Wheaton Precious Metals Corp. (WPM) Q2 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Wheaton Precious Metals 2017 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 question-and-answer session. [Operator Instructions] Thank you. I would like to remind everyone that this conference is being recorded on Friday, August 11 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'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 of Corporate Development. I'd 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 uncertainty in Management's Discussion and Analysis, both available on SEDAR and in Silver Wheaton's Form 40-F and Silver Wheaton's Form 6-K, both on file with the U.S. Securities and Exchange Commission. The Annual Information Form Q2 2017 Management's Discussion and Analysis and the press release from last night set out the material assumptions and risk factors that could cause actual results to differ, including among others, fluctuations 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 and continued operations of Silver Wheaton's counterparties. 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.

Thank you, Patrick, and good morning, ladies and gentlemen. Thank you for dialing into our conference call to discuss our second quarter of 2017 results. I am happy to announce that Wheaton Precious Metals delivered yet another solid quarter with strong financial results from our portfolio of high quality assets. During the second quarter of 2017, our attributable production on a silver and gold equivalent basis remained relatively consistent compared to the second quarter of 2016 with 12.9 million silver equivalent ounces or over 175,000 gold equivalent ounces produced. We continued to generate strong operating margins resulting in close to $250 million in free cash flow here in the first half of 2017. And with regards to cash flow, I am pleased to share that we have also increased the amount of capital we returned to our shareholders by increasing the percentage of cash flow used for the dividend distribution calculation from 20% to 30% resulting in an increase to the quarterly dividend of over 40% on a per share basis. Despite the volatility of the commodity market, our dividend policy continues to prove its sustainability. Gary Brown, one of our Senior Vice Presidents and the Chief Financial Officer will now provide more details on our results. Gary?

