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Silver Wheaton Corporation (NYSE:SLW)

Q4 2012 Earnings Conference Call

March 22, 2013 11:00 a.m. ET

Executives

Patrick Drouin - Vice President, Investor Relations

Randy Smallwood - President & Chief Executive Officer

Gary Brown - Senior Vice President & Chief Financial Officer

Analysts

John Bridges - JP Morgan

Trevor Turnbull - Scotia Capital

Cosmos Chiu - CIBC World Markets

Tyler McKenna - QB Asset Management

Adrian Mitchell - Woodlawn Post

Steve Butler - Canaccord Genuity

Operator

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2012 yearend results conference call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks there will be a question-and-answer session. (Operator Instructions) Thank you. I would like to remind everyone that this conference call is being recorded on today, Friday March 22 at 11:00 a.m. Eastern Time.

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

Patrick Drouin

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, and Gary Brown, Senior Vice President and Chief Financial Officer.

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 assurance that these forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Please refer to the section entitled Description of the Business Risk Factors in Silver Wheaton’s annual information form which is available on SEDAR and in Silver Wheaton’s Form 40-F on file with the U.S. Securities and Exchange Commission. The annual information form sets out the material risk factors that could cause actual results to differ, including the assets that control our mining operations from which Silver Wheaton purchases silver, risks related to such mining operations and the risk of a decline in silver and prices. Lastly, it should be noted that all figures referred to on today's call are in U.S. dollars unless otherwise noted.

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

Randy Smallwood

Thank you, Patrick and good morning ladies and gentlemen. Thank you for dialing in. 2012 was a tremendously successful year for Silver Wheaton. The company set new financial and operating records and fulfilled its commitments to grow organically to acquire accretive new streams and to increase the dividend. In 2012 our attributable production increased for the fourth consecutive year to a record 29.6 million silver equivalent ounces. And in August we were pleased to announce the addition of two new precious metal streams from Hudbay Minerals. This acquisition provided immediate cash flow and maintained our policy of investing in low cost, high quality assets with strong operating partners.

We remain extremely busy evaluating new opportunities and in 2013 we have already acquired two new gold streams from Vale, adding yet another strong partner and significantly increasing Silver Wheaton production profile. With these additions, we now forecast production of 33.5 million silver equivalent ounces in 2013 and by 2017 we will reach 53 million ounces of silver equivalent production, an increase of nearly 80% from 2012. With 2013 forecasted to be yet another year of record production, we anticipate robust cash flows throughout the year which should enable us to have the capacity to quickly repay the drawn debt facilities entered into for the Vale transaction.

2912 was an exceptional year for Silver Wheaton and I’m pleased to say that 2013 is shaping up to be even more exciting. With respect ot the fourth quarter of 2012, we’re of course proud to announced we finished the year with our strongest ever quarter of silver equivalent production and sales. In that fourth quarter production and sales reached all-time highs of 8.5 million ounces produced and 9.1 million silver equivalent ounces sold respectively.

We expected sales to rebound in the fourth quarter as precious metals produced from various mines worked their way through the processing, transportation and smelting pipeline and this is exactly what happened as we saw sales increase 78% from the third quarter of 2012. And of course as a result we experienced record quarterly revenues with operating cash flows increasing 55% compared to the same quarter in 2011.

This strong fourth quarter resulted in Silver Wheaton achieving record 2012 annual production of 29.6 million silver equivalent ounces and record sales of 27.3 million silver equivalent ounces. And while organic growth certainly contributed, the significant production increase was largely due to the addition of the precious metals streams from Hudbay’s 777 Mine.

Our record production and sales led to record financial results in 2012, with revenue and cash flow increasing around 15% each over 2011 numbers. Gary Brown, our Chief Financial Officer will provide more detail on this shortly.

