Wheaton Precious Metals Corp. (WPM) Q2 2016 Earnings Report, Transcript and Summary

Welcome to Silver Wheaton's 2016 Second Quarter Results Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a short presentation, relating to the recent transactions, followed by a question-and-answer session. [Operator Instructions]. I would like to remind everyone that this conference call is being recorded on Thursday, August 11 at 11:00 AM 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 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, Q2 2016 Management's Discussion and Analysis and press release from last night, set out the material assumptions and risks that could cause actual results to differ, including among others fluctuation in the price of commodities, the outcome of the challenge by the CRA of Silver Wheaton's tax filings, the absence of control over mining operations from which Silver Wheaton purchases silver or gold and risks related to such mining operations. It should be noted that all figures referred to on today's call are in U.S. dollars unless otherwise noted. Lastly, I would like to point out, that we will be referring to the slide presentation currently found on Silver Wheaton's homepage titled Salobo Transaction Presentation towards the end of this call, which also includes forward-looking information. Now I'd 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 second quarter 2016 results. I am pleased to announce that Silver Wheaton delivered yet another solid quarter led by strong results from Salobo and our newest cornerstone asset, Antamina. In the second quarter, we produced 7.6 million ounces of silver and over 70,000 ounces of gold, and from a sales perspective, we sold over 7 million ounces of silver and over 70,000 ounces of gold. This does represent record gold sales volumes for the second consecutive quarter. This quarter exemplifies the value of having a diversified portfolio backed by four cornerstone assets, all providing a secure foundation for the company, shortfalls from San Dimas and the Peñasquito mines were offset by strong performances from the Salobo and Antamina mines. With respect to Salobo, we are very excited to have added an additional 25% of the gold coming from this cornerstone asset just last week. I will discuss this acquisition in more detail at the end of this call. For the second quarter of 2016, quarterly silver production increased by 5% and gold production increased by 40% from the previous year. Silver sales volumes increased by 28% and gold sales volumes increased by 16%. And for the first time in a while, I am pleased to report that our average realized sale prices for silver and gold are actually up year-over-year, with silver and gold prices up 5% and 6% respectively. As a result, Silver Wheaton's revenue increased by 29%, net earnings were up 12% and operating cash flows increased 23% compared to the second quarter of 2015. With the increase in commodity prices, our cash operating margins for silver and gold were strong at around 70%, resulting in operating cash flows of over $130 million during the quarter. With regards to 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 quarterly dividend payment of 2016 of $0.05 per share for the second quarter. With our organic growth profile and the recent strength we have seen in precious metals prices, having a dividend policy linked directly to cash flow should bode well for higher dividend in the very near future. In the second quarter of 2016, Silver Wheaton closed an equity financing, with net proceeds of just over $600 million. This added capacity positioned us well to evaluate and pursue new streaming opportunities, and as such, subsequent to the quarter, we announced that on August the 2nd, Silver Wheaton's wholly owned subsidiary, Silver Wheaton Cayman's Limited, agreed to acquire from a subsidiary of Vale, an additional amount of gold equal to 25% of the life of mine gold production from the Salobo mine in Brazil. Again, I will be discussing the Salobo acquisition in more detail following Gary's report on our operations and financials. As always, Silver Wheaton continues to focus on acquiring accretive new streams from high quality, low cost mines, and there are still a number of additional tangible opportunities that we are busy assessing, and we do hope to pull some of these over the line in the very near future. In summary, the second quarter was an exceptional example of the unparalleled quality of Silver Wheaton's portfolio, by acquiring streams with attractive economics during the downturn, we are now beginning to reap the robust cash flows, when the commodity prices turn. Our production and fully funded growth are founded on the highest quality portfolio of streams in the industry, which is underpinned by very low cost mining operations. We are also optimistic about our ability to capitalize on the favorable corporate development environment and to add additional top tier assets to our portfolio. 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 June 30, 2016, I'd 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 second quarter of 2015, unless otherwise noted. The company's precious metals interests produced 7.6 million ounces of silver and 70,200 ounces of gold in the second quarter of 2016. With respect to silver, this represented an increase of 5% relative to the prior year, with production from the recently acquired Antamina stream, being largely offset by decreased production from San Dimas and Peñasquito. Gold production increased 40% relative to the prior year, with increases being observed from all of the company's gold interests. Sales volumes amounted to 7.1 million ounces of silver and 70,800 ounces of gold in Q2 2016, representing a 28% increase for silver and a 16% increase for gold relative to the prior year. As of June 30, 2016, approximately 2.6 million payable silver ounces and 28,500 ounces of gold had been produced but not yet delivered to the company, representing a decrease during the quarter of approximately 400,000 ounces of silver and 5,200 ounces of gold. It is important to remember that we estimate a normal level per ounces produced but not delivered, to approximately two 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 second quarter of 2016 amounted to $212 million, representing a 29% increase from 2015, due to the increased sales volumes combined with average selling prices increasing by approximately 5% to 6%. Of this revenue, 58% was attributable to silver sales, while 42% related to gold. Gross margin for the second quarter of 2016 amounted to $77 million, representing a 22% increase relative to the prior year, despite operating margins decreasing 2%, due to higher depletion rates per ounce of silver, attributable primarily to the recently acquired Antamina silver interest. Cash based G&A expenses amounted to $9 million in the second quarter of 2016, representing a $2 million increase from 2015, due primarily to higher legal costs. The company continues to estimate the 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. Interest costs for the second quarter of 2016 amounted to $5 million, resulting in an effective interest rate and outstanding debt of 2.2%. All of this interest was expensed in the calculation of net income. This compares to $3 million of interest costs incurred in the prior year, $2 million of which was capitalized with the remainder being expensed. Net earnings amounted to $60 million in the second quarter of 2016 compared to $54 million in Q2 2015, with the higher operating income being partially offset by higher G&A and interest costs. Basic earnings per share increased to $0.14 compared to $0.13 in 2015. Operating cash flow for the second quarter of 2016 amounted to $134 million or $0.31 per share, compared to $109 million or $0.27 per share in the prior year, representing a 14% increase on a per share basis. Once again, highlighting the accretiveness of the company's acquisitions over the past year. 