Silver Wheaton's (SLW) CEO Randy Smallwood on Q1 2014 Results - Earnings Call Transcript

May. 9.14 | About: Silver Wheaton (SLW)

Silver Wheaton Corporation (NYSE:SLW)

Q1 2014 Earnings Conference Call

May 9, 2014 11:00 AM ET

Executives

Patrick Drouin – SVP, IR

Randy Smallwood – President and CEO

Gary Brown – CFO

Analysts

Andrew Quail – Goldman Sachs

Andrew Kaip – BMO Capital Markets

Dan Rollins – RBC Capital Markets

John Bridges – JPMorgan

Kevin Chiew – CIBC

Michael Gray – Macquarie Capital Markets

Scott Morrison – Dundee Capital

Operator

Thank you, operator. Good morning ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2014 First Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's 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 Friday, May 9th at 11 AM Eastern Time.

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

Patrick Drouin

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

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, 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 among others, the absence of control of our mining operations from which Silver Wheaton purchases silver, risk related to such mining operations and the risk of a decline in silver 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'd 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 into our first quarter 2014 conference call.

We are pleased to report that Silver Wheaton has had a solid start to 2014 and we are on track to reaching this year's forecast production of $36 million silver equivalent ounces.

In the first quarter of 2014, production and sales volume increased year-over-year and while silver and gold prices were much lower than they were in the first quarter of 2013 our low cost structure allowed us to maintain strong cash operating margins.

During the first quarter, we also made great progress with some of our key growth assets. To start with, primarily the San Dimas mine down in Mexico completed its expansion to 2500 tons per day during the first quarter. Given the nature of our sharing agreement with Primero, we should realize the full impact of this expansion in 2015 and beyond.

At Vale's Salobo mine, the expansion that would double mill throughput capacity to 24 million tons per annum reached 97% completion in the first quarter and is expected to come on-stream during any day now.

In addition, the Totten mine in Sudbury began producing in the first quarter. Totten is now adding to the gold production we have receiving from five of Vale's other mines in the Sudbury camp. And finally, towards the end of the first quarter, we made our final payment for the silver stream on Hudbay's Constancia project down in Peru. Production is expected to begin in Constancia in the second half of 2014.

All being considered, we see 2014 as a solid step forward for Silver Wheaton as these core assets continue to add significant growth to our production profile. Over the next five years, we forecast production growth of nearly 35% reaching $48 million ounces in 2018 with the bulk of the growth realized over the next two years.

With respect to the first quarter 2014 our first quarter launched 2014 with substantially year-over-year gains in silver equivalent production and sales volumes. Production was 8% higher than the comparative period of last year coming in at $9 million silver equivalent ounces.

Silver equivalent sales volumes were 17% higher than a year ago at 8.1 million ounces. We also maintained a very healthy cash operating margin with cash flows of nearly $115 million over the quarter. Speaking of cash flows, our quarterly dividends continue to deliver 20% of the average cash generated by operating activities in the previous fourth quarter back to our shareholders.

As such, our dividend remains linked to our organic growth profile, our ability to make additional accretive acquisition and commodity prices. And so, even if commodity prices stay relatively constant, we will see dividend growth as our organic growth comes online over the next couple of years.

In addition, we are implementing a dividend reinvestment program that will be effective for this upcoming dividend. We have received numerous requests from our shareholders for this program and believe it will provide further flexibility and generally make it easier for our investors to increase their exposure to Silver Wheaton. Gary Brown, our Chief Financial Officer, will provide more details on this shortly.

We understand that the volatility of the current market conditions can prove challenging as it relates to share price performance. While Silver Wheaton is not immune to commodity price pressures, our business model is based on the premise of paying low and predictable cost for precious metals production from a diverse portfolio of high quality mines.

Our average cash cost in the first quarter of 2014 was $4.57 per silver equivalent ounce, which is easily among the lowest cost in all of the precious metal space. Furthermore, our first quarter cash operating margin was around 70% despite precious metals prices being down over 30% compared to a year ago. These numbers once again show that even in a weak commodity price environment, it can generate some of the highest margins in the industry.

On the corporate development front, our team remains busy pursuing value enhancing acquisitions, and we feel that we are still in a good market add to our portfolio. As streaming becomes more widely understood, we see increasing numbers of both large and small mining companies recognize the flexibility and cost competitiveness of this model.