In 2011 we introduced a dividend policy where 20% of the previous quarter’s operating cash flow is distributed in the form of a quarterly dividend. Having the dividend linked directly to operating cash flow gives our shareholders a direct connection to both the price of silver and to our industry leading growth profile. This new policy resulted in a 95% increase in dividend payments made in 2012 over 2011, even though this was a period of weakening precious metal prices. Furthermore, our strong fourth quarter cash flows resulted in yesterday’s announcement that our first dividend of 2013 will be a record $0.14 per share. We are also pleased to report that Sliver Wheaton has reached yet another milestone surpassing 1 billion ounces in silver equivalent reserves, an increase of over 38% from year-end 2011. With the recent additions of Hudbay and Vale, coupled with organic growth from our partners exploration success, we now have just over 850 million silver ounces and almost 5 million gold ounces, which when combined is more than 1.1 billion ounces of silver equivalent reserves.

On the production side we released our one and five year production guidance earlier in the year. For 2013, Silver Wheaton is forecasting another year of production growth, climbing 13% from our 2012 levels to 33.5 million silver equivalent ounces. This growth is primarily driven by a full year of production from Hudbay's 777 mine as well as production from the newly acquisition Salobo and Sudbury mines around the same time.

Silver Wheaton's growth to 53 million silver equivalent ounces by 2017 will be driven largely by Barrick's Pascua-Lama project and Hudbay's Constancia project, both of which are expected to begin production in late 2014. Further contributing to this organic growth are the expected startups of Augusta's Rosemont project in 2015, and of course continued expansions of the newly acquired Salobo and the Sudbury mines.

It is worth highlighting that this growth is organic and does not account for any additional acquisitions that we may make in silver and gold streams. As we have shown already this year with the acquisition of the two new gold streams from Vale, the market has never been better for acquiring new accretive precious metal streams. With the Vale deal, we showed that sizable deals with the largest of the diversified miners are possible. And that does not mean that we are not still looking at the single asset development opportunities out there. What we will promise to our shareholders is that we will only pursue accretive deals on high quality long-life assets with strong operating partners.

It is worth noting that our capacity to continue making additional acquisitions has not been hampered by the Vale deal. We currently have well over $1 billion in capacity for additional acquisitions through two credit facilities put into place earlier this year. So in summary, Silver Wheaton has one of the strongest organic production growth profiles in the entire precious metals industry with almost 80% in growth anticipated over the next five years. Our organic growth track continues to advance with Constancia and Pascua-Lama on track for late 2014 start-ups, Salobo reaching 24 million tons per annum around the same time, and of course Rosemont targeting a 2015 production startup.

Complementing this organic growth and with our expected cash flows, our balance sheet remains very strong and we continue to look for additional accretive opportunities. We feel that we are in an ideal market to further add to our portfolio of high quality assets with strong operating partners. With more silver reserves than any other silver company in the world, an industry leading organic growth profile and  a strong track record of accretive growth, we believe that we continue to offer the premier investment vehicle for not only silver, but precious metals investors worldwide.

With that, I would like to turn the call over to Gary Brown, our Senior Vice President & Chief Financial Officer, to provide a bit more detail. Gary?

Gary Brown

Thank you, Randy, and good morning ladies and gentlemen. Prior to reviewing Silver Wheaton's audited financial results for the three-months ended December 31, 2012, I would like to remind everyone that all monitory figures discussed are denominated in U.S. dollars unless otherwise noted.

Silver Wheaton finished 2012 with a record breaking fourth quarter marked by record levels of Sliver equivalent production and sales volume which translated into record setting quarterly revenues, operating earnings, net income and operating cash flows. The company's precious metal interest generated a record setting 8.5 million silver equivalent ounces of attributable production in the fourth quarter of 2012, 10% higher than the prior quarter attributable primarily to the [fixation] of the sharing mechanism at San Dimas, better grades at Veladero, and the inclusion of a full quarter's production from Hudbay's 777 mine.

This production level was 22% higher than the production for the comparable period of the prior year, due primarily to production from 777 which was added to the portfolio in Q3 2012. Payable silver equivalent ounces produced but not yet delivered by our partners decreased by approximately 1.4 million ounces during the fourth quarter to 3.8 million ounces, primarily attributable to the shipment of concentrate produced in the prior quarters at Yauliyacu, Peñasquito and 777.

Silver equivalent sales volumes amounted to a record setting 9.1 million ounces in Q4 2012 with 80% of this relating to silver and 20% relating to gold, which was almost 80% higher than the prior quarter due to higher production at San Dimas combined with the reduction in ounces produced but not delivered at Yauliyacu, Peñasquito and 777. Compared to Q4 2011, sales volumes increased by over 50%.

