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Silver Wheaton Corporation (NYSE:SLW)

Q2 2014 Earnings Conference Call

August 14, 2014 11:00 AM ET

Executives

Patrick Drouin - SVP, IR

Randy Smallwood - President and CEO

Gary Brown - SVP and CFO

Haytham Hodaly - SVP, Corporate Development

Analysts

Trevor Turnbull - Scotiabank

Duncan Lai - Macquarie Research Equities

John Flanagan - Fundamental Equity

Dan Rollins - RBC Capital Markets

Operator

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2014 Second 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 Thursday, August 14th 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, Stephanie. Good morning ladies and gentlemen and thank you for participating in today's call. I'm joined today by Randy Smallwood, Silver Wheaton's President and Chief Executive Officer; Gary Brown, Senior Vice President and Chief Financial Officer; and Haytham Hodaly, Senior Vice President, Corporate Development.

I'd like to bring your attention that some of the commentary in today's call may contain forward-looking statements. There can be no assurances 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 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 and gold 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 in to our second quarter 2014 conference call. We’re pleased to report that Silver Wheaton had another solid quarter in Q2 of 2014. During the quarter, significant progress was made at two of our key growth platforms Salobo and Constancia.

The Salobo mine received first production after their recent expansion which doubled the mine capacity and the Constancia project is moving forward and was at 85% completion at the end of Q2. We look forward to receiving production from Constancia later this year. Two of our cornerstone assets are also worth highlighting. Firstly, despite water supply continuing to be a limiting factor Peñasquito achieved record production in the second quarter.

And secondly, San Dimas completed its expansion to 2,500 tons per day earlier this year and Primero very recently announced a further expansion to 3,000 tons per day. Given the progress made in our diversified portfolio of mines and projects, we believe we’re well positioned to grow our revenues and earnings even if precious metal price which maintain these levels.

Based on current agreements we forecast 2014 annual production of around 36 million silver equivalent ounces and by 2018 this is expected to increase approximately 35% to 48 million silver equivalent ounces. This five year growth will be driven by Hudbay's Constancia project, Vale's Salobo and Sudbury mines and the Rosemont project along with the continued expansion of San Dimas.

In the second quarter silver equivalent sales volumes were 4% higher than the comparative period last year coming in at 7.5 million ounces. Our production was 4% lower than the comparable period last year about 8.4 million silver equivalent ounces. The average realized sales price per silver equivalent ounce was 14% lower than Q2 of 2013. However, we once again maintained a healthy cash operating margin with cash flows in excess of $100 million.

Speaking of cash flows, our quarterly dividend continues to deliver 40% of the average cash generated by operating activities in the previous four quarters. Our dividends remain linked to the Company’s organic growth profile, our ability to make additional accretive acquisitions and commodity prices. And despite the volatility of the markets our dividend are sustainable as evidenced by our third quarterly dividend payment of 2014 of $0.06 per share.

Furthermore, our recently implemented dividend reinvestment program has been very well received. Gary Brown, our Chief Financial Officer will provide more detail on this shortly. Over the past few months, there’s been renewed optimism in the precious metal space both for the actual performance of silver and gold and for share prices of precious metal companies.

Our business model is based on the premise of paying low predictable costs for precious metal streams from a diverse portfolio of high quality mines, so any increases in precious metal prices flow directly to our bottom-line. In the second quarter, our average cash cost per silver equivalent ounce was $4.72 per ounce which is easily among the lowest cost than all of the precious metal space. As a result, our second quarter cash operating margin was over 75%. These numbers once again show that we can generate some of the highest margins in this industry.

On the corporate development front, our team remains busy pursuing value enhancing acquisitions and we feel we’re still in a good market to add to our portfolio. We certainly believe that streaming provides an attractive funding solution for both large and small mining companies, particularly within the current environment of scarce capital. Our funding option continues to be more widely understood amongst the mining sector and as a result, we see a number of high quality opportunities for Silver Wheaton. And while we look for accretive new opportunities, we remain focused on strong operating partners with high quality assets that are producing in the lowest half of their respective cost curves.

