Wheaton Precious Metals Corp. (WPM) Q1 2016 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton’s 2016 First Quarter Results Conference Call. [Operator Instructions] I would like to remind everyone that this conference call is being recorded on Monday, May 9 at 11:00 a.m. Eastern Time. I will now turn the conference over to Mr. Patrick Drouin, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen and thank you for participating in today’s call. I am 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 would like to bring to your attention that some of the commentary on today’s call may contain forward-looking statements. There can be no assurances that forward-looking statements will prove to be accurate as the actual results and future events could differ materially from those anticipated in such statements. In addition to our financial results’ cautionary note regarding forward-looking statements, please refer to the section entitled, Description of the Business Risk Factors in Silver Wheaton’s annual information form and the risks identified under Risks and Uncertainties in Management’s Discussion and Analysis both available on SEDAR and in Silver Wheaton’s Form 40-F and Silver Wheaton’s Form-6K, both on file with the U.S. Securities and Exchange Commission. The annual information form and press release from this morning set out the material assumptions and risk factors that could cause actual results to differ, including among others fluctuation in the price of commodities, differences in the interpretation or application of tax laws and regulations from those taken by Silver Wheaton, the absence of control over mining operations from which Silver Wheaton purchases silver or gold and risks related to such mining operations. 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.

Thank you, Patrick and good morning ladies and gentlemen. Thank you for dialing into our conference call to discuss our first quarter 2016 results. I am happy to announce that we had a solid start to the year as Silver Wheaton achieved its second best quarter ever for production and sales volumes. During the quarter, we produced 12.7 million silver equivalent ounces and realized sales volumes of 12.8 million silver equivalent ounces. In regards to production, we had strong performances from the Salobo and Antamina mines, which were offset by a shortfall from the San Dimas mine. The shortfall relates to Primero’s efforts to enhance safety at the San Dimas mine, an initiative that we fully support. It is the right thing to do. Subsequent to the quarter end, we completed an equity financing and raised over $600 million, which gives us the capacity to pursue additional accretive acquisitions in what we believe is a very favorable environment. For the first quarter of 2016, quarterly production increased 24% from the previous year and sales volumes increased 65%. Weak commodity prices once again affected our average realized sales price per silver equivalent ounces, which was 13% lower. Despite this, Silver Wheaton’s revenues increased 44% and operating cash flows increased 28% compared with the Q1 of 2015. Lower commodity prices did impact our net earnings. However, we once again maintained a healthy cash operating margin of 70%, resulting in operating cash flows of $114 million during the quarter, an increase of 28% from Q1 in 2015. Gary will provide a bit more information shortly. Speaking of cash flows, our quarterly dividends continue to deliver 20% of the average cash generated by operating activities in the previous four quarters. Despite the volatility of this commodity market, our dividend policy continues to prove its sustainability as evidenced by our second quarterly dividend payment of 2016 of $0.05 per share. But with our organic growth profile and the recent strength that we have seen in precious metal prices having a dividend policy linked directly to cash flows should bode well for higher dividends in the near future. On other news, as most of you know, last September, Silver Wheaton received Notices of Reassessment from the Canada Revenue Agency, or the CRA from 2005 to 2010 taxation years. This year, on January 8, Silver Wheaton commenced an appeal in the Tax Court of Canada in relation to those reassessments. In order to commence the appeal, the company was required to make a deposit of 50% of the reassessed amounts of tax interest and penalties. Silver Wheaton posted security in March in the form of a letter of guarantee rather than making the deposit in cash. Management still strongly believes that the company has filed its tax returns and paid applicable taxes in full compliance with Canadian tax law. As we have mentioned before, generally, a company is taxable in Canada on its income earned in Canada while non-Canadian income earned by foreign subsidiaries is not subject to Canadian income tax. With these reassessments, however, the CRA is trying to subject income earned outside of Canada by our foreign subsidiaries to Canadian taxes. This income relates to Silver Wheaton’s foreign subsidiaries buying and selling silver and gold in relation to streams on mines that are located outside of Canada. I would like to reiterate that Silver Wheaton is taxable on income earned in Canada from buying and selling silver and gold on streams from mines located within Canada. We do intend to vigorously defend our tax filing positions. Gary Brown will provide a bit more detail on this shortly. Subsequent to the first quarter of 2016, Silver Wheaton closed an equity financing with net proceeds to the company of approximately $607 million. On the corporate development front, this added capacity positions us well to benefit from an environment ripe with opportunities. As always, Silver Wheaton continues to focus on acquiring accretive new streams from high quality, low cost mines. And we are busy looking at a number of tangible opportunities and hope to pull some of these over the line in the near future. So in closing, Silver Wheaton will continue to focus on delivering on our growth guidance and on maintaining one of the lowest cost profiles in the industry. Our production and fully funded growth are founded on the highest quality portfolio streams in the industry, which are underpinned by very low cost mining industries. This is exemplified by our cornerstone assets, which include the Salobo mine in Brazil; the Peñasquito and San Dimas mines in Mexico and the Anatamina mine in Peru. With our solid start to 2016, we are well on track to realizing our production guidance of 54 million silver equivalent ounces for the year and we are also optimistic about our ability to capitalize in the favorable corporate development environment and to add additional Tier 1 assets to our portfolio given our strong balance sheet and no existing capital commitments. 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?