Thank you, Randy, and good morning, ladies and gentlemen. Prior to reviewing Wheaton Precious Metals unaudited financial results for the three months ended June 30, 2017, I would like to remind everyone that all monetary figures discussed are denominated in U.S. dollars unless otherwise noted. The Company's precious metal interest produced 7.2 million ounces of silver and 78,100 ounces of gold in the second quarter of 2017. Relative to the second quarter of the prior year, this represented a decrease of 5% in silver production and an increase of 10% in gold production. The lower silver production was primarily attributable to lower production associated with San Dimas, whose production was negatively impacted by a strike at the mine during the beginning of the quarter, and Cozamin due to the expiry of the agreement on April 4, 2017. These decreases were partially offset by higher production at Peñasquito. The increase in gold production was primarily due to the 25% increase in the gold interest, relative to Salobo, partially offset by lower gold production at Sudbury resulting from scheduled plant maintenance. Sales volumes amounted to 6.4 million ounces of silver and 72,000 ounces of gold in the second quarter of 2017, representing a decrease of 11% for silver and an increase of 2% for gold, relative to the second quarter of 2016. The decrease in the silver sales volumes was attributable to the decreases in production, coupled with negative changes in the balance of payable silver produced, but not yet delivered to Wheaton Precious Metals. The increased gold sales volumes was attributable to the increased gold production, partially offset by negative changes in the balance of payable gold produced, but not yet delivered to the Company. As of June 30, 2017, approximately 4.2 million payable silver ounces and 52,900 payable gold ounces had been produced, but not yet delivered to the Company, representing an increase during the quarter of 200,000 payable silver ounces, and 2000 payable gold ounces. We estimated normal level per ounces produced but not delivered to equate to approximately two months worth of payable production with the balances at June 30, being consistent with this expectation. Revenue for the second quarter of 2017 amounted to $200 million, representing a 6% decrease relative to Q2 2016, attributable primarily to the decrease in silver sales volumes. Of this revenue, 54% was attributable to silver sales, while 46% related to gold. Despite this lower revenue, gross margin for the second quarter of 2017 increased 8% to $83 million attributable to a combination of a change in the sales mix and lower depletion rates. Cash-based G&A expenses amounted to $8 million in the second quarter of 2017, representing a decrease of $1 million from Q2 2016 due primarily to differences related to accrued expenses associated with the Company's outstanding performance share units, or PSUs. The Company continues to estimate that non-stock-based G&A expenses, which exclude expenses relating to the value of stock options granted in PSUs, will be approximately $33 million to $35 million for 2017. Interest costs for the second quarter of 2017 amounted to $6 million, resulting in an effective interest rate on outstanding debt of 2.53%, as compared to $5 million of interest costs at an effective interest rate of 2.21% incurred in Q2 2016. Net earnings amounted to $68 million in the second quarter of 2017, compared to $60 million in Q2 2016. Basic earnings per share increased 11% to $0.15 compared to $0.14 per share in the prior year. Operating cash flow for the second quarter of 2017 amounted to $125 million or $0.28 per share, compared to $134 million or $0.31 per share in the prior year, representing an 8% decrease on a per share basis. The Company’s Board has approved the changes of the Company’s stated dividend policy, whereby the quarterly dividend will be equal to 30% of the average of the operating cash flow for the previous four quarters, an increase of 50% compared to the former dividend policy. Based on this revised dividend policy, the Company’s Board has declared a dividend of $0.10 a share payable to shareholders of record on August 25, 2017. Under the Dividend Reinvestment Plan, the Board is 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 2017 included the following. Attributable silver production relative to the San Dimas mine decreased 39% to 973,000 ounces with production at San Dimas being negatively impacted during Q2 2017 due to a strike initiated by the unionized employees at the mine on February 15, 2017, which was successfully resolved on April 13. Silver sales volumes in Q2 2017 relative to San Dimas decreased 41% to 845,000 ounces as a result of this lower production. Attributable silver production relative to Peñasquito in Q2 2017, amounted to 1.5 million ounces, while sales amounted to 1.6 million ounces, an increase compared to Q2 2016 of 71% and 85% respectively with Goldcorp having indicated that the increase was a result of mine sequencing in Phases V and VI and higher mill throughput as the second quarter of 2016 included a prolong period of the planned and unplanned maintenance. In addition, the construction of the Pyrite Leach project was 14% complete by the end of the second quarter of 2017 with engineering being 94% complete. As part of this project, Carbon Pre-flotation facility is being constructed, which will allow or which was previously expected to be uneconomic to be processed. Attributable silver production relative to Antamina in Q2 2017 amounted to 1.9 million ounces, while sales amounted to 1.5 million ounces, an increase compared to Q2 2016 of 11% respective to production and a decrease of 34% relative to sales with sales being adversely impacted by negative changes in payable ounces produced, but not yet delivered to Wheaton Precious Metals. Attributable silver production relative to other silver interest in Q2 2017 amounted to 2.3 million ounces, while sales amounted to 1.9 million ounces, a decrease compared to Q2 2016 of 13% and 11% respectively with the decrease being primarily due to the expiry of the Cozamin agreement on April 4. Salobo generated 57,500 ounces of attributable gold production in Q2, 2017, an increase compared to Q2 2016 of 61% primarily due the increase in the Company's attributable gold interest from 50% to 75% effective July 1, 2016. For the third straight quarter the two 12 million ton per year lines operated at near capacity with current quarter achieving an average throughput rate of approximately 97%. Gold sales volumes in Q2 2017 relative to Salobo increased 11% to 50,500 ounces with the increase being result of the increased production partially offset by negative changes in gold ounces produced, but not yet delivered to Wheaton Precious Metals. Attributable gold production relative to Sudbury in Q2 2017 amounted to 7,000 ounces, while sales amounted to 5,800 ounces, a decrease compared to Q2 2016 of 53% and 49% respectively with the decrease in both production and sales being result of the plant shutdown in the surface plant for three weeks for scheduled maintenance. In addition to the fact that furnace number two was taken offline in March for the three months rebuild to expand its capacity in order to allow Sudbury to transition to a single furnace in the fourth quarter of 2017. Attributable gold production relative to Constancia in Q2 2017 amounted to 2,300 ounces, while sales amounted to 2,400 ounces, a decrease compared to Q2 2016 of 50% and 35% respectively with the decrease in production being due to the processing of lower grade ore which was expected. The other gold interests generated 11,200 ounces of attributable gold production in Q2 2017, a decrease compared to Q2 2016 of 29% primarily due to the fact that Wheaton Precious Metals attributable percentage of gold relative to 777 decreased from 100% to 50%, effective January 1, 2017, as a result of Hudbay successfully satisfying the completion test relating to Constancia coupled with lower production at the Minto mine where sequencing changes to support of mine life extension negatively impacted production in the quarter. Gold sales volumes in Q2 2017 relative to the other gold interests increased 28% to 13,300 primarily due to positive changes in gold ounces produced, but not yet delivered to Wheaton Precious Metals. During the second quarter of 2017, the Company repaid $111 million on the revolving facility and dispersed $52 million in dividend. Overall, net cash decreased by $38 million in Q2 2017, resulting in cash and cash equivalents at June 30 of $77 million. This combined with the $953 billion outstanding under the revolving facility resulted in a net debt position as of June 30, 2017 of approximately $876 million. 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 agreements. Finally, there is no material update relative to the Company's ongoing dispute with the CRA. We continue to work diligently with counsel to advance the case as expeditiously as possible. As in any litigation we don’t control the timing, but we are trying to move the process a long as quickly as possible. As such our best estimate currently is for discovery to be finished by the end of 2017. That concludes the financial summary, and with that I turn the call back over to Randy.