So to summarize, Silver Wheaton has a robust organic production growth profile of nearly 35% anticipated over the next five years. The bulk of this growth will be driven by the start-up of Hudbay's Constancia project later this year, with continued expansions at Vale, Salobo and Sudbury mines and Primero’s San Dimas mine and continued improvements at Peñasquito all expected to deliver over the next couple of years. And of course the Rosemont project now acquired by Hudbay Minerals will help us reach that 48 million silver equivalent ounces of production in 2018.

Our sustainable dividend will continue to provide investors a direct link towards the earnings growth profile and operating cash flows and we will strategically search for additional accretive opportunities to complement this organic growth focusing on high quality, low cost assets. Silver Wheaton remains well positioned given our strong diversified portfolio of streams and we look forward to the coming years as our growth profile continues to crystallize.

With that, I’d 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 June 30, 2014, I’d just like to remind everyone that all monetary figures discussed are denominated in U.S. dollars unless otherwise noted.

The Company’s precious metal interest generated 8.4 million silver equivalent ounces of attributable production in the second quarter of 2014, 4% lower than production from the comparable period of the prior year due primarily to lower production levels from Keno Hill, 777 and the Barrick and Sudbury mines with such being partially offset by a significant increase in production from Peñasquito and Salobo. Of the overall production, approximately 25% was gold with the remainder being silver, while attributable production in the second quarter of 2014 was lower than that in the first quarter, this decline was anticipated and we expect to see an increase in production through the third and fourth quarters of 2014.

Payable silver equivalent ounces produced but not yet delivered by our partners amounted to 6.3 million ounces as of June 30, 2014, a decrease of about 100,000 ounces over the quarter with reductions at 777, Peñasquito, Sudbury and Salobo being offset by a significant increase at Yauliyacu although a significant amount of silver was delivered from Yauliyacu immediately following quarter end.

Silver equivalent sales volumes amounted to 7.5 million ounces in Q2, 2014 with 70% of this relating to silver and 30% relating to gold representing a 4% increase from Q2 2013 attributable to increased silver deliveries from Peñasquito and increased gold deliveries from Sudbury and Salobo partially offset by decreased silver deliveries from Yauliyacu and the Barrick mines.

Revenue for the second quarter of 2014 amounted to $149 million representing an 11% decrease from the comparable period of the prior year with increased sales volumes being more than offset by a 14% decrease in the average realized price per silver equivalent ounces sold with such being $19.83 during the most recent quarter. Earnings from operations for the second quarter of 2014 amounted to $75 million representing a decrease of 18% relative to the second quarter of 2013 with operating margins decreasing by 4% to 50% in the second quarter of 2014 due primarily to lower commodity prices partially offset by lower depletion rates.

Cash based G&A expenses were $8.3 million in the second quarter of 2014 representing an increase of $1.3 million from Q2 2013 with such being primarily attributable to an increase in the expense relating to potential payouts under the Company’s performance share unit program partially offset by lower expenditures on consulting. The Company continues to expect non-stock-based G&A expenses of $31 million to $34 million for 2014 with such expense excluding expenses relating to the value of stock options and PSUs granted.

Net earnings amounted to $63 million in the second quarter of 2014 compared to $71 million in the comparable period of the prior year with basic earnings per share decreasing by 10% to $0.18 per share from $0.20 per share with the decrease being primarily attributable to the decrease in commodity prices. Operating cash flow for the second quarter of 2014 amounted to $103 million compared to $125 million in Q2 2013. This translates into operating cash flow per share of $0.29 and resulted in a dividend of $0.06 being payable to shareholders of record on August 27, 2014.

Under the dividend reinvestment plan that the Company recently implemented, 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. For the dividend dispersed on May 30, 2014, shareholders owning approximately 21% of the outstanding common shares of the Company elected to have their dividends reinvested generating $5.2 million of proceeds.