We certainly believe that it provides an attractive funding solution, particularly in this current environment. While we search for new opportunities, we remain focused on strong operating partnerships with high quality assets that are producing in the lowest half of the respective cost curves. And rest assured, we will only add new streams that are accretive to our shareholders.

So to summarize, given that we have a strong track record of accretive growth, more silver reserves than any other silver company in the world and a robust organic growth profile that would be delivering over the next couple of years, we see our current portfolio, streaming agreements positioning us well in 2015 and beyond. And I'm excited about the next few years.

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

Gary Brown

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

Prior to reviewing Silver Wheaton's unaudited financial results for the three months ended March 31, 2014, I would like to remind everyone that all monetary figures discussed are denominated in U.S. dollars unless otherwise noted.

The company's precious metal interests generated almost 9 million silver equivalent ounces of attributable production in the first quarter of 2014, 8% higher than production from the comparable period of prior year due primarily to higher production level of Penasquito. Of the overall production, approximately 24% was gold with the remainder being silver. Payable silver equivalent ounces produced but not yet delivered by our partners amounted to 6.3 million ounces as of March 31, 2014 an increase of about 59,000 ounces over the quarter with the largest increase being observed at 777 offset by significant reduction at Yauliyacu.

Silver equivalent sales volumes amounted to 8.1 million ounces in Q1 2014, 77% of which was silver and 23% was gold representing a 17% increase from Q1 in 2013 attributable to increased gold deliveries from Sudbury and Salobo combined with increased silver deliveries from Yauliyacu and Penasquito. Revenue for the first quarter of 2014 amounted to $165 million representing 20% decrease from the comparable period of the prior year with the increased sales volume being more than offset by a 31% decrease in the average realized price per silver equivalent ounce sold with such being 2038 during the first quarter.

Earnings from operations for the first quarter of 2014 amounted to $92 million representing a decrease of 39% relative to the first quarter of 2013 with operating margins decreasing by 18% to 55% in the first quarter of 2014 due primarily to lower commodity prices with higher depletion rates also contributing to margin contraction.

Cash-based G&A expenses were $7.9 million for the first quarter of 2014, representing a decrease of $0.5 million from Q1 2013 with such being primarily attributable to lower expenditures on consulting and donations. The company continues to expect non-stock based G&A expenses of $31 million to $34 million for 2014. Net earnings amounted to $80 million in the first quarter of 2014 compared to $133 million in the comparable period of the prior year with basic earnings per share decreasing by 41% to $0.22 per share from $0.38 per share with the decrease being primarily attributable to the decrease in commodity prices.

Operating cash flow for the first quarter of 2014 amounted to $115 million compared to $166 million in Q1 2013. This translate into operating cash flow per share of $0.32 and results in a dividend of $0.07 being payable to shareholders of record on May 20, 2014.

I would like to remind shareholders that this is the first dividend that will qualify for the recently implemented dividend reinvestment plan or DRIP plan pursuant to which shareholders can elect to have this dividend reinvested in newly issued shares of Silver Wheaton Corp.

For this dividend, the Board has elected to offer the shares at a 3% discount to market. Participation in the DRIP is optional. For registered shareholders enrolment forms are available on the company's website. Non-registered or beneficial shareholders should contact their brokers to register for participation in the DRIP.

During the first quarter of 2014, the value of the company's long-term investment portfolio of shares in other publicly listed mining and mineral exploration companies increased by $8 million, which has been reflected in the statement of other comprehensive income.

The operational highlights for the first quarter of 2014 included the following: Yauliyacu produced 718,000 ounces of silver during the first quarter of 2014 representing a 15% increase from the comparable quarter of the prior year. However, silver sales relative to Yauliyacu amounted to 1.1 million ounces due to the delivery of approximately 500,000 ounces of payable silver produced in prior quarters.

This represented an increase in sales volume of 948,000 ounces compared to silver sales recognized in Q1 2013. As of March 31, 2014, payable silver contained in the concentrate that has been produced but not shipped relative to Yauliyacu amounted to approximately 1.1 million ounces.