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, 2016, I would like to remind everyone that all monetary figures discussed are denominated in U.S. dollars unless otherwise noted. In addition, all prior year comparisons that are referenced are to the first quarter of 2015 unless otherwise noted. The company’s precious metal interest generated silver equivalent production of 12.7 million ounces in the first quarter of 2016, 24% higher than the prior year due primarily to the recently acquired Anatamina stream combined with higher production from the Salobo mine partially offset by lower production from San Dimas. Approximately 59% of this production related to silver with the remainder relating to gold. Silver equivalent sales volumes amounted to 12.8 million ounces in Q1, 2016 representing a 65% increase from Q1 2015 due to a combination of higher production and changes in silver equivalent ounces produced, but not yet delivered. As of March 31, 2016, payable silver equivalent ounces produced, but not yet delivered, amounted to approximately 6.1 million ounces, a decrease of approximately 0.9 million ounces during the quarter. It is important to understand that we estimate a normal level for ounces produced, but not delivered to equate to approximately 2 months worth of payable production. As a result, our expectation is that this balance will grow over the remainder of 2016, with production being more heavily weighted towards the latter half of the year. Revenue for the first quarter of 2016 amounted to $188 million, representing a 44% increase from 2015 with the increase in sales volumes being partially offset by a 13% decrease in the average realized silver equivalent selling price. Gross margin for the first quarter of 2016, amounted to $60 million, representing a 7% decrease relative to the prior year, with operating margins decreasing by 17% to 32% due to a combination of lower commodity prices and higher depletion rates. Cash based G&A expenses amounted to $9 million in the first quarter of 2016, representing a $3 million increase from 2015, due to a combination of higher PSU-related expenses and higher legal costs. The company now estimates that non-stock based G&A expenses, which exclude expenses relating to the value of stock options granted in PSUs, will be approximately $31 million to $34 million for 2016, slightly higher than previously estimated. Interest costs for the first quarter of 2016 amounted to $7 million, resulting in an effective interest rate on outstanding debt of 1.9%. All of this interest was expensed in the calculation of net income. This compares to $4 million of interest costs incurred in the prior year with $3 million having been capitalized. Net earnings amounted to $41 million in the first quarter of 2016 compared to $49 million in Q1 2015, with the decrease being attributable to lower gross margins per silver equivalent ounces sold combined with higher G&A and interest costs. Basic earnings per share was $0.10 compared to $0.13 in 2015. More importantly however, operating cash flow for the first quarter of 2016 amounted to $114 million or $0.28 per share compared to $89 million or $0.24 per share in the prior year. This 17% increase in cash flow on a per share basis despite a 13% decrease in realized commodity selling prices, once again highlights the accretiveness of the company’s recent acquisitions. Based on the company’s dividend policy, the company’s Board has declared a dividend of $0.05 a share payable to shareholders of record on or about May 19, 2016. Under the dividend reinvestment plan, the Board has elected to offer shareholders the option of having their dividends reinvested in newly issued common shares of the company at a 3% discount to market. The operational highlights for the first quarter of 2016 included the following. Attributable production relative to the San Dimas mine amounted to 0.9 million ounces, representing a 52% decrease relative to Q1 2015, with this decrease being due to the implementation of additional safety measures, which resulted in average melt throughput of 1,639 tonnes per day compared to 2,863 tonnes per day in Q1 2015. Sales volumes in Q1 2016 relative to San Dimas amounted 1.3 million ounces of silver compared to 1.9 million ounces with approximately 0.4 million ounces having been produced in prior quarters being shipped during Q1 2016. Primero has indicated that it is deferring the previously announced mill expansion project and that the addition of ground support has resulted in a modified mine plan, which will involve targeting higher grade stopes with slightly lower tonnes. We expect these changes will result in attributable 2016 production guidance relating to San Dimas, being reduced by 500,000 ounces to 700,000 ounces of silver. Peñasquito, generated attributable silver production of 1.4 million ounces, representing a 7% decrease from 2015, with such being primarily attributable to the processing of lower grade material. Silver sales volumes from Peñasquito decreased by 40% relative to the prior year with