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 August 24, 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 second quarter of 2016 included the following; attributable production related to the San Dimas mine amounted to 1.6 million ounces, representing 11% decrease relative to Q2 2015, with this decrease being due to lower throughput and grade, partially offset by there being no sharing of payable ounces produced at San Dimas during the second quarter of 2016 compared to approximately 400,000 ounces of sharing in the prior year, and this is due to the 6 million annual threshold not being achieved in 2016. Sales volumes in Q2 2016 relative to San Dimas amounted to 1.4 million ounces of silver, an increase of 13% relative to the prior year, which the lower production being more than offset by positive changes in payable ounces produced but not yet delivered to Silver Wheaton. Peñasquito generated 0.9 million ounces of attributable silver production and sales in Q2 2016, representing a 55% and 38% decrease respectively from 2015, primarily as a result of lower ore grade and recovery from the upper transitional ore, and low grade stockpiles in 2016 compared with 2015, when ore was being sourced from the heart of the deposit. Additionally, production declined as a result of a shutdown for 10 days for plant maintenance, and longer than anticipated periods to ramp the plant up to full production, due to a variety of restart issues. The plant has operated normally in July. Gold Corp has indicated that 15% of the total freshwater relating to the Northern wellfield project was commissioned by June 30, and the project is on track to be completed during the third quarter. Antamina continues to exceed our expectations, generating over 1.7 million silver ounces of attributable production, and 2.2 million ounces of silver sales in Q2 2016, with this stream having been added in the fourth quarter of the prior year. Other silver interests generated attributable silver production in sales of 2.7 million ounces and 2.1 million ounces respectively in the second quarter of 2016, consistent with the prior year. The Sudbury mines produced almost 15,000 ounces of attributable gold during Q2 2016, representing an 82% increase from the prior year, attributable to higher grades in recoveries. Sales volume relative to Sudbury amounted to 11,400 ounces of gold, representing a 9% decrease relative to prior year, with the increased production being offset by changes in gold ounces produced but not delivered to Silver Wheaton during the relevant periods. Salobo produced almost 36,000 ounces of attributable gold during Q2 2016, an increase of 28% from the comparable quarter of the prior year, with such being attributable to a combination of higher grades and recoveries. The two lines operated at an average rate of approximately 87% of capacity sharing with the second quarter of 2016. Sales volume relating to Salobo exceeded 45,000 ounces of gold, an increase of over 40% relative to Q2 2015, with such being attributable to a combination of increased production and changes in gold ounces produced but not delivered to Silver Wheaton during the relevant period. Other gold interests generated almost 20,000 ounces of attributable gold production in Q2 2016, 40% higher than the prior year, with increased production from Minto, Constancia, and 777. Sales volumes from other gold interests amounted to 14,000 ounces in Q2 2016, representing a 14% decrease relative to the prior year, with the increased production being more than offset by a buildup in ounces produced, but not yet delivered in Q2 2016, compared to a significant reduction in such balances in Q2 2015. During the second quarter of 2016, the company completed a bought deal equity financing, generating net proceeds of $607 million. These proceeds, together with cash flow generated from operating activities, were used to repay $665 million of debt outstanding under the company's revolving facility. In addition, the company disbursed $37 million in dividends and made the initial $2 million upfront payment relative to the Cotabambas early deposit agreement. Overall, net cash increased by $38 million in Q2 2016, resulting in cash and cash equivalents at quarter end of $124 million. This, combined with the $706 million outstanding under the revolving facility, resulted in a net debt position as at June 30, 2016 of $582 million. Subsequent to June 30, 2016, the company announced that it had amended its agreement with Vale to acquire an additional 25% of the gold from Salobo, in return for an additional upfront cash payment of $800 million and adjusting the strike price, relative to the 10 million currently outstanding warrants to $43.75 per share from $65. The adjustment to the warrants is estimated to result in an additional $25 million of consideration relative to this transaction. On a pro forma basis, based on the balance sheet as of June 30, 2016, the company would be in a net debt position of approximately $1.4 billion, following the closing of this transaction, leaving over $600 million of immediately available capacity under its $2 billion revolving facility. Given the strength of the company's operating cash flow, the company can comfortably comply with the financial covenants associated with the revolving facility, even at significantly lower commodity prices. The company's cash position, strong forecast, future operating cash flows, combined with the 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 agreements. Finally, with respect to the status of the dispute with the CRA, we continue to work diligently with council to advance the case and are currently in the discovery phase. Although it is difficult to accurately predict the timing associated with the various phases of the case, we have instructed our council to continue to seek an expeditious resolution, with a view to completing a trial next year. That concludes the financial summary, and with that, I turn the call back over to Randy.