During the first quarter of 2014, the value of the Company’s long-term investment portfolio of shares and other publically listed mining and mineral exploration companies increased by $19 million which has been reflected in the statement of other comprehensive income. The operational highlights for the second quarter of 2014 included the following; during the second quarter of 2014, San Dimas contributed 1.1 million ounces of silver production and 1.2 million ounces of sales including 375,000 ounces being received directly from Goldcorp relating to their four year commitment to deliver 1.5 million silver ounces per year which ended on August 06, of this year.

In addition Primero recently announced that they will be expanded mill throughput capacity by 20% from 2,500 tons per day currently to 3,000 tons per day by mid 2016. Peñasquito generated record attributable silver production of 2.1 million ounces during the second quarter of 2014 representing a 43% increase from the comparable quarter of the prior year with such increase being primarily attributable to significantly higher grades combined with better recoveries.

Silver sales for the second quarter of 2014 relative to Peñasquito announced the 2 million ounces representing an 85% increase relative to Q2 2013. As of June 30, 2014 approximately 1.3 million ounces of payable silver have been produced in Peñasquito but not yet delivered to Silver Wheaton, representing a decrease of approximately 100,000 ounces of payable silver. Goldcorp has indicated that initial permits for the Northern Well Field project were received during the second quarter of 2014 allowing construction to commence with completion expected by mid 2015.

Salobo produced, nearly 8,500 attributable ounces of gold or 551,000 silver equivalent ounces during the second quarter of 2014 representing a 34% increase from the comparable period of the prior year with the expansion of mill throughput capacity from 12 million to 24 million tons per annum being completed during the most recent quarter and the first production of copper concentrate from Salobo II being achieved on June 5, 2014.

Gold sales relating to Salobo were just shy of 12,000 ounces during the second quarter with gold ounces produced but not shipped being reduced by almost 4,000 ounces during the quarter. As at June 30, 2014 approximately 5,000 ounces of payable gold or approximately 300,000 silver equivalent ounces has been produced in Salobo but not yet delivered to Silver Wheaton. The Sudbury gold interest produced about 6,100 ounces of gold or 394,000 silver equivalent ounces in Q2 2014, this represented a 30% reduction compared to Q2 2013 reflecting the impact of planned annual maintenance at some of the surface facilities.

Gold sales relative to Sudbury amounted to 6,700 ounces or 435,000 silver equivalent ounces representing a 61% increase from Q2 2013 with a prior year sales reflecting a significant build up of ounces produced but not shipped. As at June 30, 2014 approximately 10,000 ounces of payable gold or 600,000 silver equivalent ounces have been produced but not yet delivered to Silver Wheaton relative to the Sudbury mines.

Vale has indicated that the mines in Sudbury which are the bottleneck to the regions operations continued to operate and stockpile ore and concentrate during the periods of planned maintenance in the first half of 2014. As a result, Vale anticipates an increase in production from the Sudbury region during the second half of the year. Overall, the Company’s cash balances increased by $57 million in the second quarter of 2014, with $103 million of operating cash flow being partially offset by $45 million of dividend payments representing cash dividends for two quarters.

As at June 30, 2014 the Company had $139 million of cash and cash equivalents on hand and $1 billion of debt outstanding under the non-revolving term loan. The Company’s current cash balance and 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 addition 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 and 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, Gary. Operator, we’d like to open up the 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 Trevor Turnbull with Scotiabank. Please go ahead.

Trevor Turnbull - Scotiabank

Randy, I was wondering with respect to Salobo, you talked about how they have tied in the second line which will take them eventually to a doubling of the throughput capacity, but I was trying to have a better understanding of how that throughput ramps up now that they are tied in? It seems like Vale was talking about achieving that full 24 million tons per annum sometime in 2015, I just wasn’t clear kind of what your expectations were for production increasing between now and full capacity?

