Wheaton Precious Metals Corp. (WPM) Q1 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to the Wheaton Precious Metals’ 2018 First 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 call is being recorded on Friday, May 11th at 11 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, Wheaton Precious Metals’ President and Chief Executive Officer; Gary Brown, Senior Vice President and Chief Financial Officer; and Haytham Hodaly, Senior Vice President, Corporate Development. I’d like to bring to your attention that some of the commentary in 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 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 Wheaton’s Form 40-F and Wheaton’s Form 6-K, both on file with the U.S. Securities and Exchange Commission. The Annual Information Form Q1 2018 Management’s Discussion and Analysis and the press release from last night set out the material assumptions and risks factors that could cause the actual results to differ, and including among others, fluctuations in the price of the commodities, the outcome of the challenge by the CRA of Wheaton’s tax filings, the absence of control over mining operations from which Wheaton purchases silver and gold, completing new streaming transactions and risks related to such mining operations and the continued operations of 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 in to our conference call to discuss the first quarter results of 2018. I am pleased to announce that we had a solid start to the year. During the first quarter, we produced 7.4 million ounces of silver and 80,000 ounces of gold. From a sales perspective, we sold 6.3 million ounces of silver and 70,000 ounces of gold, and with our core assets performing better than expected, we are well on track to meet guidance for the year. We continued to generate strong operating margins in the first quarter of 2018, resulting in cash flow of over $125 million from revenue of $200 million. As a result of our dividend policy, which is linked directly to operating cash flow, we declared a quarterly dividend of $0.09 per common share, an increase of 29% relative to the comparable period in 2017. And finally, in January of this year, we announced the restructuring of the San Dimas streaming agreement in connection with the acquisition of Primero by First Majestic. As First Majestic announced yesterday, the acquisition of Primero has now been completed and as such we have terminated the existing San Dimas silver purchase agreement and entered into a new precious metals purchase agreement with First Majestic. Gary Brown, one of our Senior Vice Presidents and our 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’s unaudited financial results for the three months ended March 31, 2018, 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 7.4 million ounces of silver and 79,700 ounces of gold in the first quarter of 2018. Relative to the first quarter of the prior year, this represented an increase of 12% in silver production and a decrease of 5% in gold production. With the higher silver production being primarily attributable to San Dimas, partially offset with the expiry of the Cozamin silver purchase agreement on April 4, 2017 and the lower gold production being primarily attributable to Minto and Sudbury. Sales volumes amounted to 6.3 million ounces of silver and 70,000 ounces of gold in the first quarter of 2018, representing an increase of 21% for silver and a decrease of 21% for gold, relative to the first quarter of 2017. The increase in the silver sales volumes was attributable to a combination of increased production and positive changes to payable silver produced, but not yet delivered to Wheaton, the decrease in gold sales volumes was attributable to negative changes in the balance of payable gold produced but not yet delivered to Wheaton coupled with decreased production levels at Minto and Sudbury. As at March 31, 2018, approximately 4.8 million payable silver ounces and 84,800 payable gold ounces had been produced, but not yet delivered to the company representing an increase during the quarter of point 0.3 million payable silver ounces and 5,300 payable gold ounces. We estimate a normal level for ounces produced, but not delivered to equate to approximately two months’ worth of payable production for silver and two months to three months for gold with the balances at March 31st being consistent with this expectation for silver, but slightly higher than expectations for gold. Revenue for the first quarter of 2018 amounted to $199 million, representing a 1% increase relative to Q1 2017, with the increase in silver sales volumes being offset by the decrease in gold sales volumes. Of this revenue, 53% was attributable to silver while 47% related to gold. Gross margin for the first quarter of 2018 increased 13% to $86 million, attributable primarily to a 10% increase in gold prices coupled with lower depletion rates, partially offset by a 4% decrease in silver prices. Cash based G&A expenses amounted to $9 million in the first quarter of 2018, representing an increase of $2 million from Q1 2017, due primarily to higher consulting and legal costs in addition to higher accrued costs associated with the company’s performance share units or PSUs, during Q1 2018. 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 amount to $34 million to $36 million for 2018. Interest costs for the first quarter of 2018 amounted to $6 million, consistent with the comparable quarter of the prior year resulting in an effective interest rate on outstanding debt of 3.12%. Net earnings increased by 11% to $68 million in the first quarter of 2018 compared to $61 million in Q1 2017. After negating the effect of various non-cash charges and irregular receipts, adjusted net earnings in the first quarter of 2018 amounted to $70 million, representing a 14% increase relative to comparable quarter of the prior year. Basic adjusted earnings per share also increased 14% to $0.16 compared to $0.14 per share in Q1 2017. Operating cash flow for the first quarter of 2018 amounted to $125 million or $0.28 per share, compared to $120 million or $0.27 per share in the prior year, representing a 4% increase 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 May 25, 2018, representing a 29% increase from the dividend declared relative to the comparable period of the prior year. Under the Dividend Reinvestment Plan, the Board has elected to offer shareholders the option of having their dividends reinvested in newly issued common shares in the company at a 3% discount to market. The operational highlights for the first quarter of 2018 included the following. San Dimas generated 1.6 million ounces of attributable silver production in Q1 2018, an increase compared to Q1 2017 of 158%, as Q1 2017 production was negatively impacted by a strike initiated by the union at San Dimas on February 15, 2017. Silver