Wheaton Precious Metals Corp. (WPM) Q3 2017 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Wheaton Precious Metals 2017 Third Quarter Results Conference Call. [Operator Instructions] Thank you. I would like to remind everyone that this conference call is being recorded on Friday, November 10 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 Q3 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 third quarter of 2017 results. I am pleased to report today that Wheaton Precious Metals continues to deliver solid financial results from our portfolio of high quality low cost assets. In the third quarter of 2017 we produced 7.6 million ounces of silver and 96,000 ounces of gold. From a sales perspective, we sold 5.8 million ounces of silver and 83,000 ounces of gold. These results were in line with our forecasts and we remain on track to meet full year production guidance. We continue to generate strong operating margins resulting in over 370 million in cash flow year-to-date and with regard to cash flow, our quarterly dividend is now delivers 30% of the average cash generated by operating activities in the previous four quarters. We now provide the highest dividend yield in the precious metal streaming space. Gary Brown, one of our Senior Vice President and our Chief Financial Officer will now provide more detail on these 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 September 30, 2017, I’d 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 7.6 million ounces of silver, 95,900 ounces of gold in the third quarter of 2017. Relative to the third quarter of the prior year this represented a decrease of 1% and 15% in silver and gold production respectively with the lower gold production being in line with expectations and attributable primarily due to the decrease attributable percentage of gold that the company from the 777 mine and lower production from Minto. The company is reiterating its production guidance for the year of 28 million ounces of silver and 340,000 ounces of gold. Sales volumes amounted to 5.8 million ounces of silver and 82,500 ounces of gold in the third quarter of 2017 representing a decrease of 6% and 3% for silver and gold respectively relative to the third quarter of 2016. The decrease in the silver sales volumes was attributable primarily to the buildout during the quarter of payable silver produced but not yet delivered to Wheaton Precious Metals. The decrease in the gold sales volumes was attributable to the decreased gold production partially offset by positive changes in the balance of payable gold produced but not yet delivered to the company. As at September 30, 2017 approximately 5.3 million payable silver ounces and 57,200 payable gold ounces had been produced but not yet delivered to the company representing an increase during the quarter of 1.1 million payable silver ounces and 8200 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 September 30 being consistent with this expectation. Revenue for the third quarter of 2017 amounted to $203 million representing a 13% decrease relative to Q3 2016 with the decrease being primarily attributable to a 14% decrease in the average realized silver price and a 6% decrease in the number of silver ounces sold. Of this revenue 48% was attributable to silver sales while 52% related to gold. Gross margin for the third quarter of 2017 decreased 16% to $83 million attributable primarily to the lower silver prices. Cash-based G&A expenses amounted to $8 million in the third quarter of 2017 virtually unchanged from Q3 2016. The company currently estimate that non-stock-based G&A expenses will be approximately $32 million to $34 million for 2017. Interest costs for the third quarter of 2017 amounted to $6 million consistent with the comparable quarter of the prior year resulting in an effective interest rate on outstanding debt of 2.75%. Net earnings amounted to $67 million in the third quarter of 2017 compared to $83 million in Q3 2016. Basic earnings per share decreased 20% to $0.15 compared to $0.19 per share in the prior year. Operating cash flow for the third quarter of 2017 amounted to $129 million or $0.29 per share compared to $162 million or $0.37 per share in the prior year representing a 20% decrease on a per-share basis. Based on the company's dividend policy the company's Board has declared a dividend of $0.09 a share payable to shareholders of record on November 27, 2017 representing a 50% increase from the dividend declared relative to comparable period of the prior year. 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 third quarter of 2017 included the following; attributable silver production relative to the San Dimas mine decreased 17% to 1 million ounces with Camaro stating that production at San Dimas has been negatively impacted during the third quarter of 2017 by persistent issues with underground equipment reliability which is impacted development rates and underground stoping activities. Silver sales volumes in Q3 2017 relative to San Dimas decreased 10% to 962,000 ounces as a result of the lower production. Attributable silver production relative to Peñasquito in Q3 2017 amounted to 1.6 million ounces while sales amounted to 1.1 million ounces, an increase compared to Q3 2016 of 10% and 3% respectively with Goldcorp having indicated that the improved results were driven by improvements at Peñasquito mill as a result of opportunities identified to achieve sustainable efficiencies including improved equipment reliability and higher recoveries. Goldcorp also reported that the construction of the Pyrite Leach Project was 40% complete by the end of the third quarter of 2017 and is expected to commence commissioning in the fourth quarter of 2018, three months ahead of schedule. Attributable silver production relative to Antamina in Q3 2017 amounted to 1.7 million ounces while sales amounted to 1.5 million ounces, an increase compared to Q3 2016 of 18% relative to production and a decrease of 4% 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 the other silver interest in Q3 2017 amounted to 2.6 million ounces while sales amounted to 1.7 million ounces, a decrease compared to Q3 2016 of 5% and 10% respectively with the decrease being primarily due to the expiration of the Cozamin agreement on April 4 of this year. Salobo generated 73,000 ounces of attributable gold production in Q3 2017 an increase compared to Q3 2016 of 7% primarily due to the mining of higher grade material. During the quarter the two 12 million ton per year lines operated in excess of design capacity .Gold sales volumes in Q3 2017 relative to Salobo increased 34% to 67,200 ounces with the increase being result of the increased production coupled with positive changes in gold ounces produced but not yet delivered to Wheaton Precious Metals. Sudbury generated 8400 ounces of attributable gold production in Q3 2017, a decrease compared to Q3 2016 of 22% with the decrease being primarily the result of lower throughput. Vale has reported that the decrease was primarily due to the full operation of two furnaces in Q3 2016 while in Q3 2017 Sudbury transitioned to a single furnace operation. However, Vale has also stated that the transition has gone very well as the newly designed furnace is already exceeding its nameplate capacity. Gold sales volumes in Q3 2017 relative to Sudbury decreased 74% to 3200 ounces as a result of lower production coupled with negative changes in gold ounces produced but not yet delivered to Wheaton Precious Metals. Attributable gold production relative to Constancia in Q3 2017 was in line with expectations and amounted 2500 ounces while sales amounted to 2200 ounces, a decrease compared to Q3 2016 of 33% and 35% respectively. Attributable gold production relative to the other gold interests in Q3 2017 amounted to 12,000 ounces while sales amounted to 9900 ounces, a decrease compared to Q3 2016 of 60% and 49% respectively with the decreases being primarily due to two factors, first 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. And second lower throughput in the processing of lower grade material at the Minto mine as a result of mine sequencing changes to support the mine life extension. During the third quarter of 2017, the company repaid $99 million on the revolving facility and dispersed $37 million in dividends. Overall net cash decreased by $7 million in Q3 2017 resulting in cash and cash equivalents at September 30 of $70 million. This combined with the $854 million outstanding under the revolving facility resulted in a net debt position as of September 30, 2017 of approximately $784 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. That concludes the financial summary. And with that, I turn the call back over to Randy.