Thank you, Gary. As I previously mentioned, with this solid second quarter results, Wheaton Precious Metals remains on track to achieve our 2017 production guidance of 340,000 ounces of gold and 28 million ounces of silver. That being said, we remain focused on adding additional production from the corporate development front and we continue to see a number of high quality accretive opportunities. Of note, many of these recent opportunities that we are pursuing are related to project development and growth. This is a definite shift from the opportunity set that we have seen in the last few years. Such projects include the recent announcement that we have signed a non-binding term sheet with Desert Star Resources to enter into an Early Deposit Precious Metals Purchase Agreement for the Kutcho project located here in British Columbia. For relatively little upfront capital, the early deposit model provides us with access to high-quality early stage projects with significant optionality. And as Wheaton has by far the strongest free cash flow in the entire streaming space that well over $100 million per quarter and over $1 billion of current capacity, we have plenty of firepower for continued investments. As always, we remain disciplined and continue to focus on acquiring streams that are accretive to our current shareholders and come from high-quality assets producing in the lowest half of the respective cost curves. As you are already aware, in the second quarter, we officially launched the new Wheaton Precious Metals brand, after we received shareholder approval at the May 10, Annual General Meeting. The new identity accurately reflects our diversified portfolio of both silver and gold assets while reinforcing our position as the leader in Precious Metals Streaming. I would like to thank our shareholders for their continued support through this transition. So in summary, the second quarter has provided a solid start to 2017. Our continued solid start to 2017, our production remains founded on the highest quality portfolio of Precious Metals streams in the industry underpinned by very low cost mining operations. Wheaton produces more metal, generates more cash flow, and now delivers the highest yield in the streaming space. And 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 open the call up to questions, operator?

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from the line of Chris Terry with Deutsche Bank. Your line is open.

Hi, guys. A couple of questions from me. Just in terms of the increase in the dividend. How do we think about that going forward, obviously you can't control exactly the M&A opportunities that may arise? So if you do have excess capital, will you be looking to do buybacks, special dividends, or can we expect that 30% might increase again at some point in the future? Or I guess, how closely linked are the M&A opportunities with the capital returns?

Chris thanks for calling in. And when it comes to the dividend, our Company is now of a size, where we can actually do both. We can grow the dividend and continue to invest into the space. This still gives us plenty of capacity to continue making acquisitions and growing the company itself. And I've always said, I feel the long-term vision for our Company is that yes, that dividend will grow. We will continue to climb as a percentage of cash flow. We’re at 30% of our cash right now which still puts us comparable to our peers, if not slightly less than our peers. And so, I think it gives us plenty of capacity to do both is probably the answer. I mean our focus having just raised that I don't expect us to be raising anytime again in the near future, but with these kind of cash flows and with some of these assets and some of our optionality, we start delivering on these projects, we‘re not going to have any problem being able to grow both. And you mentioned actually buybacks and special dividends. We're not really strong believers in the special dividends. We think it's a – we want to focus on being sustainable and hence the approach that we've taken with respect to our dividend, and so I don't ever see a special dividend on our side. Buybacks, our preference is again to have something that sort of people can rely on a consistent forward basis.

Okay, thanks. Thanks for the color, Randy. And the last one for me, just on the M&A opportunities, you touched on a little bit. Can you just talk a little bit more about the split of Brownfield versus Greenfield opportunities? Obviously, we’re seeing news around Rosemont, Pascua-Lama is ticking away in the background, you’ve done the deal with Desert Star. Is that generally an appetite for sort of $100 million deals or there are some bigger ones – and just the Brownfield versus Greenfield split?