Revenue for the fourth quarter of 2012 amounted to a record $287 million, with an average realized selling price of $31.46 per silver equivalent ounce sold. Again this represented an increase of almost 80% from the prior quarter and a 50% increase from the comparable period in the prior year.

Earnings from operations for the fourth quarter of 2012 amounted to $196 million, representing yet another record for the company and an increase of 57% relative to the prior quarter and 31% relative to the fourth quarter of 2011. With operating margins decreasing by 10% to 68% in the fourth quarter of 2012, due primarily to the higher depletion rates associated with the silver and gold sales from 777.

Cash based G&A expenses were $7.6 million in the fourth quarter of 2012, representing an increase of $3 million on a year over year basis, with the increase being primarily attributable to higher personnel related costs.

Net earnings amounted to a record setting $178 million in the fourth quarter of 2012 compared to $145 million in the comparable period of the prior year, with basic earnings per share increasing by 22% to $0.50 per share from $0.41 per share.

Operating cash flow for the fourth quarter of 2012 increased by 55% from the prior year to a record setting $254 million, or $0.72 per share, resulting in a dividend to be paid in April of $0.14 per share.

During the fourth quarter of 2012, the value of the company’s long-term investment portfolio and shares and other publicly listed mining and mineral exploration companies, decreased by $28 million, which has been reflected in the statement of other comprehensive income.

The strong fourth quarter completed another record setting year with the company achieving new records across virtually every measurable financial metric. Attributable silver equivalent production rose to a record 30 million ounces, 6% above the company’s most recent guidance and 17% above that achieved in 2011. This contributed to record sales of 27 million of silver equivalent ounces, representing a 30% increase relative to the prior year, with silver ounces produced by our partners, but not yet delivered to Silver Wheaton, decreasing by 300,000 ounces to 3.8 million silver equivalent ounces, with significant reductions at Yauliyacu being partially offset by a number of smaller increases at other mines.

Revenue was a record setting $850 million, compared with $730 million in 2011, with the 16% increase being attributable to the combination of a 30% increase in silver equivalent sales volumes, partially offset by 10% decrease in the average realized selling price.

Earnings from operations increased by 8% to $631 million in 2012, representing yet another record for the company, with margins falling to 74% of revenue in 2012 from 80% in 2011, due primarily to a combination of higher depletion rate and lower silver prices.

Cash flow from operations increased by 15% to $719 million, compared to $626 million in 2011, again representing a record for the company. This translated into operating cash flow per share in 2012 of $2.03 compared to $1.77 in 2011.

Cash G&A expenses totaled $24 million, consistent with company guidance in 2012, compared with $19 million in 2011, with the majority of the increase relating to increased personnel costs and charitable donations.

For 2013, the company estimates that cash based G&A expenses will amount to $32 million to $35 million, with the increase from 2012 being largely attributable to increase personal cost, combined with company's heightened commitment to corporate social responsibly initiatives and giving back to the communities in which it or it partners are involved.

Net earnings were a record setting $586 million in 2012, representing a 7% increase compared to the net earnings of $550 million generated in the prior year with basic earnings per share amounting to $1.66 in 2012 compared to $1.56 in 2011. The operational highlights for the fourth quarter of 2012 included the following. San Dimas produced 1.7 million silver ounces in Q4 2012 including 375,000 ounces from Goldcorp, representing a 7% increase relative to the prior year due to improved [mentioned] throughput grade and recoveries. This increase production translated into silver sales of 1.6 million ounces at 10% increase from the prior year.

Yauliyacu produced 616,000 ounces of silver during the fourth quarter of 2012, representing a slight increase from the comparable quarter of the prior year. However, silver produced but not delivered relative to Yauliyacu decreased by approximately 550,000 ounces during Q4 2012, resulting in silver sales of 1.1 million ounces. This was almost five times the silver sales recognized relative to Yauliyacu in the prior quarter and almost 70% higher than the silver sales recognized in Q4 2011.