Randy Smallwood

Yes and you’ve got it right on, the second mine they expect to get the full capacity towards the latter half of 2015. These are -- it’s a pretty big scale of expansion. And so it’s got to work its way all the way back to the system in terms of mine operations being able to deliver and work all the way through. And so it will be a slightly faster ramp-up than what we saw at the first mine which is still getting close to 100% but not quite there yet. It will take about a year and a half and then or a little bit more than a year, year and a half to get it up to full capacity.

Trevor Turnbull - Scotiabank

And then the other question was with respect to Yauliyacu and it’s more just of a kind of a background history question. But I recall in the past they changed the nature of the concentrates they were making partly to make off takes easier at one point they went to a bulk concentrate and then it seems like they’ve gone back to or sorry, they went away from a bulk concentrate now as I understand that they may be back doing that. Can you just remind us kind of what their situation is for shipments?

Randy Smallwood

Well some of it has to do with which smelter they’re sending their feed because there is I can’t remember the name of the smelter, there is smelter right in the area are down there [indiscernible]. It's owned by Delrun or used to be run by Delrun but used to accept a bulk concentrate and when that smelter went through shut down for a while and they had to separate it into the separate land and copper concentrates and so that’s why they were producing that. They have switched back and forth, it’s owned by Glencore which of course is also one of the largest concentrate traders in the world. And so I think what they have at Yauliyacu is the processing facility that has the flexibility to satisfy where they see the best demand and the best returns on the concentrate market. And so it is actually back and forth between the three concentrates down to the bulk concentrate plus the zinc. And it’s one of the reasons that sometimes we have some pretty decent produced but not yet solid numbers and it sometimes gets very lumpy in terms of the actual sales.

Trevor Turnbull - Scotiabank

So do you see that getting less lumpy? Will they settle on something with longer term off takes or is it always going to be a little bit ad hoc in terms of how they place that?

Randy Smallwood

In cases I see right now that is probably going to be a little bit ad-hoc, it’s going to be lumpy. We didn’t have any significant shipments during Q2 but shortly after the end of Q2 we had a very large shipment. Again with the company the size of Glencore and the amount of concentrates that they market and trade around the world this is something they used to probably adjust and take advantage of certain opportunities when they see them.

Operator

Your next question comes from Duncan Lai with Macquarie.

Duncan Lai - Macquarie Research Equities

Hey, Randy, just a question, so looking at the MD&A I see that the cumulative payable is silver equivalent ounces produced but not yet delivered have been growing compared to a year ago. So can you explain if this will be reversed or this will be a continued trend going forward?

Randy Smallwood

It’s going to continue. I’d like to characterize it as basically as our production profile grows so well that produce have been not yet delivered. It typically represents about two, two and a half months of our production. And so as our annual production climbs our yearly production rates climb that produced but not yet delivered will also climb. And we will see the impact of this when we have new projects coming on that produced concentrates. The assets that produce dore tend to deliver much rapid -- there's not as much of a pipeline in terms of delivering the product and the concentrates of course when you sit and look, Salobo is ramping up, Peñasquito is ramping up, Constancia coming on produce as a concentrate. And so those are the assets those are the type assets that will add to that produced but not yet delivered.

Duncan Lai - Macquarie Research Equities

Okay, so I guess when I see like mines that produce a concentrates produce more activity at the new project coming in and then I’d expect to see that we’re having a bump going forward?

Randy Smallwood

Right, yes. And I think the best way to estimate it is essentially look at the production rates and then consider it as the number will typically be somewhere between two to two and half months of our overall production.

Duncan Lai - Macquarie Research Equities

Two to two and a half months of overall, okay. And my second question is with the recently royalty transaction with Chesapeake I know it’s a small one but does this imply that management would not consider royalty deals and not just streaming deals going forward?

Randy Smallwood

No, not at all, we think streaming actually much more advantageous for both parties for both us and for the operators themselves. The advantage there was that well they are already in place that we wound up and we wound up getting access to the right of first refusal on further financing on the Metates project and it is a project that I know well I’ve spent enough time in Mexico and what I can tell you there is lot of metal in that hill. So we were quite excited about getting the right of first refusal on being able to help finance that project going forward.

