Randy Smallwood – President and CEO
Silver Wheaton Corporation (SLW) CIBC Institutional Investor Conference Call January 23, 2014 7:05 PM ET
Thanks everyone, Randy Smallwood, President and CEO of Silver Wheaton. Thanks for CIBC for putting this one on. I wish this is my second home. I’ve got kids that raised up here. So I spend lot of the time up here. So I enjoy being able to get up here for business and like having everyone else here too.
So, anyways, few cautionary statements. So I encourage you to read them. I will make some forward-looking statements.
I think Dave was right-off and started off by saying who is Silver Wheaton and look at that market cap enterprise value on our first slide. You can see what we have built. We started this company back in 2004. We are a streaming company. We don’t have royalties. We only stream. We came up with the business model and it’s been successful.
We have been able to build up a pretty healthy company through this whole process and you could see how we compare amongst the peer group. We are of course Silver focused and so there is a slight difference amongst the peer group, but we have been adding a little bit of gold over recent time.
By liquidity, we trade twice as much as everyone out in this space. We are very active. The silver space is something that’s got a strong retail holding and we do most of the trading course done in New York on the Stock Exchange.
By operating cash flow and earnings, you can see how we also compare amongst the peer groups. So we are a pretty healthy company. We’ve got very strong cash flows. We’ve got a good strong asset base going forward.
This is the asset base. It’s the total of 24 assets altogether, 19 of which are delivering metal to us already and five different development/permitting stage projects.
And so it’s really America’s focus to political risk it’s something that’s very important to us. Mexico and Peru of course being the two dominant silver producers worldwide. They are also the countries that are very, very important to us. But often in Canada and Europe, America is focused with a healthy built European exposure.
This is something my background, I’m a Geological Engineer and come from the corporate development side and focus on quality of the resources that we are investing into it.
The quality of those resources and reserves that we invest into in the silver space, we’ve built up a portfolio that includes more reserves than any other silver company out there including Fresnillo with their excellent assets down in Mexico.
But we’ve got well over 800 million ounces of reserves and close to 1.6 million ounces of total reserves and resources in the silver space along with – as I mentioned a healthy dose of gold over and above this, but definitely within the silver space, we become the dominant company.
This is the most important slide that sort of identifies Silver Wheaton and what we build on. We really focus on asset quality and our eyes in the streaming business. Even in the royalty business, asset quality comes down to the operating margins of those assets and how successful how profitable those will be for the operators, because if our partners aren’t healthy.
We are not healthy and that really comes down to as making sure that make investment into assets that have high operating margins. Because when commodity prices go down and we know they do, I’ve been in the business long enough, it’s cyclical.
We want to make sure that our investments will survive through that whole process, through that low cycle and still continue to deliver metals to us.
So what we do when we look at our assets out there, we focus on where they fit within the respective cost curve, is this a copper mine, where does that copper mine fit in the copper cost curve, where does that gold mine fit in the gold cost curve, where does that led zinc mine fit in the zinc cost curve, where does the nickel mine fit.
And you can see the current production, 88% of our production comes from assets that are in the lowest quartile of the respective curves. These are assets that will continue to produce for us and through the highs and lows of the commodity price cycles they will withstand royalty changes.
They will withstand poor management. They will withstand all the issues. They will still provide enough incentives to the partners even construction delays they will provide incentives to the partners to bring these things to production and so you can see how that changes by 2017 with the growth that we have up over to 42.5 million ounces a year silver equivalent.
We are still over 90% in the lowest half of the respective curves. So a good strong portfolio that will produce through those lows and highs. As I mentioned, climbing to 42.5, you can see how diversified our portfolio is. San Dimas the company that we founded the streaming business model on is still our largest producer.
But we are confident that we’ll eventually get surpassed by Peñasquito, and ultimately by Pascua-Lama when it comes on. We do not have Pascua-Lama in this forecast. Barrick is of course working their way through the permitting process to come up with the schedule as to when it will come into production and so you can see we are at 42.5 million ounces in 2017 without Pascua-Lama.
You still have the optionality of the Pascua explosion. A more recent transaction we did with a company called Sandspring towards the end of last year. It’s the first of our – what we call an early deposit structure, an early deposit agreement.
And it replaces in the past we’ve made equity investments to try and support to earlier stage projects as they move their forward and advance their way forward and basically what it is it’s a small amount upfront that will carry the company through the completion of a bankable feasibility study at which point.
We can make the decision as to whether we want to continue with a further investment through the construction process going forward. We think in this market, there is a lot of opportunity for this type of business model. There is a lot of junior single asset companies out there that have promising assets and they just don’t have the equity support and of course there is no debt for those entities out there.
And so this is a way for these smaller companies to provide, to get capital without diluting their current shareholders. If they’d have done this through some type of an equity financing, they would have diluted their current shareholders by about 50%.
So, this is very attractive for Sandspring, their current shareholders get to advance this project all the way through to the completion of a bankable feasibility study at which point, ideally the project will be judged, the company will be judged based on the business model and on that bankable feasibility study.