As of December 31, 2012, payable silver contained in concentrates that has been produced but not shipped relative to Yauliyacu, amounted to approximately 600,000 ounces, a decrease of over 1 million ounces from the prior year. Peñasquito generated attributable silver production in excess of 1.4 million ounces during the fourth quarter of 2012, representing a 26% decrease from the prior quarter and a 12% decrease from Q4 2011, with such decreases being attributable primarily to the scheduled mining of lower grade material. Silver sales for the fourth quarter of 2012 relative to Peñasquito amounted to 1.6 million ounces with the difference between ounces produced and sold being attributable to a reduction payable silver produced but not delivered to Silver Wheaton.

Water shortages due primarily to an unprecedented regional drought, resulted in plant throughput being constrained in Peñasquito reducing throughput to 98,800 tons per day during the fourth quarter of 2012. About three quarters of designed capacity. Goldcorp has indicated that they continue to bring additional water wells into production and a water entailing study is expected to be completed in the first half of 2013 to develop a comprehensive long-term water strategy for the Peñasquito district.

The Barrick mines produced 934,000 ounces of silver in the fourth quarter of 2012, representing a 29% increase from the fourth quarter of 2011, due primarily to higher grade and recoveries at Veladero. This resulted in sliver sales of 826,000 ounces representing a 9% increase relative to the prior year. The 777 mine generated attributable silver equivalent production of 1.2 million ounces during the fourth quarter of 2012, representing the first full quarter of production from this mine since closing the transaction with Hudbay on September 28, 2012.

However, due to the delivery of silver and gold produced in the prior quarter, silver equivalent sales relative to 777 amounted to 1.8 million ounces, comprised of 28,000 ounces of gold and 300,000 ounces of silver. In summary, silver and gold produced but not delivered from Yauliyacu, Peñasquito and 777, decreased by approximately 1.4 million payable silver equivalent ounces during Q4 2012. Overall, the company's cash balances increased by $223 million in the fourth quarter of 2012, comprised of $254 million of cash generated from operations, offset primarily by $29 million of cash outflows attributable to financing activities including $7 million of debt repayments and $25 million of dividend distributions.

As at December 31, 2012, the company had $778 million of cash and cash equivalents on hand and $50 million of debt outstanding under the term loan facility.

On February 28, 2013 the company closed two new credit facilities, a $1.5 billion bridge loan facility with a term of one year and a $1 billion revolving credit facility having five year term. These two facilities replace the term loan and the $400 million revolving credit facility and as such, the $50 million of term debt outstanding at December 31, 2012 was repaid.

In addition, the company acquired two Gold Streams from Vale, making $1.9 billion in upfront payments using a combination of cash on hand and a $1.09 billion drawdown under the bridge facility. The company’s strong future cash flows combined with available credit capacity , including $1 billion available under the new revolving credit 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 pressures in metal purchase agreements.

Lastly, there has been no substantial change in the status of the audit of the company’s taxation years 2005 to 2010 by the CRA.

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

Randy Smallwood

Thank you, Gary. Operator, we’d like to open up the call for questions now, please.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of John Bridges with JP Morgan. Your line is now open.

John Bridges - JP Morgan

Congratulations on the results. At the end of your talk, you mentioned the Canadian tax review. Does that mean that’s over or does that mean there’s nothing come out of it yet?

Gary Brown

No. It means that nothing has come out of it yet. We’d hoped that this will be concluded sometime this year, but it’s very unclear as to what CRA’s timing is on this.

John Bridges - JP Morgan

And then I see you’re a good citizen paying or booking Canadian taxes. I just wondered what we could expect going forward there because you’ve got Canadian expenses as well. Is that taxes booked? And then you’ve got deferrals that will come through. How should we model that?

Gary Brown

We will ultimately pay Canadian taxes on the profits from our Canadian operations. That tax rate I believe just went up to 26%. But we won’t pay cash. So we’re accruing taxes on a deferred basis right now on that income and we’ll not pay taxes on that until we’ve exhausted the loss carry forward position that we’ve got. We estimate at current silver and gold prices that we’ll start paying cash taxes sometime in 2015.

John Bridges - JP Morgan

Thanks for the high dividend payment. I’m sure that’s been helpful this morning.

Randy Smallwood

Yeah. Again it’s 20% of our operating cash flow so there’s no change in the actual calculation, but it is definitely a nice bump up. So happy to provide that to our shareholders.