Thank you, Gary. We will now move on to a discussion of the recent Salobo transaction, and as Patrick noted at the beginning of this call, I will be referencing a slide presentation that's currently found on Silver Wheaton's home webpage, it's titled 2016 Salobo Transaction Presentation. So I will be referencing page numbers, as we turn through this presentation itself. And I am going to start off with slide number 3; basically, Salobo -- one of the huge attraction to this is of course the immediate cash flow, and expanding on a good strong asset for us, but definitely accretive on all metrics. Strong enhancement of the production growth profile by adding another 50% of production or increasing our production from Salobo by 50% from 50 to 75. So Salobo gold production is now expected to average about 300,000 ounces per year between 2016 and 2020, and so with that, we get 75% of that total production. Very-very strong asset, good cornerstone foundation for our company. This asset is, I would argue, probably the best quality asset in our portfolio, so it's definitely high quality ounces coming into this portfolio, and definitely, lots of exploration and expansion potential on this asset. Terms of the deal are summarized -- and were summarized by Gary. But just to reiterate, $800 million in cash paid upon closing and an adjustment to the warrants that were previously issued on the very first transaction on Salobo. In addition, there is some adjustments to the payments, if Vale decides to move forward with an expansion of the asset, and those range anywhere between $113 million to $953 million depending on both the scale and the size of the -- the scale and the timing of the actual expansion. The entire 75% is now guaranteed by Vale SA and by Salobo Metais, which is the direct mine owner of Salobo, and it does, as I said, apply to the entire stream and then production payments were also the acceleration or the inflation accelerator, was extended to January 1 of 2019, and that was adjusted for the entire 75%. All in all, good strong terms and very happy with that. The balance sheet itself, as you can see --