payable silver ounces produced but not yet delivered increasing by approximately 200,000 ounces in the quarter to approximately 400,000 ounces as of March 31, 2016. Goldcorp has indicated that the Northern Well Field project is on track to be completed in late 2016. Antamina generated over 2 million silver ounces of attributable production and 1.9 million ounces of silver sales in Q1 2016, with this stream having been added in the fourth quarter of the prior year. As a reminder, our overall production guidance of 54 silver equivalent ounces reflects only 5.5 million silver ounces relative to Antamina. Other silver interests generated attributable production of 2.6 million silver ounces in Q1 2016, a 9% increase over 2015, driven primarily by increased production from Constancia, offset by reduced reduction from the Veladero mine. However, sales volumes relative to other silver interests increased by almost 50% to 2.8 million ounces, primarily due to increased deliveries from Constancia and Zinkgruvan. Over 12,000 ounces of attributable gold was produced from the Sudbury mines or 1 million silver equivalent ounces, representing a 41% increase relative to prior year due to a combination of higher throughput grade and recovery. Gold sales relative to Sudbury amounted to over 9,000 ounces or 0.7 million silver equivalent ounces, representing a 12% increase relative to 2015. The increased sales volume is attributable to the higher level of production, partially offset by an increase in payable gold ounces produced but not yet delivered to Silver Wheaton, which increased by about 2,200 ounces during Q1 2016, totaling approximately 18,000 ounces or 1.4 million silver equivalent ounces as of March 31, 2016. Salobo produced over 38,000 ounces of attributable gold or 3 million silver equivalent ounces, an increase of 39% from 2015, with such being attributable to a combination of the continued ramping up of the second line and the processing of higher grade material. The two lines operated at an average rate of approximately 86% of capacity during the first quarter of 2016 compared to approximately 77% of capacity in 2015. Gold sales relating to Salobo exceeded 35,000 ounces or 2.8 million silver equivalent ounces, almost 4x the sales volumes achieved in Q1 2015, with such being attributable to a combination of increased production and a much smaller buildup in ounces produced, but not delivered in Q1 2016 compared to 2015. As of March 31, 2016, payable gold produced at Salobo, but not yet delivered to Silver Wheaton, amounted to approximately 17,000 ounces of gold or 1.3 million silver equivalent ounces. Other gold interests generated attributable gold production of just under 15,000 ounces or 1.2 million silver equivalent ounces in Q1 2016, with the 17% decrease from 2015 being attributable primarily to lower production from 777, partially offset by higher production from Constancia, which declared commercial operation on April 30, 2015. Sales volumes from other gold interests amounted to almost 21,000 ounces, almost double the sales volumes for Q1 2015, reflecting almost 7,000 ounce reduction in ounces produced, but not delivered during the most recently completed quarter. As at March 31, 2016, approximately 3,000 ounces of gold or 0.3 million silver equivalent ounces had been produced by other gold interests, but not yet delivered to Silver Wheaton. During the first quarter of 2016, the company repaid $95 million of debt under its revolving facility and repurchased $33 million of Silver Wheaton stocks under its normal course issuer bid at an average price of $14.43. Overall, net cash outflows amounted to $17 million for Q1 2016, resulting in cash and cash equivalents at quarter end of $87 million. This combined with the $1.37 billion outstanding under the revolving facility, resulted in a net debt position as of March 31, 2016, of $1.28 billion. The company also extended the maturity date of the revolving facility in the first quarter of 2016 by 1 year to February 27, 2021. Subsequent to March 31, 2016, the company completed a bought deal equity financing where by it raised net proceeds of $607 million and issued 38.1 million common shares. The proceeds of this equity issue were used to repay debt outstanding under the company’s revolving facility. The company’s cash position strong forecast future operating cash flows combined with available credit capacity under the revolving facility positions the company well to satisfy its funding commitments, sustain its dividend policy while at the same time providing flexibility to consummate additional accretive precious metal purchase agreement. Randy has previously provided a detailed update on the status of the CRA dispute. The only item that I would add is that the $192 million letter of guarantee that we issued to the CRA was issued under a separate credit agreement, which does not consumed any of the credit capacity available under the company’s revolving facility. That concludes the financial summary. And with that, I would turn the call back over to Randy.

