, with these solid third quarter results, Wheaton Precious Metals 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 continuing to add additional production from the corporate development front. There are a number of high-quality accretive opportunities that we are pursuing related to both operating and development assets. In August, we announced the signing of a nonbinding term sheet with Desert Star Resources to enter into an early deposit precious metals purchase agreement for the Kutcho project located here in British Columbia. We are very impressed with the Kutcho project and believe the project has excellent potential for both expansion and exploration.

For relatively little upfront capital, the early deposit model provides us with access to high-quality, early-stage projects with significant optionality while providing the mine developer with a non-dilutive form of financing. And as Wheaton has, by far, the strongest cash flow in the entire streaming phase as well over $100 million per quarter and over $1 billion of current capacity, we still have plenty of firepower for continued investments. As always, we remain disciplined and 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.

In summary, the third quarter was in line with our forecast end guidance. Our production remains founded on the highest quality portfolio of precious metal streams in the industry, underpinned by very low-cost mining operations. Wheaton produces more metal, generates more cash flow and now delivers the highest yield in the streaming space. 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, I'd like to open up the call for questions. Operator?

(Operator Instructions) Your first question comes in the line of Kevin Chiew with CIBC.

First off, just want to say thank you for the additional detail or breakout of the other categories for production and sales, quite helpful. Just a few questions for me. On San Dimas, with Primero's credit facility coming to you in a couple of weeks, any thoughts as we approach that deadline?

Yes. I mean, it's Randy here, Kevin. It's -- we're supportive in terms of working with Primero. We've been pretty clear about the fact that as long as progress is being made towards the solution here that we would extend that guarantee, and so we're hopeful that Primero keeps making progress.

Okay. I guess in past years that we've typically seen a larger drawdown on the -- yet to be delivered inventory, anything we should watch out for when comparing sort of past Q4 performances in terms of timing of shipments, that sort of thing?

Well, we talked about it in the past. Typically, what we wind up seeing is our partners tend to squeeze the inventory pipelines or pathways in that fourth quarter to improve their overall year-end results. And so typically, what that -- I mean, I hate to say it, but it almost winds up being a bit of an inventory build as we've seen here in the third quarter that, that winds up getting cleaned out. There's no guarantees behind that, but there's definitely incentives when it comes to year-end performance that we typically see that all captured back into the fourth quarter.

Right, absolutely. And then just on the balance sheet. You've paid down a good amount on your revolver. Just wondering how aggressive do you plan to take down the remaining amount. And all things being equal, do the past 3 quarters sort of represent a good run rate to model out?

Yes. I mean, I think you've got to look at what our projected cash flow would be per quarter. We'll take any excess cash that we've got and apply it to that facility, which is available to us for further drawdowns. So we're predicting annually to be generating $500 million to $600 million of operating cash flows. So we're paying 30% of that out to shareholders in the form of quarterly dividend, and the remainder will be applied to reduce the debt.

I would actually highlight that our hopes are to actually put it back into the ground on new acquisitions. And that's what Haytham is, of course, working on. But in the event that we don't have new acquisitions, any of that cash would just go back against the revolver.

(Operator Instructions) Your next question comes from the line of Anita Soni with Credit Suisse.

I just wanted to know if you have any idea, if an asset goes into receivership in -- or bankruptcy in Mexico, does the parties -- or would Primero still hold title to that, hold title to the asset? Or does it go back to the government?

I believe -- well, Primero would hold title if we go to the receiver who would steer through that process. So it doesn't just collapse back to the government, no.

All right. And then secondly, in terms of -- have you ever had your actual title on the royalty or the stream tested in bankruptcy court?

We have in the past. We've got a very strong security position on San Dimas, and so this is a little bit different. Every partnership is different. Our hopes are that -- we do see there's a solution here, and we're just waiting for Primero to act on that solution that would avoid any of this kind of process. But that is up to Primero. But our security being second ranked behind the depth, and the fact that we've guaranteed that top-level depth, puts us in a very, very good position with respect to this asset. Hope we never have to use it, though.

All right. And so at this stage, I mean, would we expect another extension? Or that's -- the 23rd is the deadline?

Well, the 23rd is the deadline. We've always been very clear that on an -- in fact, that's why we provided the guarantee in the first place. We've been very clear about being supportive to Primero as they work their way through this process. What I can tell you is that the asset does have healthy interest, and so there's lots of -- there's opportunities here, and now it's up to Primero to choose their own path. We're willing to work with them, and we have been working with them, and we'll continue to work with them to hopefully get them -- to take one of these paths, but they have one of their choices. So...

And your next question comes from the line of Dan Rollins with RBC Capital Markets.

Randy, I was wondering if you might be able to comment on some of the size of the potential opportunities you're looking at specifically with the assets that are producing, you're looking to the $300 million? Or are you looking something that potentially could be north of $500 million?

Dan, I'm going to let Haytham answer that one.

Thanks for the question, Dan. We continue to be very proactive, obviously, in this challenged equity environment, and there's definitely companies looking at other sources of capital including streaming. If I had to put a size factor for potential streams, it's anywhere between, call it, $50 million to $500 million at this stage. We're seeing a number of opportunities specifically related to advancing projects through the feasibility or the development stage. We're also working with certain press mill-producing companies that are looking to expand certain projects without having to take on additional debt. And lastly, we continue to look at opportunities to work with companies as they consider using stream as source of funding for potential M&A transactions. All that being said, our focus continues to be on accretive transactions, Dan. And with the assets falling to the lowest half of the cost curve, they continue to complement our current portfolio of assets. So in conclusion, any transaction we undertake has to fit in with our high-quality portfolio of assets we have.

And if you -- I know things will change having to flow with the movements in the markets and the potential partners you're talking about. But what would the -- and what's the probability that you guys going to pull the trigger on the $200 million to $300 million deal on the next 6 months?

We hope that probability is very high. We're working on a quite a few transactions that could fall onto that time line. Whether one or many gets concluded is yet to be seen.

Okay. And just on the, I think, the Kutcho deal, you've done a convertible also with that company. Is that a new element to looking at adding into the events -- asset-type acquisition?

Yes. I mean, these are partnerships that we look at. And when we see an asset that's -- I mean, one of the things that our team going through that Kutcho project were pretty impressed the way this looks. And so from a competitive space, it just looked like the right thing to do.

We -- also, we strive to be a competitive source of capital, Dan. While we obviously like to prefer to stick to streams, we recognized that in the current environment, competition is offering multi-faceted financing solutions. So we are trying to continue to be fluid in this environment and provide the counterparties and what they're looking for.

Okay. That's great color. And then, Randy, I don't know if you can comment on it, but I will try. When would you expect maybe to have an answer here on the San Dimas stream? Obviously, you're not running the process. It's up to Primero. But are you hopeful to have something by year-end? Or could this be something that maybe drags in the beginning of new year.

Well, it -- you sort of answered the question. It is up to Primero. This is something that could happen relatively quickly, but it comes down to Primero making some decisions. So we are patient in waiting for them to work their way through this process.

Thank you, and thanks to everyone for dialing in today.

Wheaton Precious Metals is on track for another strong year of production and sales here in 2017, and we believe that 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 assets and proven track record of accretive acquisitions; thirdly, by now delivering the highest yield in the streaming space; and finally, by delivering our shareholders optionality measured in ounces, not acres.

We look forward to speaking with you again soon. Thank you.

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