Sorry, I am on page 5, we are just going to talk briefly about the financing of the acquisition. As previously stated, the company will fund the upfront payment related to the stream, primarily by drawing down on the $2 billion revolving facility. At June 30, 2016, the company was in a net debt position of $582 million. Following the closing of this transaction, the company would be in a net debt position of just under $1.4 billion. And we are very comfortable with this level of debt for a number of reasons; first, it is important to remember how attractive a form of capital this is, costing us just over 2% per year currently. Secondly, at current commodity prices, our high quality portfolio of streaming assets, should generate close to $700 million of operating cash flow annually, and as can be seen from the next slide, on slide 6, we can easily comply with financial covenants underlying our revolving credit facility, which has a current maturity date of February 27, 2021. The first covenant requires that we maintain a net debt to tangible net worth ratio less than 0.75. And as can be seen from the graph, after paying for Salobo III, we are far below this level. The only other financial covenant requires that we maintain a minimum interest coverage ratio of greater than three times. Again, on a pro forma basis, we expect this ratio to be far above the required level. So in summary, we are very comfortable financing this acquisition with debt and do not anticipate raising any additional capital in conjunction with this transaction.

Thank you, Gary. If you turn to slide 7; as you can see, all the way across the board here, significant increases in forecast cash flow reserves and resources and ultimately production. So this is -- definitely, it adds over 10% to our production and cash flows over the next 10 and 20 years, and almost 12% to our total reserves. In fact, on the gold reserves and resources, as you can see, a 37% climb in gold reserve ounces, and strong increases also in the measured and indicated and inferred resources. So we now have 12 million ounces of gold reserves within Silver Wheaton, as a total. Slide 9 highlights the position of Salobo during the 2016 operating year. I want to highlight that this is during 2016, when they are still finishing off the ramping up of the second mine, and so we expect these costs to even further improve and push these assets further down this cost curve itself. So a good strong high quality asset. As I mentioned earlier, one of the strongest in our portfolio. One of the reasons I am most excited about Salobo, is the exploration potential. On slide 10, we have got a cross section here, that shows some gravity, some deep gravity surveys that Vale completed recently. And as we have said before, this deposit was only drilled off to about a billion tons and then Vale decided to move this asset forward. And so there is still plenty of potential for this asset to grow beyond the current reserves and resources itself. We look forward to Vale moving in the drills, hopefully sometime soon, to try and ultimately define the full ore body on this, when we do think there is excellent exploration potential at Salobo itself. And with that exploration potential and the existing reserve base, at current rates, that reserve base runs over 50 years of mine life. And so, all that adds up to an excellent opportunity to expand or lots of support for expanding this. So if you look at slide 11, you can see conceptual study here that Vale has completed or is working on right now, in terms of a third line, that would expand production amongst the 36 million tons per annum, and you can see how that's being laid out close to the existing stockpiles and the existing pit itself. On slide 12, you can see the impact to Silver Wheaton with respect to gold production and how it compares on an overall basis. 42% of our revenue now should be coming from gold this year, after this pro forma and this transaction, and over the next five years, counting 2016, it averages about 45%. So we definitely are a precious metals, more so than just a silver company, and we see lots of opportunity still in that gold space. So strong portfolio that's diversified amongst the precious metals. On slide 13, you can see our updated production profile going forward with Salobo III added in. In 2016, we expect to produce 32 million ounces of silver and just over 300,000 ounces of gold over the course of the year, and if you look at a five year average, 2016 to 2020, we should be averaging around 31 million ounces of silver and about 330,000 ounces of gold per year. On an equivalent basis, this represents around 55 million to 56 million ounces per year of silver, and well over 700,000 ounces per year of gold equivalent ounces. So good strong production profile, continued growth and some great optionality, as you can see at the end of this production profile in Pascua Lama and Rosemont and other projects, good strong assets that with rising gold prices, rising precious metal prices, will have even more pressure, in terms of moving into our production profile. So on slide 14, in summary, the Salobo III transaction delivers immediate cash flow. It is a first cost quartile mine already in 2016, even though they are still going through the ramp-up process, and we expect those costs to even drop further. It is accretive on every metric that we contested on, it’s a good strong asset. We know the asset well, and for that reason, we are confident about the exploration and expansion potential of this mine. We do think that there is a strong likelihood that that will move forward. Of course, with our balance sheet, the revolver that we have, gives us very good flexibility to be able to act on these type of assets, and fund it with very low interest debt. Vale of course, is a very strong partner, and a very comfortable relationship with them, both at Salobo and at Sudbury. And in summary, this is, I think the best asset in our portfolio, and so to be able to add more high quality ounces to our portfolio from the best asset in our portfolio, extremely excited about this acquisition. So operator, with that, we have finished our presentation. We'd like to open up the call to questions please.