John Bridges - JP Morgan

Well done. Thanks guys.

Operator

(Operator Instructions) Your next question comes from Trevor Turnbull with Scotia Bank. Your line is open.

Trevor Turnbull - Scotia Capital

I just wondered if there was a 43-101 that might be coming out with respect to the Sudbury assets like we saw for Salobo.

Randy Smallwood

No, the Sudbury assets, the scale of Sudbury assets, they are not material with respect to Sliver Wheaton and contribution, so no need for a 43-101 to be completed.

Operator

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

Cosmos Chiu - CIBC World Markets

Few questions here. I guess first off on the Barrick stream, maybe I am looking too far ahead. But in terms of 2014, are you going to continue receiving production from Pierina, Lagunas Norte and Veladero.  Because I know you are confirmed or you are guaranteed for 75% of the capacity, so you are not really going to know until mid-late 2014. I am just wondering how I should model that transitional year in 2014?

Randy Smallwood

They expect to be starting up the mills, starting up production in the second half of 2014. The way the contract is structured is that once they achieve 75% of production rates, they satisfied the completion test. And so until they get to that point, it's tough to predict when that will actually happen. It is a 90-day completion test and so we have modeled it that we will definitely receive some silver from Lagunas Norte, Pierina and Veladero in 2014. We are hopeful of course that Barrick gets is up and running at full capacity by the end of 2014. That would be great for us. But it's tough to sort of accurately predict where that is. We know, we have been down at the site. We are pretty happy with what we see going on down there. We think Barrick has made some really good moves in the last few months to attain those targets and so it's tough to sort of be exactly firm with how that is going to transition. But basically until the completion test is satisfied, we pull silver from the other three mines to fill you any shortfalls.

Cosmos Chiu - CIBC World Markets

Okay. So certainly Q1 and Q2 2014, you are going to have some type of production coming from those other three currently producing [mines].

Randy Smallwood

Yeah, definitely. Yeah, no, they would....

Gary Brown

I think we would expect it for the entire year.

Randy Smallwood

Yeah. Because of the 90-day completion test, it is the short fall. There will be some for the entire year, of course for the entire year. We are hopeful if they can actually satisfy it by the end of the year.

Cosmos Chiu - CIBC World Markets

Okay. And in terms of the -- switching gears a little bit, in terms of the bridge loan that you have in place. I guess, it's up to the [option] of Silver Wheaton to chose either option number one, LIBOR plus 1.7% or Bank of Nova Scotia's base rate plus 0.75. Which one is more favorable at this point in time?

Gary Brown

LIBOR, for sure.

Cosmos Chiu - CIBC World Markets

Okay. So that’s how  we should model. Is it a one time kind of option? Is that how things work?

Gary Brown

No, no. Base rate loans would only be taken to the extent that we thought we would be borrowing for only a few days. Whereas LIBOR you have got to draw down for a minimum of 30-days, but LIBOR is much lower than base rates.

Cosmos Chiu - CIBC World Markets

At this point in time?

Gary Brown

Yeah.

Cosmos Chiu - CIBC World Markets

Okay. And then I guess, given that there is  a duration fee on the bridge. You know, certainly it's going to depending on what happens in terms of more permanent financing at the end. Would you consider switching some of that outstanding loan on the bridge into the revolver, given that there is not duration fee on the revolver?

Gary Brown

Yeah. We consider that, but I think you need to recognize that we put $2.5 billion of credit facilities in place, knowing that we wouldn’t need all of those to close the Vale transaction. So it really depends on that, what additional deal flow occurs here. But we would definitely consider moving some of the bridge to the revolver.

Operator

Your next question comes from the line of [Tyler McKenna with QB Asset Management]. Your line is open.

Tyler McKenna - QB Asset Management

Great quarter. I just had a question regarding the process of how do you stream in the royalty. I understand the basics but I am wondering, do you ever take the silver or gold in your possession or you’re just kind of a middle person that gets the money?