So, it’s a good strong model. We’ve got a lot of interest in this current market environment, a lot of appeal for this type of a structure and we are pretty excited about where this is going to take us. Little bit higher risk investment, very small upfront payment and great exposure for that going forward.
So really happy with the way this has turned out and look forward to doing a few more of these. So why invest in Silver Wheaton, David mentioned ETFs, you can see in the silver space back in 2004, before we created Silver Wheaton, basically the only way to get exposure to silver was investing in the traditional silver producers that you can see how that’s changed over time.
We created in 2004 where the blue bar across the bottom. But you can see what ETFs has done. The silver ETF there is much more trading activity with respect to ETFs and even Silver Wheaton or the producers themselves. But we have made a mark in this space.
Versus the silver producers, I think it’s pretty simple to understand the advantages of investing into a streaming company over a traditional producing company. That graph shows it off.
I’d like to say production companies have cost curves, we have a cost line. It’s fixed where I can tell you exactly what my cost per ounce will be in 2015 and 2020, 2024, there is no cost surprises. It’s predictable all the way through, it’s not a function of commodity prices.
It’s not a function of inflation. We’ve got a hard 1% factor that kicks this thing up going forward. So having that confidence allows our investors’ potential future and path to assess the value with confidence that now come down to the risk, the risk of the investment is the commodity price itself.
We take the cost risk out and that is easily the biggest differential between us and a traditional mining company. But versus ETF and bullion to sort of reiterate some of the stuff that David mentioned with Franco, leverage and the best way to look at that is what we’ve done over five years compared to the price of silver, 179% increase in silver price since over the last five years, but share price is being up 40%.
We do have leverage over just by virtue of our base cost per ounce, but also other factors that we fed into that. One being, organic growth. You can see when we started this company, we had about 250 million ounces in reserves and resources, we’ve added 1.8 billion in silver equivalent reserves and resources.
We’ve mined 276, but organically, we’ve had already 385 million ounces of silver equivalent growth at our projects and I would argue that with the bulk of our projects it’s still relatively immature, there is still plenty of growth to come in that space as these projects get optimized and move forward.
So, organic growth, ETF, bullion holdings grow, it definitely provide to that exposure in terms of good quality mines that has that organic growth. Accretive growth acquisitions and I think this is a good slide, not many companies will show this and this comes back to the amount of ounces per share.
Back when we started this company, 1.5 ounces of silver per share of Silver Wheaton were now over 6 ounces per share and most of that is now reserves with high confidence. That is on a per share basis. We are not issuing shares to grow. We are not diluting ourselves just to get extra metal in, we are adding value on a per share basis back and so, it’s consistent track record all the way across.
Where do we grow Silver Wheaton? The next thing, and the reason we are still silver focused is we see lots of opportunities. 70% of silver is not produced at silver mines, it comes from mainly copper mines actually, led zinc are second and gold mines are third, and then 30% of course comes from the traditional silver companies.
Our target is that byproduct production, especially the base miners. It trades at a discount, as a value arbitrage when we pool silver out of a base metal company and put it into Silver Wheaton, it’s the only type of transaction that I know of where our stock will gain value and the other party’s stock will gain value.
Every other mining transaction I know of there is always a clear winner and loser. As somebody announced the stream we’ll start scaling. So it creates value and that's reflected in the market interpretation to that. So we’ve got plenty of market there. As we can see, we’ve got only got about 4% of the current market silver production and another 6% by 2017.
Boy! I’ve used up your two minutes and a bit more. The price record, we do focus on not buying in the peaks. We have a policy of trying to buy in the bottoms. I think everyone has that policy. It’s a matter of actually being able to pick the bottoms.
When we’ve had a decent track record and continuing to being able to do that, few anomalies but we do put a real focus in that space. In terms of balance sheet capacity, we’ve got $1 billion in debt at a very, very attractive rate, 1.67% right now, so attractive that we’ve decided to carry that for a while.
We’ve also got a $1 billion revolver available to us, operating cash is of course, we do have some commitments close to $500 million as Constancia moves forward and as Augusta brings Rosemont into production which gives us still plenty of capacity and lots of market support continually receiving offers in terms of equity financings and such like that.
So we are very comfortable with respect to our capacity to continue growing Silver Wheaton. Dividend yield, bit unique, tied to operating cash flow and 20% of operating cash flow gets delivered to our shareholders. Over time that 20% will go on to 30%, 40% and because it’s tied to operating cash flow it also will capture our organic growth or our production profile that we have going forward.
So, this is worth highlighting when I add that all up with respect to ETFs and stuff like that and then look at our G&A, how cheap we are relative to the ETFs and bullion accounts out there. We deliver all of that for the same price and if you add in the dividend, we actually pay it on our shares versus the ETFs.
So, pretty healthy and competitive. You can see our performance in silver and the silver index, Silver Wheaton has been a very good place to be. So, I can summarize here, cost certainty, leverage, I hope all of that is apparent through this presentation. So, thank you.
[No formal Q&A for this event]
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