Thanks very much, Gary. Operator, we would like to turn the call over for questions, please.

Thank you. Ladies and gentlemen, we will now conduction a question-and-answer session. [Operator Instructions] Your first question comes from the line of John [indiscernible] from Canaccord Genuity. Your line is open.

Hi, good morning gentlemen. Congratulations on a good start to the year. I have got three, hopefully pretty quick questions. Depreciation expense for 2016, what do you see, guys, for the year?

Yes. John, I think your best estimate is to look at what we had as depletion rate for the first quarter. And so that was an average of $5.59 per silver equivalent ounce.

Okay, that’s perfect. Antamina, I notice the sales are still lagging production and there hasn’t been a catch up yet, do you expect the catch up as the year progresses?

Yes. I mean it’s a matter of just getting things into flow there. So we do get 100% of production, so it just got to work its way through the system.

Do you – I mean, do you have a sense of timing, would you expect that closer to the later half of the year or…?

No. I think we should see it actually here in the second quarter.

Second quarter, okay, perfect. And then third question Yauliyacu, I noticed the cost ticked up from where you were running at the end of the year, is that due to the revised agreement that you signed in November?

Yes. I mean we converted that from a term transaction that was supposed to end in 2025 to a life of mine transaction. And so some of that cost, without putting any capital up, the way we adjusted the contract was to have a slightly higher production payment and a bit of silver sharing there too, at certain levels. So this is a mine that’s been running for well over 200 years continuously and we were pretty excited about being able to convert it to a life of mine agreement.

Yes, absolutely. I totally understand that. So should we be looking at this level basically roughly going forward plus the inflation?

There is – as they outperform, there are some variables in the production payment and so we will move around a bit. But I would say it’s probably not too far up from where we are right now.

Okay, perfect. That answers my question. Thanks a lot guys.

Thank you, John.

[Operator Instructions] Your next question comes from the line of Alex Watt from Scotia. Your line is open.

Yes. Thanks guys. Just one quick housekeeping question on the interest expense, with this quarter being 100% expense, which seems a little bit different than years past, is that going to be the case going forward or how do you decide whether to capitalize versus expense?

Yes. At this point, we wouldn’t expect to be capitalizing any of the interest to any of the properties under development. So I think if you are looking to model interest expense from an income statement perspective, we would expect to expense 100% of it.

Okay, great. Thank you.

Thanks Alex.

Your next question comes in the line of Dan Rollins from RBC Capital Markets. Your line is open.