Randy Smallwood

We take delivery of silver credits. We could hold those if we want and convert them into hard silver, but we don’t hold that. We keep our business model simple for our shareholders to understand we don’t hold silver. If our shareholders choose to do that they’re more than welcome to and there’s lots of avenues for that. So we want to make sure that our model is clean and simple and easy to understand. What we provide access to is high quality precious metals production. So we don’t hold any of that metal. We could choose to if we wanted to, but there’s other avenues that I think are probably more efficient than forcing it upon all of our shareholders.

Tyler McKenna - QB Asset Management

Right. So you haven’t started. I know Franklin (inaudible) starts to do that and then I was just wondering if you guys had thought about that at all.

Randy Smallwood

I didn’t know that Franklin had actually started holding gold, but yeah, again our objective is to make sure that this company is easy to understand and easy to comprehend what it provides. As I mentioned there’s lots of avenues for people to hold silver and gold. So for us to actually mix that into our business model I think probably provides complication. I know there are shareholders that we have that do like that idea, but they’ve got avenues to pursue that and at the same time there’s also shareholders out there that perhaps don’t like that idea. So we choose to keep our business model simple and easy to understand.

Operator

Your next question comes from the line of Adrian Mitchell with Woodlawn Post. Your line is open.

Adrian Mitchell - Woodlawn Post

I was looking at the 80% growth that you have projected and I wanted to know how that reflects upon your cash operating activities and your dividend moving forward over the next five years.

Randy Smallwood

Well, because our dividend is actually connected to 20% of our operating cash flow, that’s how it’s calculated, our dividend will grow with that organic growth. As we climb in 80% of production, our dividend payments will climb. Obviously it’s a function of commodity prices too, but we are bullish in terms of precious metal prices on a longer term basis. So we expect to see growth both from organic. We also -- this is the best market that we’ve ever seen in terms of opportunities out there to make accretive acquisitions until we see acquisition growth. And then we also see exposure to the precious metals being a good one. So I would see continued -- I’m hopeful that we can continue to grow that dividend irrespective. We’ve got three different factors that we’ll add to that dividend growth over the next five years.

Operator

Your next question comes from the line of Steve Butler with Canaccord Genuity. Your line is open.

Steve Butler - Canaccord Genuity

Randy or maybe for you Gary on the tax discussion on Sudbury where you have I guess an upfront payment was described $70 million U.S, would there be a little longer timeline to paying cash taxes on the Sudbury/Vale assets?

Gary Brown

Well, I think we would pay taxes on those assets once the deposit is fully depleted. So that really doesn’t affect when it is that we’re going to ultimately pay cash taxes. What drives that is really the loss carry forward position.

Steve Butler - Canaccord Genuity

Second question was, I can’t remember the last quarter you guys actually delivered more sales in production and of course Q4 was enormously a great quarter that way where you reduced cost from inventories. Is that enough and is that maybe a yearend thing, cleaning house if you will, but sweeping the floors. But Randy, is there any chance here that you’d get some lingering effects for additional concentrate inventories sold above production in Q1?

Randy Smallwood

Yeah. Steve, it’s important to reinforce and I know I;’ve said this in the past and I’m going to reinforce it again. When it comes to produced but not yet sold, we traditionally do see in the fourth quarter companies squeeze the pipelines. Their yearends are important for them and they want to make sure that they get their production sales numbers out too. So the guidance that I’ve given in the past and I’ve reiterated now, thanks for giving me the opportunity to -- it's that our Q4s will always be good ones in terms of getting sales climbing up and I can't promise that we will always receive the production in the fourth quarter, but they will definitely be one where we do clean out that produce but not yet sold category. Unfortunately, what happens traditionally is typically in the first quarter is that that pipeline then swells back up again. And so there may be a bit of swallowing that, expending that whole pipeline that comes to a pipeline back up again here in the first quarter. We may see a bit of growth there. Overall, I mean, it all averages out in the long run but it does give us some pretty big swings in Q4 and Q1 mainly because of that year-end incentive that most of our partners have.

Steve Butler - Canaccord Genuity

Right. And was there also a small quarter quirk from Q3 into Q4 with respect to the 777 mine at Manitoba?