[Operator Instructions]. Our first question comes from the line of Dan Rollins with RBC Capital Markets. Your line is open.

Yeah, thanks very much and nice to see you guys do another good deal on Salobo. Randy, I was wondering if you could touch base? We have seen the equity markets improve here, we have seen a number of the larger diversifieds start to short their balance sheets or beginning that process. Where do you see the opportunity pipeline right now? Do we see anything in the $1 billion range, or are we now looking at the $200 million to $400 million range, as a more realistic sort of target market for you guys?

Yeah. Thanks Dan and good morning. The market out there has definitely -- there is not a lot of larger opportunities out there right now. We do see plenty of opportunities, but most of them are below $500 million. I would say, probably not too far of that $200 million to $400 million as a range. That's probably, I am going to say 90% or 95% of what we are looking is down in that range in terms of scale. And so, something that we are more than comfortable in working in, with respect to our current capacity and the cash flows that we have coming in, we think we are well positioned to work with that.

And of that sort -- not to put exact numbers, but percentage wise, how many of those opportunities would fit your criteria to be in the first or second quartile cost curves with decent sized mine lives?

I mean, if I was going to put some, and these are very loose numbers out there, but I probably see anywhere between $2 billion to $3 billion in streaming opportunities out there. But I think we'd only be interested in about half of that. The rest of them represent higher cost or higher risk assets, political risk jurisdictions, stuff like this, and we'd be a little bit hesitant to move into that space. So probably about half of that, all told, but that's all varying stages, that's stuff that will probably crystallize over the next 12 to 18 months.

Okay. And then just of that percentage, would you say there -- a majority of those are still producing assets, or are you now starting to see some interesting development opportunities?

I have to tell you Dan, we haven't seen a development asset for a long time. There is a few out there, but it's one of the reasons that I am so bullish about where we are going in this space, because without investing back into the ground, that just puts supply side pressure under the commodity prices themselves. And so, most of what we are looking at is still balance sheet repair. It's still strengthening of balance sheets to pay for pass. We are not seeing money get put into the ground yet, and until we start seeing that, we are going to continue to see supply side pressure on commodity prices.

Okay, perfect. And then just one second question, and I always like to ask it with you guys, given you are generating significant amount of free cash flow now, especially at these prices. And if we do see prices move higher, when do you expect to may be start to do a blend of growth plus a dividend growth strategy in the company? As we go through the cycle and the last cycle, you are very hesitant to do deals at the top of the market and you use all that cash to basically cash the original Salobo and Sudbury deals. But are we six months out, are we a year out before we start to see that cash flow levels -- cash flow paid out as a dividend start to creep higher?

Well I think the driving factor there -- I mean, first off, important to highlight the fact that, because our dividend is linked to production and therefore, also linked to commodity prices. We will see some growth in our dividends, just by virtue of the higher prices. This quarter was at $0.05, but I can tell you, there is upward pressure on that dividend, and I fully expect, if commodity prices stay where they are, we will see some just natural growth, just by the fact that it is directly linked to our cash flows, and our cash flows are climbing. If there is opportunities in front of us, that are reasonably priced, then we are -- our principal focus is to try and take advantage of those opportunities. But as commodity prices climb, some of those opportunities become a bit too expensive, and that's the point that we start shifting more towards the dividend side. If we go back, that's when we actually implemented the last bump-up in our dividend policy was during the peak of the commodity price cycles, when it didn't make sense for us to put money into the ground. We don't like buying at the top of the cycle, our preference is to try and make acquisitions near the bottom of the commodity price cycle. So really what drives that, is what happens with commodity prices. If we see real strength in silver and gold prices over the next six months to a year, then it's going to make it tougher for us to close new acquisitions, but that's the point that we start looking at our cash flows and start contemplating increasing the dividend and moving forward. So it's really driven by commodity prices in terms of how that goes, but I do want to highlight, the fact that we do have a linked dividend that ties to our cash flows, there will be upward movement, as long as commodity prices keep their current trends there, there will be upward movement in our dividends.