Penasquito generated attributable silver production of 2.1 million ounces during the first quarter of 2014 representing an 88% increase from the comparable quarter of the prior year with such increase being attributable to significantly higher grades and recoveries. Silver sales for the first quarter of 2014 relative to Penasquito amounted to 1.8 million ounces representing a 26% increase relative to Q1 2013.

And as at March 31, 2014, approximately 1.5 million ounces of payable silver had been produced to Penasquito, but not yet delivered to Silver Wheaton.

Goldcorp has indicated that permitting for the Northern Well Field project, which was expected to help address the water shortages affecting throughput of Penasquito has been delayed due to unanticipated additional regulatory requirements. Goldcorp now expects this project to be completed in mid-2015. However, Goldcorp's exploration program at Penasquito continue to define the copper-gold sulphide rich skarn ore body located below and adjacent to the diatreme ore body.

In addition, Goldcorp has indicated that it is investigating the potential for producing a saleable copper concentrate at Penasquito as well as assessing the viability of leaching a pyrite concentrate from the zinc flotation tailings. Successful implementation of these new process improvements has the potential to add 4 million to 5 million ounces of silver dore production per year, of which Silver Wheaton would receive 25% which would significantly improve the overall economics and add to the mineral reserves of Penasquito.

The 777 gold interest produced 12,800 ounces of gold or 794,000 silver equivalent ounces in Q1 2014 compared to 17,000 ounces of gold in the comparable quarter of the prior year. The reduction was due primarily the lower grades and recoveries. Gold sales relative to 777 amounted to 6,300 ounces or 391,000 silver equivalent ounces which was 33% lower than sales volumes in Q1 2013 with payable gold produced but not shipped to 777 growing by about 6,100 ounces in Q1 2014 to 6,900 ounces or 400,000 silver equivalent ounces as of March 31, 2014.

The Sudbury gold interest produced about 6,100 ounces of gold or 378,000 silver equivalent ounces in Q1, 2014. This represented a 38% reduction compared to Q1 2013, primarily attributable to the mining of lower grade material. Gold sales relative to Sudbury amounted to 6,900 ounces of 428,000 silver equivalent ounces compared to 111 ounces in Q1 2013 with the comparable quarter of the prior year reflecting a build-up of ounces produced but not shipped. As of March 31, 2014, approximately 11,000 ounces of payable gold or 700,000 silver equivalent ounces had been produced but not delivered to Silver Wheaton

Another significant development relative to Sudbury was Vale’s announcement that the Totten mine was officially open during Q1 2014, which is expected to ramp up to full production in 2016 processing 2,200 tons of ore per day.

The Salobo gold interest produces 8,900 ounces of gold or 560,000 silver equivalent ounces in the first quarter of 2014 compared with 4,700 ounces in Q1 2013 with the increase being primarily attributable to the successful ramping up in the first 12 million ton per year line, which was operating in an average of 84% capacity during the first quarter of 2014. However gold sales relative to Salobo amounted to 10,600 ounces or 664,000 silver equivalent ounces compared to 720 ounces of gold in Q1 2013 with goal produced but not delivered to Silver Wheaton decreasing by about 2,100 ounces during Q1 2014 to approximately 8,800 ounces or 568,000 silver equivalent ounces.

Mill throughput capacity at Salobo is currently being expanded from 12 million tons per year to 24 million tons per year with the second line being 97% complete at March 31, 2014. The second line is expected to be operational during the second quarter of 2014.

Overall, the company's cash balances decreased by 14 million in the first quarter of 2014 with the final payment of 125 million relating to the Constancia silver stream being made during the quarter and such being largely funded with $115 of cash generated from operations during the quarter.

As of March 31, 2014, the company had $82 million of cash and cash equivalents on hand and $1 billion dollars of debt outstanding under the non-revolving term loan.

The company's current cash balance and the strong future cash flows combined with the $1 billion of credit capacity available under the 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 precious 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 Canada Revenue Agency.

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

Randy Smallwood

Thank you very much, Gary. Operator, we'd like to open up this call for questions please.

Question-and-Answer Session

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. (Operator Instructions) Your first question comes from Andrew Quail with Goldman Sachs. Your line is open.