Thank you, Gary. As I previously mentioned with the solid third 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 continuing to add additional production from the corporate development front. There are a number of high quality accretive opportunities that we are pursuing related to both operating and development assets. In August, we announced the signing of a nonbinding term sheet with desert star resources to enter into an early deposit precious metal purchase agreement for the Kutcho project located here in British Columbia. We are very impressed with the Kutcho project and believe the project has excellent potential for both expansion and exploration. For relatively little upfront capital, the early deposit model provides us with access to high-quality early stage projects with significant optionality while providing the mine developer with a nondilutive form of financing. And as Wheaton has by far the strongest free cash flow in the entire streaming space at well over $100 million per quarter and over $1 billion of current capacity, we still 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. In summary, the third quarter was in line with our forecast and guidance. Our production remains founded on the highest quality portfolio of precious metal 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'd like to open up the call for questions. Operator?

[Operator Instructions] Your first question comes from the line of Kevin Fu with CIBC. Your line is open.

First off just want to say thank you for the additional detail breakout of the other categories for production and sales quite helpful. Just a few questions from me, on San Dimas with Primero’s credit facility coming due in a couple weeks. Any thoughts as we approach to that deadline?

Yes, I mean its Randy here Kevin it’s, we’re supportive in terms of working with Primero. We’ve been pretty clear about the fact that as long as progress is being made towards a solution here that we would extend that guarantee, and so we’re hopeful that Primero keeps making progress.

I guess in past years that we've typically seen a larger drawdown on the – yet to be delivered inventory anything we should watch out for when comparing sort of passed Q4 performances in terms of the timing of shipments that’s what you think?

Well, we talked about in the past, typically what we windup seeing is our partners tend to squeeze the inventory pipelines or pathways in that fourth quarter to improve the overall year-end results. And so, we typically what’s that, I mean I hate to say, but it is almost winds up being a bit of an inventory build as we have seen here in the third quarter that the winds up getting cleaned out. There is no guaranteed behind that, there is definitely incentives when it comes to year-end performance that we typically see that all captured back into fourth quarter.