All right. Thanks very much and enjoy your weekends that are coming up.

Thank you, Dan. Good talking to you.

Your next question comes from John Flanagan from Fundamental Equities. Your line is open.

Gary, including the recent offering, what's the total common share count now?

Its disclosed in our MD&A. it is about $440 million common shares.

Gary, how would that compare with four, five years back, in terms of total additional equity that you have sold? Where I am going is, are you confident that the ROE in that has been acceptable?

I think if you look at the cash flow and earnings per share growth that we have had over that period, I think you'd -- its hard to say, it wouldn't be acceptable. We have only done two equity financings over that period, one was back in 2009 and then we did one earlier this year, and we funded over -- about $5 billion of acquisitions primarily using cash flow from operations. So we are very happy with the way that we have executed on our growth strategy.

John, it's Randy here. To just highlight, about not even -- about $1.5 billion in financings and over $5 billion in acquisitions, and when you look at the results compared, as you say, the last four or five years, there has been downward pressure on the commodity prices. What we have delivered over that period, I think has definitely set us up very well for what we see here in the future.

Okay. Thanks a lot.

Thank you, John.

Your next question comes from Trevor Turnbull from Scotiabank. Your line is open.

Hey, good morning Randy. I had a question with respect to the expansions you mentioned at Salobo. They have obviously cashed themselves up to a certain degree. You have still got the capital participation agreements that you mentioned, with respect to the scale and the timing of perhaps a third or even additional lines at Salobo. So now that they have kind of laid out what they would potentially do with a third line, do you have any sense of what they need to kind of make those decisions and what happens in terms of timing for them to actually -- to start moving ahead on the third line of Salobo?

Well they have got conceptual studies in place for this third line, and from my perspective, we think, one of the things that I think is probably a wise move on their part, would be to bring the drills in and try and fully define the ore body. To try and understand, what the real -- the full capacity of this ore body is. So there has been some discussions on their side in terms of bringing the drills in, it hasn't been finalized, but they are talking about doing that. In terms of any expansion, it's always good to have a relatively firm framework in terms of what you are working towards. With great exploration success, that third line may not be the last expansion potential, it may drive decision to even go larger than that in terms of expansion. So to me, one of the most important things that Vale could do, is actually get in there and fully define this ore body or try and show how much bigger the potential is on this ore body.

Yeah, with the 50 year mine life, it seems a third line obviously makes a lot of sense going forward, but you are saying that in terms of layouts, you need to look even a bit further down the road, and perhaps with drilling, they can better assess what the full life of mine potential is?

The capital participation agreement that we have with them, is a onetime event. And so they have to sort of make a decision in terms of how much support they want from Silver Wheaton, as to what the scale is. So that's a pretty factor, in terms of that. If they do a third phase, but then they see the potential for a fourth phase, they may want to hold off before exercising this capital participation rate, and wait for that fourth expansion, if that comes to play. So they have got to go through their process. This is still early stages, conceptual studies on their side, but as you said, with greater than 50 year mine life, it just begs for it, and especially with the operating margins; I mean, it's one of the reasons that we really put a lot of focus on the bottom half of the cost curve, when we are making investments. These are the assets that our partners are driven to reinvest into, and to try and expand and spend the exploration dollars on, because they are the ones, these assets are the ones that deliver the best profits back to their partners, to the operators. And so, this is a good example of Vale, which their focus right now of course, is finishing the S11D iron ore operations. But I can tell you, Salobo is just begging for some further investment on their side.

Seems like it. Thanks Randy. That's all I had.

Thank you, Trevor.

Your next question comes from John Tumazos from John Tumazos Very Independent Research. Your line is open.

Thank you. The previous question was exactly the one I wanted to ask. Thank you.

Hey, thanks John.

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

Hi Randy, Gary, Patrick and team. Congrats on a good quarter. Just a few questions here Randy; you sort of touched on this, but could you maybe elaborate a little bit more in terms of how you have enhanced your security on the entire Salobo stream, and how that's different from what it used to be?