Andrew Quail – Goldman Sachs

Randy, Gary, Patrick, good morning guys. Thank you very much for the update and congratulations on a solid quarter. I've got a few questions. First one, Randy, can you talk about sort of what the potential upside at Sudbury and what you guys are doing there to maybe increase the stream when it -- normally talking this year, and next year but maybe long term.

Randy Smallwood

Well, I will point out that Sudbury is 20-year term agreement. So when it comes to exploration and such they've already got enough reserves and resources to satisfy that 20-year term. I think probably the best upside we see there is if there is a continued efficiency discovered in the camp in terms of being able to optimize some of the production. And I know there has been some talk in the past of potentially sharing some processing capacity and stuff like that. So that's probably one of the areas that we would see some potential upside in the Sudbury camp.

Andrew Quail – Goldman Sachs

Yeah, that's good. On your financial position, do you guys sort of -- obviously, the [imminent] [ph] sort of strong cash flow generation, are you guys going to use that to pay down debt or you sort of happy with this debt level and this will sort of a create a cash surplus?

Randy Smallwood

Yeah, we're happy with this debt level. We'll create a cash surplus and just ultimately work ourselves up to even getting more capacity with the cash flows. The current market is pretty active on the corporate development front. So hopefully they don't build up too much of a cash surplus.

Andrew Quail – Goldman Sachs

Yeah, yeah. And last one, and on maybe Salobo. Just obviously ramping up given the expansion. What was sort of risk? Obviously, it's pretty much almost complete. Can that be accelerated before sort of 2016 or is it 2015 - is that sort of something we could see through coming a bit earlier?

Randy Smallwood

Well, because it's basically a parallel line for the first one, there's no doubt there's going to be some efficiencies in terms of them ramping up this one. They would have learned from starting up the first line. And so I think that's some of the reason why it was finished off six months ahead of the original schedule. So and something coming in ahead of schedule and on budget in this environment is refreshing.

There's no doubt that as they continue to ramp up, there should be some benefits and our experience is that Vale has always been very, very good at making their forecast and achieving their objectives and goals. And so, we're hopeful, but I can't promise anything.

Andrew Quail – Goldman Sachs

All right. Thanks very much guys.

Randy Smallwood

Thank you, Andrew.

Operator

Your next question comes from Kevin Chiew with CIBC. Your line is open.

Kevin Chiew – CIBC

Hey, good morning guys and congratulations on a solid quarter.

Randy Smallwood

Thanks, Kevin.

Kevin Chiew – CIBC

Few questions from me, it looks like Sudbury and Salobo sales actually exceeded production for the first time this quarter and the inventory of silver produced but not yet delivered was fairly stable. So going forward, can we assume that this is somewhat of a normal run rate for inventory build understanding that there's going to be more production coming from the concentrate assets?

Randy Smallwood

Yes. I mean as our production profile grows as we increase overall production, the produced but not yet sold is basically a function of our production levels and I'd like to characterize it as somewhere between two to two and a half months worth of production. And it's going to vary back and forth on a quarter to quarter basis. It's very challenging to forecast. I mean, a lot of this comes down to when does concentrates get shipped from particular mine sites. The larger the mine site, the more consistent you get to concentrate deliveries. And so assets like Salobo should be getting pretty regular now in terms of what the -- how frequently they deliver. But we have to recognize that Salobo is also growing substantially. Continually, the first line is of course getting close to a 100% and the second line starting production any day now.

And so, it is a bit of a tough one to guess. The way I'd like to look at it is I characterize it as about two to two and a half months of production. So as our production levels increase over the next few years, there will be upward pressure on the -- some growth on the produced but not year delivered.

Kevin Chiew – CIBC

All right. Understood. So it looks like 777 had a bit of a slower start relative to forecast for the year. I'm just wondering, is this function of the timing of production? And can we expect the pickup in production in the coming quarters? Just looking at some of the historical production, it's been able to hit certainly higher levels.

Randy Smallwood

Yeah, they had some issues with stope stability there and had to reschedule into some lower grade areas while they got the stability in place. And so, safety of course being paramount, and first we fully understand them taking that approach. And so they expect to be able to schedule back in some of that higher grade there was some stope stability issues that had forced them to reschedule into some lower grade materials. So we do think this is sort of a one-off.