Randy Smallwood

There definitely was. I mean 777 didn’t deliver in sales even though they had the production in the third quarter. And we did announce that back at our conference call that we had -- and they have received a large amount of the, some of the initial deliveries from the 777 shortly after the end of the third quarter. So that definitely does have -- was a bit of a quirk that probably even highlighted this a bit more than expected. So it maybe one of the things that actually drove us to exceed the production number.

Operator

Your next question comes from the line of [Andy Shopick]. Your line is now open.

Unidentified Speaker

Randy, I want to ask you about the average cost trends. When the company really was established, you were able to acquire the streams at very attractive silver prices and clearly the properties and streams that you have in existence are pretty will fixed. You have characterized the opportunities for acquiring new streams as being very strong. But what I am really interested in trying to understand is under what terms and conditions are future streams likely to be acquired. Clearly there appears to be a little bit of creep in your average cash cost in part from the higher gold contributions when gold is basically a silver equivalent. But in reality, I am wondering whether you can give any color on prospects for future deals in terms of average cash costs and whether the mix of the business is going to put a little bit of pressure on your average cost per ounce in the future.

Randy Smallwood

Well, one of the, I think dominant strengths of our business model is that fact that our costs are fixed by contract. You are correct in saying that when we borrowed on a bit more gold with the production payments at $400 per ounce, that averages back to a bit higher than our -- when you convert that to a sliver equivalent, it did average back to a higher cost in our traditional $3.90 per ounce. I will point out that when we did the Hudbay transaction, that the Hudbay transaction is using a production payment of $5.90 per ounce not $3.90. So there is also a bit of on an increase in there.

You know I think when you look at the industry as a whole, and I often wonder why when I looked at increased costs for mining across the space, both in the capital and the operating see and we see a lot of the producing mine companies out there struggling with it. There is significant inflation in the industry. People talk about relatively low inflation rate on an overall basis, but I will tell you the mining industry is not seeing that. There has been a significant inflation over time. And there is no doubt that with that our cost of acquisition or cost of production are going to climb with that market. We started this company, silver was trading at around $5-$5.5 an ounce back in 2004. Obviously it's worth more now than it was then.

So in terms of cost, I think it's the huge traction. It's one of the most dominant features that we provide in our company and our business model. The fact that I can tell you what our costs will be in 2015. I can tell you what our costs will be per ounce in 2020. You have got that confidence. And it's the one significant difference that a company like Silver Wheaton provides for mining investors, for commodity investors out there, precious metals investors is that there’s not going to be supplies in that way. They are fixed. Our capital contributions are fixed by contract and our ongoing operating costs. And so it really -- in this environment I think it really highlights the strength of our business model and obviously our operating loss are showing that thing.

Unidentified Speaker

Well, that’s clearly the case for the existing streams and properties that you have and I think my question is more toward the future prospects and what the costs would likely be to enter in or acquire new streams and really what that’s more likely to look at because clearly I don’t think you can do the kinds of deals that you were able to do in the past when you correctly noted that silver was $5 an ounce back when you started the company.

Randy Smallwood

Yeah, Andy and I agree, I’d love to still buy silver at $5 or $10 an ounce, but (inaudible). Yeah, it is worth a lot more. So there’s no doubt that the metal we buy now is worth more than metal that we’ve bought in the future. What we do is in terms of forward forecasting, we take what we think is a relatively conservative forward cost curve, a series of cost curves. We do a probability thing and that’s how we apply it and what I can assure you is that based on most reasonable projections in terms of where we see commodity prices going, all of our acquisitions will be accretive. It has to pass that test. We haven’t changed our method of estimating value. We won’t change our method of estimating value and I think our track record today has shown that pretty strong. So in this world we are confident that precious metals will continue to gain in value. Watching what’s been happening in the Euro over the last week has been I think quite refreshing. It just shows how fragile the whole fiscal system is out there. A small entity like Cyprus. Anyway, I hope that answers your question. There’s no doubt it will be more expensive than in the future, but that’s because gold and silver are a worth a lot more than they were in the past.

Unidentified Speaker

Of course. Well, I’d be curious to see what kinds of deals you’re able to do in the future. Thanks very much.

Randy Smallwood

Thank you, operator.  Thanks everyone for dialing in.

Operator

Thank you everyone for dialing into ur conference call today. This concludes today’s conference call. Please disconnect your lines.

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