Yeah I am going to let Gary provide that detail.

Yeah Cosmos.

Hi Gary.

Hi. In doing this third tranche relative to Salobo, on top of what we had normally obtained, which was a parent company guarantee, we also now have a guarantee from the company that owns the Salobo mine, and there are additional restrictive covenants around the indebtedness associated with that company to further protect this. Very similar to what we'd structured, relative to Antamina, and that structure, it's important to understand, applies to the entire 75% of the gold coming from Salobo.

Great. And then maybe on Salobo as well, maybe also a question for Gary here; in terms of that expansion payment that you have talked about, the capital participation right to Salobo, how has that payment changed? If I were to have taken your old matrix and grossed it up to 75% ownership, would I get the numbers that are displayed today?

No I mean -- its Randy here, when it comes to evaluating that matrix, its valued based on the context of the price of gold, at the time that we make those adjustments, right? And so it isn't just a direct multiplier up, its -- each agreement, there has been, this is Salobo III, this has been previous two, and they have all been priced in the context of the market that those deals were closed in. And so it's not a direct multiplier, its adjusted to reflect the value associated with each 25%, and then it's all accumulated together into the matrix itself.

Got you. And maybe switching gears a little bit, certainly Sudbury had a very good Q2, and certainly had a very good first half of 2016. Is that indicative of the future sort of production potential at the asset?

What we have always felt, Sudbury has got excellent upside potential. Vale, I mean, we really like having Vale as an operating partner, we think they do a very good job at operations. We also find that they are quite realistic, when it comes to what they expect to do, and their forecasting is something that we are comfortable working with. We do see some upside potential in Sudbury. We did when we made the original acquisition, back in 2013, and we see this as sort of weaving [ph] its way through. The focus in that camp, it’s a camp with a very-very long history, obviously Sudbury. But the focus in that camp has never been gold, it has always been nickel and copper and so on, and when we look at it, that's one of the reasons that we like going after non-core byproducts, is that we try and find some opportunity in these non-core byproducts, and I think Sudbury is a great example of that, where there hasn't been as much focus in that side, because Vale is a nickel and copper company in their Sudbury operations. So we do see that upside potential, and hopefully it continues. Yes.

Of course. And maybe on Yauliyacu here; I noticed that the cost per ounce this past quarter was $8.74 per ounce. I think that stream was restructured late last year. Could you remind us again how that works, I guess, you know, and then there is a participation, right, whenever silver is higher than $20 an ounce. How does that work, is that based on the average price, that it could be over 20 -- if the average price in the quarter is over $20 an ounce, then that participation right kicks in. How does it work?

So what we did with Yauliyacu, is it’s a Glencore owned asset in Peru. It has got well over 150 years of operating history, and so it has got a very-very extensive history. And we signed the original transaction there, back in 2006, and it had a 20 year term to it. So we came back and sat down with Glencore, and so we'd like to convert this to a life of mine agreement. This is an asset, a district that has shown the ability to continue to replace reserves and resources going forward. It’s a series of dominant structures that continue on to depth. It has got very good infrastructure, it's one of the key things is that water issues aren't a problem, they have got an excellent system set up there for managing ground waters, and so it does give very-very long term potential. And so, our interest was in converting it to a life-of-mine type agreement. We wanted to make this asset around, part of Silver Wheaton for a very long time. Their interest was to try and bring up their production payment on a per ounce basis, and help that move forward. So we came up with an agreement with Yauliyacu, that sort of -- it has a number of different triggers on it. I am not going to go into the detail here, but we'd be happy to provide it shortly. But it's basically a sharing thing that sort of incents them to continue moving the project forward, investing into the project, and we get the benefit of not only incentives during the next remaining 10 years of this contract or nine years of this contract, but we also now get the, call it, life of the mine contract, and it runs well beyond the original nine year term. So like all of our transactions, this is, in our eyes, a win-win. We gain because it's now converted to life of mine. We do think this is an asset that's going to be producing for a very long time. And for that, we pay a little bit to be able to do that type of a transaction and not put capital upfront, but to make it as part of the operating costs, is something that's very attractive to us. We have got better places to put our capital right now, in terms of doing that. If we can supply growth like that, without having to put capital upfront right now, that's also very attractive to us. So the costs have gone up, but that's how we are paying for the -- what I would call, the incredible extra potential we have got out of this mine now.