Kevin Chiew – CIBC

Right. And just a final question. I see you made your final payment related to the silver stream. Do you have a better sense of the timing of when you might expect to pay the final $135 million related to the gold stream?

Randy Smallwood

Yes, it's going to be June/July, somewhere in that timeframe. I just talked to David just recently, David Garofalo at HudBay and he sees themselves on target for that range. Just a reminder, we do have the option of delivering that one in shares of Silver Wheaton and so we'll make the decision at that time in terms of how we go forward. But yes, it's going to be sometime in June or July.

Kevin Chiew – CIBC

Right. Perfect. Thanks, Randy.

Randy Smallwood

Yeah, thanks Kevin.

Operator

Your next question comes from John Bridges with JPMorgan. Your line is open.

John Bridges – JPMorgan

Hi Randy. Congratulations on the results.

Just going a bit of bookkeeping, really. The capitalized interest, how much longer do you think you're going to be showing that?

Gary Brown

Well, we'll capitalize that to the projects that are currently under development until they start producing effectively. So the majority of that is being capitalized to Pascua Lama and Constancia. Constancia is expected to be operational by the end of 2014. So we'll likely stop capitalizing the interest that's being capitalized to Constancia near the end of 2014.

And Pascua will continue to capitalize interest until it becomes operational. So it really depends on how much debt we've got outstanding as to how -- and the interest rate that we're bearing on that debt as to how much is being capitalized; I would remind people that the debt that we're carrying right now is bearing an interest rate of below 2%. So it's very efficient form of capital for us.

John Bridges – JPMorgan

And the rough split between Pascua Lama and Constancia?

Gary Brown

I think you can get that roughly by looking at what our investment is in those two assets. I think it's going to be roughly one-third Constancia, two-thirds Pascua Lama.

John Bridges – JPMorgan

And then I've done, maybe it's my arithmetic. But was there anything which would cause a disconnect between the reported ounces from 777 and Penasquito this quarter or do I just need to look at my arithmetic?

Randy Smallwood

Sorry. Can you elaborate a bit there? I didn’t quite understand what you're asking.

John Bridges – JPMorgan

The depreciation reported for those [inaudible] was looking a little bit out of whack.

Gary Brown

Yeah. Not sure what - sorry, for 777 and…

Randy Smallwood

Penasquito.

Gary Brown

And Penasquito. Average depletion for Penasquito is about $3 per ounce and average depletion for 777 was $823 [inaudible] of gold which isn't too dissimilar from what the depletion rates were for the prior year.

John Bridges – JPMorgan

Okay, fine. I'll check my arithmetic. Thanks guys and congratulations on the results.

Gary Brown

Thank you.

Randy Smallwood

Thank you, John.

Operator

Your next question comes from Andrew Kaip with BMO Capital Markets. Your line is open.

Andrew Kaip – BMO Capital Markets

Good morning guys. Just one question. Gary, your range for your corporate expenses non-stock, it's 31 to 34. Can you just elaborate on what would push it to the higher end of that guidance?

Gary Brown

I guess one of the things that my push is to the higher end of that guidance is consulting and advisory services relative to the CRA audit that's being undergone right now. Right now, there's not a lot of new developments on that front and we're hopeful that it wraps up relatively soon. But to the extent that it requires advisory services that could be one item that drives it up.

I think it's pretty tight range that we've given there. But there could be -- we're trying to be conservative with respect to our estimation of those costs.

Andrew Kaip – BMO Capital Markets

Okay. And then just on Yauliyacu, it had a good quarter this quarter. You saw some silver is not yet delivered - paid out during the quarter. What's your sense of Yauliyacu on a go-forward basis? It has been somewhat variable. I'm just wondering if you guys are getting a sense that you're going to see more stability on that stream.

Randy Smallwood

Well, we see lots of stability in the stream from a production perspective. And that to me is the most important because the produced but not yet delivered will ultimately work its way through the system. Given that it's owned by Glencore, of course, beyond being a very capable mining company, it's also a very capable trading company. I think the concentrates that are produced at Yauliyacu will always have a bit more flexibility than we see the normal mining company that doesn't manage their own trading activities.