Thanks for the question Chris. It’s Haytham here. Chris, just with regards to opportunities. Obviously, the last couple years have been linked to deleveraging balance sheet repair and that kind of thing. We're seeing now more opportunities on the exploration, development, and restart expansion phases. We typically have – call it at least 10 or more active opportunities on our pipeline on a regular basis. A couple of those are usually $1 billion plus opportunities, but those take typically a longer time to come to fruition, require the right market conditions. The majority of the remaining opportunities we have are somewhere between $100 million to $400 million, relatively equally split between gold and silver. And if you're looking at some of the higher quality development stage projects, we do not limit ourselves by size. If we see an asset that falls in a lowest half of the cost curve that will meaningfully contribute one day to Wheaton Precious Metals, we will consider it.

Thanks Haytham. Appreciated.

Thanks Chris.

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

Thank you. Could you just review what the old formula was on San Dimas and the new formula, first question? Second question, I’m thinking a little bit of your friends at Sandstorm taking a 30% stake in a project. Sometimes when you're restructuring the streams, the operating company, isn't the strongest one in the world, would you ever just take over a project and run it as opposed to conceding a stream?

Okay. John, Unclear on the old formula versus new formula, what I can tell you at the San Dimas is the current stream agreement gives us 100% of the silver production up to 6 million ounces per year and then 50% of whatever is produced over that. That was an amendment from the very – the original agreement, which we had with Goldcorp where it was just 100% of the silver production. For the first four years, the Primero had the asset. That was a lower sharing threshold. That was over a fixed time period. It was designed to give Primero a firm foundation to build on as they started into the operating space. So yes, the current formula is that we received 100% of the silver up to 6 million ounces and then share 50% of that after that. There's obviously a bunch of discussions with some of the people involved in there, some of the other companies involved in strategic either Primero is competing, but none of those have been finalized and it has to be to the agreement of ourselves to Primero obviously and to whoever actually ultimately steps into the space. Going to the second question. Our business model is not an operating business model. We tend to think that there's a bit of a different mindset that's required to be successful with that and we tend to prefer leaving that in the hands of the operators themselves, so not a lot of interest in terms of stepping in and doing this and taking over operations. We would if we had to in terms of protecting our shareholders value, but it would never be a long-term vision, it would be something that would only be done if absolutely required. We don't see that as being required. We do think that there's a healthy process going on with San Dimas and there's a lot of interest in that asset and we look forward to getting away through this one.

Thank you.

Thanks John.

[Operator Instructions] Our next question comes from Anita Soni with Credit Suisse. Your line is open.

Good morning. It’s Anita Soni from Credit Suisse. So my question is a follow-up for John's on San Dimas. So I think you indicate – both you and Primero indicated in your press releases that you're working on restructuring the deal, but there's no guarantee that you come to a solution. So what happens with the guaranteed credit facility if you do not come to a solution before that guarantee is up?

Well we step in and supported Primero by providing a guarantee on that because it was due to expire back in July or earlier this year. And we asked them how much time they needed to get through their strategic review process and we agreed on November being the timeframe. And so that's – as far as our guarantee is therefore – and therefore that's the timeline that Primero has to work with in terms of working their way through the strategic review process. We don't intend to – I mean the reason we provided the guarantee was to give Primero enough time to work their way through the strategic review. And so it comes down to their desire to work their way through this process.

And second question, so they also announced the sale of Black Fox. Was that in line with what your expectations on how the strategic review would go?

Yes, I mean Black Fox has been – we don't know – we don't have access to the asset, it's off directly. We knew it was one of the assets in their portfolio that put a lot of effort into it and a lot of capital into it. And unfortunately, aren’t going to see a lot of return on that investment. In terms of value, it's not far off of what we expected it to be worth and so that money from the Black Fox sale goes directly against the revolver. So I think it ultimately lessens the amount owing on this revolving credit facility that's due in November. So that's a positive. So yes, we're quite comfortable with that.

All right. And last question, any further intelligence you're sort of – do you have any sense of when the Mexican tax authorities will come up with the decisions? I think it was around the same time that this credit facility guarantee expires?

Again, it's something that's in Primero’s hands in terms of working with. We've received a number of different guidance’s on that from Primero. I can tell you it's still an active process. They've still also got substantive VAT and some income taxes that are outstanding down there, some debt refunds that are outstanding. So it's a combination of a number of different things down in Mexico that are outstanding. Yes, unfortunately I can't give you any firm guidance on that. What I can tell you is that through the strategic review process, there's a number of parties that have studied it and feel it's a manageable issue.

All right. Thank you very much.

Thanks Anita.