Yes, of course. Thanks. That's all I have. Congrats again.

Okay. Thanks.

Our next question comes from the line of Mike Jalonen from Bank of America. Your line is open.

Hey Randy and team. Just had a question, I guess it goes back to the mine tour there, Salobo, in May, which was a great tour, thanks again for organizing it.

Thank you.

Production, 300,000 ounces, you guys expect between 16 and 20. But a question I wanted to ask you on the tour, was it a chance, because their presentation made by the mine staff didn't touch on it. But what would happen, if production of gold, post 2020, assuming it stays at 24 million tons a year?

It holds pretty, relatively flat. I mean, I don't have that profile right in front of me here, but this is not an asset that has a lower grade. The ore body itself maintains pretty consistent grades all the way down. We don't see -- we are not chasing lower grade marginal material. Mike, you know, I have talked about certain assets also that have low grade materials, that tends to swing back and forth. Salobo is not one. It has got a very-very well defined grade base that is consistent, pretty well all the way down. So I wouldn't see that changing. I don't have the long term production profile here in front of me, but I would say, its right along the same lines.

Mike, this is Patrick here. It does, in the very tail end of the year, probably the last 10 or 11 years, it does drop down to the -- currently we are processing to stockpile material. Prior to that though, again, it's not far from the numbers with Randy -- we have in the news release.

So in other words, 2050 or something like that?

Well, that all depends what they find with the drilling. I tend to believe it will be farther out than that.

Maybe just one question on the cost curve; I assume their cash costs, since it's in copper, is net of byproduct [indiscernible]. Is that based on the gross revenue for gold, or is it based on what they receive for the stream?

I believe what we reference here is the Woodmac cost curve, I am just sort of looking at it. And therefore, its down comparable to everything else, which wouldn't have the stream impact in it.

Okay. Okay. Well thank you.

Thank you, Mike. Operator, one more question please.

Our next question comes from the line of Andrew Kaip from BMO. Your line is open.

Hi Randy. Congratulations on a good quarter.

Thanks Andrew.

I am wondering if you can provide a bit of -- just a bit of detail on your other streams. In particular, what performed better this quarter, versus where you see it -- saw some of the streams that were lower than their quarterly run rate? You have got some fairly material streams in that other category, including Constancia. I am wondering if you can provide any more details in that regard?

Yes sure. As I have mentioned, Antamina hit it out of the park again, three quarters in a row now. That was an asset, that we were pretty comfortable with. Its ability to outperform, and so we are quite happy with that acquisition. Constancia is doing relatively well. I don't have the exact details here on a numbers basis, but again, Hudbay doing relatively well on that asset moving forward. We have had some challenges on San Dimas, that has been pretty public. Primero has gone through a drive on the safety initiative, which we fully support in terms of Primero moving that forward, and that's impacted their production capacities down there, and so at that stage, they are moving their way forward. And Lagunas Norte is doing very well for us, on the Barrick side of course. That one does expire in a couple of years, unless Barrick decides to extend it. It is a compensation, one that we get for Pascua Lama being delayed. Minto is also doing relatively well. They are getting into some nice high grade in that -- I think it's called the Minto North zone. So it has actually done relatively well. Beyond that, I think most of the details will be in our quarterly report.

All right. Great. Thanks very much.

Ladies and gentlemen that concludes the Q&A portion of today's conference call.

Thank you everyone for dialing in today. Just reinforcing, that Silver Wheaton is on track for another record year of production and sales here in 2016. We continue to believe, that Silver Wheaton offers the best option for gaining exposure to precious metals for a number of reasons. Firstly, we are 100% focused on precious metals, 100%. Secondly, we have strong tangible organic growth, as we have seen and delivered on. We have got a very strong and proven track record of making accretive acquisitions, the recent Salobo transaction really highlighted that; and finally, the optionality that we deliver to our shareholders, we measure it in ounces, not acres. We have got some very strong optionality with these higher commodity prices. We are pretty excited about some of the projects that may come into our production portfolio or production profile here, over the near term. So thank you again for dialing in today, and we do look forward to speaking with you all again very soon.

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