And so I do think it's going to be something that will have a bit unique to it. Again, from a production perspective, Yauliyacu has done well. And that's the most important number for us. We follow that most importantly. And just recognize the fact that it's a unique one. They do flip back and forth from producing bulk concentrate to producing discrete concentrates depending on what the market where they feel the best return is in the market space. And the mill has got that flexibility now that they can go back and forth. And I think we're just going to have to -- I'm not going to say live with it because it's a great asset and we're really happy to have the portfolio. I think it's just part of the cover of that asset.

Andrew Kaip – BMO Capital Markets

All right. Thanks very much.

Randy Smallwood

All right. Thanks, Andrew.

Operator

(Operator Instructions) Your next question comes from Dan Rollins with RBC Capital Markets. Your line is open.

Dan Rollins – RBC Capital Markets

Yeah, thanks very much. I was wondering if you guys could just talk about what you're seeing on the corporate development side. Obviously, we saw a bit of rally in gold and silver earlier in the year. We started to see some equity being raised. The market seems to slow down now. Are you seeing, given the markets are still pretty tighter, are you seeing more people coming back to you now? And more a second question would be how much are you starting to see this advance deposit program starting to gain trust with potential partners?

Randy Smallwood

Yeah. The first one, obviously, we provide a source of capital that competes with debt and equity and so the little wakeup in the equity market that we had early in the year provided a little bit more of an attractive alternative or it provided a more of a different alternative for a while. It's definitely dried up; we are busy on the corporate development front. Our challenge is always making sure that we invest into the top quality assets that being assets that have healthy operating margins. And so we really put a lot of focus into that. We always have and we always will.

But there's no doubt, things are busy on that front. The early deposit structure is something that we are seeing quite a bit of interest in. One of the challenges of course is that -- and we all know the market is a pretty efficient area with respect to quality of projects, and the quality of projects generally do get highlighted and supported through the marketplace even in this environment.

And so, our challenge is finding good projects to invest into so we do a lot of looking and we're hopeful to close on a few. We definitely do see some good promising projects out there. So we hope to close on a few of those over the next while and we think it's perfectly suited for this environment. It's pretty well the only way that these guys can raise capital right now without diluting their existing shareholders extensively because of the depressed share prices. And so we do think there's lots of opportunities there and hope to see to more of those types of transactions come.

Dan, you know me well enough to know that [inaudible] a lot of opportunities that we see in that space. I think it's a great long-term opportunity for Silver Wheaton.

Dan Rollins – RBC Capital Markets

Yeah. And then maybe a follow up. You guys have great sort of assets. It's very long life assets, the Salobo transaction sort of shows that it is another cornerstone asset sort of another anchor as they have in a lot of [malls with] [ph] stores. But it's something to build a company off of and you have quite a few of those.

Are you still targeting or prefer to target these larger deals just to give you that long-term benefit instability from those cash flows and likely a very strong return on equity over 30 years, 40 years?

Randy Smallwood

No doubt. But as I mentioned early on, that first criteria that we have to satisfy is operating margins. We only focus on assets in the bottom half of the respective cost curves. And that's generally is the biggest hurdle. Those assets are usually pretty healthy from a cash flow perspective. And so there's got to be a need for capital for other reasons or expansion capital and stuff like that. So that's the first criteria.

Size is always nice, geological potential in terms of long-lived assets is of course, very attractive for us. We are building for a long -term value in this company. We always have been and always will be. And so those are the assets that do find the most appeal. But I tell you, if it's -- it's got to have the margin. It's not just the scale of the resource or the geological potential. It's got to have healthy operating margins too.

Dan Rollins – RBC Capital Markets

Okay. And this is maybe my last question. Just on the competition you're seeing from -- on the streaming side, obviously, lately there have been some big players in the space. Some of them are private equity type vehicles. We've seen some pension funds starting to get active in the space.

Are you seeing them directly competing with you right now? Are they more on the smaller scale streaming opportunities?

Randy Smallwood

Well, they're definitely looking at the smaller scale. This is one advantage that we have is capacity and is scale. But I tell you, the last four, five months have been very interesting in terms of where streaming has gone from. When we started this business model 10 years ago, when you sit and look at the number of different ways that streaming has been used and we of course have our ears to the ground and there's all sorts of other interested parties out there. I mean I think it underscores success. Success always breeds competition. And it sort of underscores how strong the model is.