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

Yes, thanks very much. Randy, just wanted to get your feeling just on yesterday's Primero’s press release, obviously challenging share price move yesterday. But they also noted that they're going to be cutting spending in the capital side on that asset. And we do know that’s an asset that really needs a lot of capital to continue to occur. The cutback on spending, does that change the impetus to get a deal done from year end with either Primero or third-party within this sort of restructuring process on going?

Well, the timing here is not in our control. The timing is in Primero’s control. And I think there's a number of different issues. The cutback, given that the RCF is due in November. I think that they've got some deadlines coming up that they have to work their way around. And it's up to Primero as to how rapidly they move their way through that and get there. What we've seen is some healthy interest in this asset. We think that there's a way forward through here. We've been supportive all the way through and we've made some proposals that we think – our objective is to come through this and make sure that the asset is well set up to continue the long history of successes that San Dimas has had, and we're going to do everything we can to do that. Unfortunately, we just don't control the timing. These are the decisions that Primero has to make and we're ready to work with them.

Okay, perfect. And just on the RCF, once the proceeds from Black Fox are used to reduce the full amount drawn. To confirm, Gary, the RCF can no longer be drawn back to $75 million, the amount available drops to what's currently drawn correct?

That’s correct.

Okay, so they can draw again on it. Okay, perfect. And then Gary, Haytham, maybe you could talk on the competitive landscape we're seeing right now in the space. Obviously, there's – when a number of new participant coming in, the deal flow side is sort of changed to one, is not the big capital one that sort of more manageable, $100 million to $400 million. Are you starting to see more competition from new parties or is it really still the same competitive landscape and from the newer entrants just really don't have the capacity to compete with yourselves and some of your other peers?

Thanks for the question Dan, it’s Haytham. With regards to new parties obviously we saw the same competitors that we've always had. We have seen the private equity guys start to become a little bit more prominent a little more aggressive, but in terms of looking at large scale operations or really smaller scale operations. We still have a pretty strong niche as the other primary streamers and royalty companies. We're not really worried about competition, if it's a quality asset, if it's an asset that falls in lowest half of the cost and if its asset that adds to already high quality, low cost portfolio, we will make sure we put in a competitive business.

And just on the early stage projects are you seeing improvement in some of the quality of the opportunities coming that are being shown to you. I know a couple of years ago, you had stated that there's not many high quality opportunities and that's why you have been sort of reluctant to put a lot of money to work on the early deposit, but with rebound in prices and some changes in hand to some of these assets are you starting to see better quality opportunities out there on the early stage side.

Yes, which I could say there was a lot of early stage opportunities that are high quality from a lowest capital cost curve. I can tell you that we've looked at over 150 different opportunities in the last three or four years and now we've done three Early Deposit streaming agreements. So I think that answers the question. We're very excited about the future project. We think it's a high quality asset and internal rate returning before the stream of just approximately 28% post-tax and it's a low capital intensive asset, which we think can be in production in the next five years. So we're very, very happy to be aligned with Desert Star on this.

Dan, it’s Randy here. I just want to reinforce, this early deposit structures it's an excellent mechanism for companies that don't have feasibilities studies complete, where we come in and they’ve got scoping or pre-feasibility studies in place. Typically those companies the only access to capital that they have is to dilute their existing shareholders and this is an alternative source of capital for them I think it's a fantastic option for them to finance without doing their existing shareholders at a time that's probably very, very dilutive for their existing shareholders and so there's definitely a lot of interest in that side and as Haytham just alluded to, it’s tough to find in the quality though.

Yes, and then on the expansionary projects and some new projects coming in with the strengthen based on a prices, are you seeing few more opportunities on that side or is it still pretty quiet on that front right now?

We're definitely seeing some more opportunities, especially from expansion perspective. We're seeing some restart opportunities out there as well. Exploration opportunities aren't that that frequent these days, but we are seeing still very, very strong opportunities on the developing and expansion side.

Perfect. Thanks for my questions. And congrats on bumping the dividend, I don’t have to ask that question now for a few more quarters.

Appreciate that Dan. End of Q&A

Well, thank you everyone for dialing in today. Wheaton Precious Metals is on track for another strong year of production and sales here in 2017. Wheaton offers the best option for gaining exposure to Precious Metals for a number of different reasons. Firstly, by having some of the highest margins in the Precious Metal space; secondly, through our portfolio of long life, low cost assets and proven track record of creative acquisitions; thirdly, by delivering the highest yield now - by now delivering the highest yield in the streaming space; and finally, by delivering our shareholders' optionality measured in ounces not acres. We look forward to speaking with you again soon and thank you.

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