Operator

(Operator Instructions) Your next question comes from John Flanagan with Fundamental Equity. Your line is open.

Randy Smallwood

Hey John.

John Flanagan - Fundamental Equity

Hi Randy, how are you? Could you guys characterize the current supply-demand balance in the silver market? There was a story here in Chicago this morning about weakness in retail demand in India and China during Q2, and I wonder if you've seen that.

Randy Smallwood

We haven’t seen it directly I mean there is going to be seasonal fluctuations especially in India mainly because consumption is so tied to the different festivals. And so you do get a lot of people fluctuation especially out of India from that side so we haven’t seen the affect of that. When we look at silver, and obviously we’re exposed to both silver and a bit of gold. We like the silver sector better we think it’s got better potential here. Everywhere we look in the silver space we see on the industrial side we see just increasing applications and they are in the areas that are our growth areas. High efficiency electronics it’s anti-bacterial application, these are areas that are just becoming more and more important on a worldwide basis. So, as the world it’s been you talking about India and China you talk about even other parts of it as living standards continue to improve and continue to increase is going to require silver. So, we definitely feel very comfortable among silver in the long run, you are going to get fluctuations on the short term basis, when it comes to the retail side, that is mainly they said one of things as we do see a lot of the different festival seasons out of India always have an impact.

John Flanagan - Fundamental Equity

Thanks.

Randy Smallwood

Yes, thank you John.

Operator

Your next question comes from Dan Rollins with RBC Capital Markets. Please go ahead.

Dan Rollins - RBC Capital Markets

Yes, thanks so much. Just a couple questions, first of all Randy, when Constancia starts getting up and running, what type of lag do you expect to see between production and sales at that mine?

Randy Smallwood

It always I mean the guidance that usually give is two to two and a half months for the concentrates, it’s a little bit longer because it is backing on the company overall usually balances off by the shorter lag kind of run on assets that produce Dore. But anytime that asset starts up, you’ve got to get back pipeline and plans in terms of delivering concentrate to the smelters and get through that whole process and so, we haven’t anticipating sales even in 2014 you expect production we maybe and you surprised with few sales but we don’t have anything scheduled into our forecast for 2014 from a sales side.

Dan Rollins - RBC Capital Markets

Okay, Excellent. And then maybe, I'm not sure if you're able to answer this because a lot of the information be coming from one of your streaming partners, but there's a significant a lot of optionality that's starting to show up in your portfolio. And I guess the main would be outside of what we saw at San Dimas, but at Peñasquito the CEP process with the pyrite leach, with potentially some of the development of the skarns to underneath the open pit. Have you guys looked at what type of lift is potential there for you guys on a silver basis if all that were to happen?

Randy Smallwood

Yes, if fact, Goldcorp the operator has come out with their own forecast and so the profitable benefits out to be around 1 million ounces a year, a little bit over 1 million a year of silver production and that would be our portion of it. So it is -- if you are talking about I mean I just have to say they continue that asset just continues to improve every quarter and Goldcorp and that operating team is doing a fantastic job of maturing that mining to a great asset.

Dan Rollins - RBC Capital Markets

Perfect, well, thanks guys. That’s all I have. Good quarter.

Randy Smallwood

Thank you, Dan and thanks everyone for dialing in. Just a couple of closing comments, the second quarter we did see a lot happen in our company of course Salobo Dosc, Constancia moving forward Salobo to starting up Peñasquito having a record quarter in the Rosemont of course changing and so, as we approach our 10th anniversary and the founding of Silver Wheaton and the creation the streaming model. We are confident that our margin diverse portfolio will provide the foundation on which we’ll continue to grow our company and drive towards being the best investment in the precious metals industry. So, thanks again everyone for dialing in and I do hope that you enjoy rest of the summer. Thank you.

Operator

This concludes your conference call for today. Thank you for participating, please disconnect your lines.

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