And so there's no doubt there's more interest in this model and in this business style. We still see a lot of capacity for that. We do think that this is becoming a more attractive means of mine financing. So I think there's still a lot of capacity for -- even for the new players that are coming into the space and still to keep a healthy opportunity set for us.

Dan Rollins – RBC Capital Markets

Great quarter. Enjoy the weekend guys.

Randy Smallwood

Thank you, Dan.

Operator

Your next question comes from Michael Gray with Macquarie Capital Markets. Your line is open.

Michael Gray – Macquarie Capital Markets

Good morning guys. Just a question on the Penasquito (indiscernible). I think I heard correctly, 25% of maybe up to 4.5 million ounces silver once Goldcorp may be gets that pre-feas done. Was there anything, any silver associated with your other project, potentially [inaudible] copper stream?

Randy Smallwood

Oh, definitely. Yes, yes. When you say copper stream, I think you mean the copper concentrate that they're talking about producing?

Michael Gray – Macquarie Capital Markets

Yeah, yeah.

Randy Smallwood

It's a combination. What they're looking at is producing a copper concentrate which we see from the Chile Colorado zone, [this zone] [ph] had higher copper grades than the Penasco zone and so they're shifting the production in that space, but they're also seeing some good copper numbers out of this [skarn][ph] exploration they are doing. And both of those do come with healthy silver credits. So, yeah, I know, it's definitely exciting news for us. The project is maturing into the asset that we've always known that it can be.

Michael Gray – Macquarie Capital Markets

Okay. Thanks. And last question on San Dimas 2018 production, looks like you are estimating 6.24 million ounces of silver, whereas the contract is going to be a minimum 6 million. So would it be fair to say you're kind of being conservative on that front vis-a-vis any future expansions?

Randy Smallwood

Possibly. First off, it's not a minimum of 6 million. What it is, we get 100% of the silver up to 6 million. So there's no minimums in that.

Michael Gray – Macquarie Capital Markets

Right, right. Sure.

Randy Smallwood

But at that point we'll be getting 100% of the silver up to 6 million ounces and the next of that we share. I got to tell you Joe Conway and the guys at Primero have done a fantastic job of that asset. It continues to perform; they are investing into the asset and it is delivering great returns.

And so, you know, we do see Primero they are studying further expansion beyond the 2,500 tons per day. I would stay tuned and listen to what Primero has to say over the next -- I think it's by the end of this year they expect to have some decisions later maybe early next year.

That would definitely increase the capacity, the longer term capacity. So we are basing on a long-term numbers on this, on that lower number right now.

Michael Gray – Macquarie Capital Markets

Okay. Thanks guys.

Randy Smallwood

Thank you, Michael. Last question, please, Operator?

Operator

Your next question comes from Scott Morrison with Dundee Capital. Your line is open.

Scott Morrison – Dundee Capital

Good morning and congratulations on the good quarter. Just a housekeeping question for us.

When we look at payable levels on the quarter there around 91% to 92%, what do you expect that to be going forward through this year and then through 2015 as Salobo and Constancia ramp up?

Gary Brown

We would expect that the payable factor will remain about 90% level.

Scott Morrison – Dundee Capital

Okay. That's great. Thank you.

Randy Smallwood

Great. Well, thank you for dialing in everyone. Just a couple of closing comments here. Our first quarter represented a very solid start to what I call a pivotal year for Silver Wheaton. With San Dimas expansion, Totten mine coming online, the Salobo mine ready to turn on the switch, the second line at Salobo ready to turn on the switch any day now Constancia coming on towards the end of this year; 2014 is truly a pivotal year for Silver Wheaton. Plenty of [inaudible] within 2014, within our current pipeline and given how ripe the environment is out there right now, we do think there's ample opportunity to continue to grow our portfolio.

One last final reminder, we have our Annual General Meeting today here in Vancouver. If anyone is in Vancouver, you’re welcome to come and join us at the Fairmont Waterfront Hotel at 1 p.m. today. So thanks for dialing in everyone and stay tuned.

Operator

This concludes the conference call for today. Thank you for participating. Please disconnect your line.

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Silver Wheaton (SLW): Q1 EPS of $0.22 in-line. Revenue of $165.4M (-19.6% Y/Y) misses by $20.71M.