Yes. Thanks very much. Randy, I was wondering if you could provide a little bit of color on the pipeline, I know you have mentioned in the past there are some pretty big chunky deals that they aren’t producing assets, there is also some of that $200 million to $400 million range on smaller producing assets, but more importantly with respect sort of the earlier stage projects, with the recent improvement in metal prices, have you seen the level of interest from those smaller opportunities such as like Panoro, have they started to decline or are they still pretty active and people approaching it for capital?

Well Dan, I mean the change in prices that we have seen has been pretty well focused. The recent strength has been focused on the precious metals side and we haven’t seen as much strength in the base metals side. And so assets like Cotabambas in Panoro of course mainly a copper asset are still having a tough go of it. That being said, we do get a bit of a spillover effect. There is definitely a bit of a stronger market out there. And so I do see some of these companies perhaps setting their options out there. But that type of a structure, that Panoro deal is one that we are very excited about, because we think it’s an excellent avenue to have good long-term optionality in terms of being able to deliver opportunities when that market wakes up again. There is no doubt that we need copper assets like that eventually. The one thing I would say about the asset mix that we are seeing on the corporate development front right now is that it’s a bit scary. The lack of development projects, namely what we are looking at is operating assets. And I can tell you that this industry always needs development and redevelopment in terms of continuing to supply the resources that the world what needs. And so that does bode well for us as an industry. But it underscores 2 years or 3 years ago, I would say half of the stuff we were look at was to help fund new construction. Those are in few and far between right now. And so that’s a lot of what we are looking at. Dan you have mentioned a few of the comments or a few of the assets we are looking at $200 million to $400 million range. But there are a few other chunkier assets out there and so we are pretty excited about what we see coming down the pipe.

Excellent. And then with respect to competition, there has always been, over the last 10 years, you have seen these cycles where people say, hey there is new competitors coming into the space. They view it as sort of an easy business plan to execute on, although a lot of them have not had the success given the technical side of things, have you started to see more competition from beyond your current competitors in the space like private equity or pension funds or is it really just the main players at the table right now?

I mean we started the streaming model 12 years ago. And quite literally, I mean I have always said the ultimate form of compliment is when someone copies you. And we are having a few people out there copying the business model. But we have got the advantage of 12 years of experience, plus I would say a very strong technical team and then the critical mass, the scale, the capacity that we have as a company in terms of going forward, the cash flows that we have that we can put to effort and then in terms of continuing to reinvest and continuing to grow our company. It gives us a real advantage and we don’t plan on giving up that advantage anytime soon. And so I am not surprised. It’s definitely not a simple business to run. There is challenges in this business, but as we continue to put in the effort and I think we continue to fine tune that and perform.

Perfect. And then just maybe one last question I always love to ask you is, with respect to the payout ratio on the dividend, any plans near-term to increase that or is the opportunity set just so large that right now all cash is looking to pursue accretive acquisitions?

Yes. Because the dividend is tied to our cash flows and I would fully expect stronger both with our organic growth and how I think reached over the last few quarters on top of stronger commodity price mix, we do average it over the previous four quarters. I can tell you that it’s bursting at the scenes ready to start growing right now because we have seen both the organic growth and the entire commodity pricing. The 20%, that will come – I tend to look at these opportunities, these times of the cycle as times to reinvest into the space. The bottom of the – or near the bottom of the commodity price cycle is the best time to reinvest into a new asset. But as we see stronger commodity prices, that’s when we will start shipping some of our cash flows back towards perhaps increasing that 20% of cash flow. And that’s when we implemented the dividend in the first place was back during the last sort of peak cycle of the commodity prices and they fully expect that when we see that again, that’s when we will continue to increase that 20%.

Perfect. Thanks very much and best of luck for the remainder of 2016.

Thanks Dan. Thank you everyone for dialing in today. Silver Wheaton is on track for another record year of production and sales here in 2016. We have had a very good start. Our portfolio streams on low cost, high quality assets should deliver over 10% of additional production at no additional costs this year. And we think this is an excellent time to add additional streams to our portfolio. We continued to believe that Silver Wheaton offers the best option for gaining exposure to precious metals by offering a proven track record of accretive acquisitions and tangible organic growth. So thank you again for dialing in today. And we do look forward to speaking with all of you again soon. Thank you.

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