And then just on the balance sheet, you’ve paid down a good amount of your revolver, I’m just wondering how aggressive do you plan to take it down the remaining amounts and all things being equal do the past three quarters sort of representative a good run rate to model out?

I mean I think you’ve got a look at what our projected cash flow would be per quarter. We’ll take any excess cash that we've got and apply it to that facility which is available to us for further drawdown. So we’re predicting annually to be generating, $500 million to $600 million of operating cash flow. So we’re paying 30% of that out to shareholders in the form of a quarterly dividend and the remainder will be applied to reduce the debt.

I would actually highlight that our hopes are to actually put it back into the ground on new acquisitions and that's what Haytham’s of course working on. But in the event that we don’t have new acquisitions any of that cash would just go back against the revolver.

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

I just wanted to know if you have any idea, if an asset goes into receiver ship or bankrupts in Mexico, does the party so would Primero still hold title to that, hold title to the asset or does it go back to government?

I believe Primero would hold title we’ll go to the receiver who would steer through that process. So it doesn’t just collapse back to the government, no.

And then, secondly in terms of have ever had your actual title on the royalty or the stream tested in bankruptcy court?

We have in the past we’ve got a very strong security position on San Dimas. So this is a little bit different every, every partnership is different. You know, our hopes are that, we do see there is a solution here and we’re just waiting for Primero to act on that solution that would have avoid any of this kind of process, but that is up to Primero. But our security being, second rank behind the debt and the fact that we’ve guaranteed that top level debt puts us in a very, very good position with respect to this asset, hope we never have to use though.

And so at this stage - I mean would we expect another extension or is that’s the 23rd is the deadline?

Well the 23rd is the deadline, we’ve always been very clear that – in fact that's why we provided the guarantee in the first place. We’ve been very clear about being supportive to Primero as they worked their way through this process. What I can tell you is that the asset does have healthy interest, and so there is lots of – there is opportunities here and now it is up to Primero to choose their own path. We’re willing to work with them and we have been working with them and we’ll continue to work with them to hopefully get them, to take one of these paths, but they have one their choices so.

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

Randy I was wondering if you might be able to comment on some of the size of the potential opportunities you're looking at specifically with gases that are producing, you’re looking to the $300 million or you’re looking something that potentially could be north of $500 million?

Dan I’m going let Haytham answer that one.

We continued to be very proactive obviously in this challenged equity environment and there is definitely companies looking at the source of capital including streaming. If I had to put a size factor for potential streams its anywhere between call it $50 million to $500 million at this stage. We’re seeing a number of opportunities specifically related to advancing projects to the feasibility or the development stage. We’re also working with certain precious metals producing companies that are looking to expand certain projects without having to take on additional debt. And lastly we continue to look at opportunities to work with companies as they consider using streams as source of funding for potential M&A transactions. All that being said our focus continues to be on accretive transactions Dan and with asset following to the lowest asset cost curve that continued to complement our current portfolio of assets. So in conclusion any transaction we undertake assets fit in with our high quality portfolio of assets we have.

And if you, I know things will change ebb and flow with the movements in the markets and the potential partners you’re talking about, but – what’s the probability of you guys if you pull the trigger on $200 million to $300 million deal in the next six months?

We hope that probability is very high. We’re working on quite a few transactions that could follow into that timeline whether one or many get concluded is yet to be seen.

Just on, I think that the Kutcho deal you’ve done a convertible also with that company is that a new element you're looking at adding into the advanced assets type acquisition?

I mean, you know these are partnerships that we’re look at and when we see an asset that’s, I mean one of the things that our team going through that Kutcho project. We’re pretty impressed with the way this looks, and so from a competitive space it just look like the right thing to do.

We also we strive to be competitive source of capital Dan while we obviously like to prefer to stick to streams we recognized that in the current environment. Competition is offering multifaceted financing solutions so we are trying to continue to be fluid in this environment and provide the counterparties what they are looking for.

And then, Randy I don’t know if you can comment on it, but I'll try when would you expect me to have an answer here on the San Dimas stream obviously you’re not running the process it’s up to Primero, but are you hopeful to have something by year-end or could this be something that maybe dragged into the beginning of New Year?

Well - sort of answered the question it is up to Primero this is up and could happen relatively quickly, but it comes down to Primero making some decisions. So we are patient in waiting for them to work their way through this process.

Great, thanks for the color, I appreciate it. Enjoy the weekend.

Thank you, and thanks everyone for dialing in today. Wheaton Precious Metals is on track for another strong year of productions and sales here in 2017. And we believe that 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 accretive acquisitions; thirdly, 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. Thank you.

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