sales volumes in Q1 2018 relative to San Dimas increased 72% to 1.4 million ounces due to the higher production, partially offset by negative changes in payable ounces produced but not yet delivered to Wheaton. On May 10, 2018, First Majestic completed the previously announced acquisition of Primero, in conjunction with this and as previously disclosed on May 10th, we also cancelled the existing San Dimas silver purchase agreement and entered into a new precious metal purchase agreement with First Majestic. As a reminder, under the new agreement, we will be entitled to 25% of the gold production, plus an additional amount of gold equal to 25% of the silver production converted to gold at a fixed gold to silver exchange ratio of 70:1. Additionally, Wheaton will pay $600 per ounce of gold delivered. As part of the transaction, in addition to the new stream, Wheaton International received $20.9 million First Majestic common shares. As a result of this restructuring transaction the company anticipates recording a gain on disposal of the existing stream with the carrying value of the stream as at March 31, 2018 being $133 million. Attributable silver production relative to Penasquito in Q1 2018 amounted to 1.4 million ounces while sales amounted to 1.2 million ounces, an increase compared to Q1 2017 of 8% and 43% respectively, with the significant increase in sales volumes being primarily the result of positive changes in payable ounces produced but not yet delivered to Wheaton. Gold Corp. also reported that by March 31, 2018 the construction of the Pyrite Leach Project was 86% complete and is still expected to commence commissioning in the fourth quarter of 2018. Antamina generated 1.3 million ounces of attributable silver production in Q1 2018, a decrease compared to Q1 2017 of 9%, with the decrease being a result of lower silver grades resulting from mine sequencing. Silver sales volume the Q1 2018 relative to Antamina increased 21% to 1.4 million ounces, with the increase being due to positive changes in silver ounces produced but not yet delivered to Wheaton. Attributable silver production relative to the other silver interest in Q1 2018 amounted to 2.4 million ounces, while sales amounted to 1.8 million ounces, a decrease compared to Q1 2017 of 11% and 13%, respectively, with the decrease being primarily due to the expiry of the Cozamin agreement on April 4, 2017. As a reminder, the Lagunas Norte, Veladero and Pierina streams, which contributed a combined 500,000 ounces of silver production during the first quarter expired at the end of March. Attributable gold production relative to Salobo in Q1 2018 amounted to 61,500 ounces while sales amounted to 54,600 ounces, an increase compared to Q1 2017 of 6% relative to production and a decrease of 13% relative to sales. The increased production was attributable primarily to the mining of higher grades while the decrease in sales were -- was attributable to negative changes in gold produced, but not yet delivered to Wheaton. Attributable gold production relative to Sudbury in Q1 2018 amounted to 6,500 ounces while sales amounted to 5,200 ounces a decrease compared to Q1 2017 of 29% and 25%, respectively. The decrease in production was due to the cessation of mining activities at the Stobie mine since the second quarter of 2017, coupled with the extended unscheduled maintenance at the Coleman mine which had been in a maintenance shutdown since November 2017 and returned to production in April 2018. Attributable gold production relative to Constancia in Q1 2018 amounted to 3,300 ounces, while sales amounted to 3,200 ounces, an increase compared to Q1 2017 of 36% and 40%, respectively. Hudbay has reported that while negotiations to secure surface rates over the Pampacancha deposit continued to progress and Hudbay has been granted access to the land to carry out early works activities, they anticipate the mining of this high grade satellite deposit to commence in 2019, representing a one-year delay. In the interim Hudbay has indicated that they will continue to mine higher grade ore from the main Constancia pit. As a reminder should the mining of the Pampacancha deposit be delayed beyond 2018, Wheaton will be entitled to an increased portion of gold from Hudbay. Attributable gold production relative to the other gold interest in Q1 2018 amounted to 8,400 ounces, while sales amounted to 6,900 ounces, a decrease compared to Q1 2017, a 41% and 57%, respectively, primarily due to the mining of lower grade material at Minto During the first quarter of 2018, the company repaid $107 million on the revolving facility. Overall net cash increased by $17 million in Q1 2018, resulting in cash and cash equivalents at March 31 of $116 million. This combined with the $663 million outstanding under their revolving facility resulted in a net debt position as at March 31, 2018 of approximately $547 million. 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, as it relates to the company’s ongoing dispute with CRA, the Tax Court scheduled the trial to commence in mid-September of 2019, with the trial process set to be conducted over two month period. We continue to work diligently with counsel to advance the case as expeditiously as possible. That concludes the financial summary. And with that, I’ll turn the call back over to Randy.

Thank you, Gary. On the corporate development front, we remain very busy pursuing several high quality accretive opportunities related to both operating and development assets. And with the strength of our cash flow well over $100 million per quarter and over $1.4 billion of current capacity, Wheaton is well positioned for continued investment opportunities. As always, we will remain disciplined and focus on acquiring streams that are accretive to our current shareholders and come from high quality assets producing in the lowest half of their respective cost curves. So, in summary, the first quarter of 2018 was a strong start to the year and it’s laid the foundation for meeting our guidance. We believe our production remains founded on the highest quality portfolio of precious metal streams in the industry, underpinned by very low cost mining operations such as Salobo Antamina, and Penasquito. And we do look forward to working with First Majestic as they re-establish San Dimas as one of the premier precious metals mines in Mexico. We remain very optimistic about our ability to capitalize on the favorable corporate development environment and to add additional quality assets to our portfolio. And so, with that, I would like to open up the call for questions. Operator?

Thank you. [Operator Instructions] Your first question comes from Dan Rollins, RBC Capital Markets. Please go ahead.

Thanks very much. Gary, I was wondering and Randy maybe you could provide a little bit of color just on the ongoing situation with the CRA. I think last time we chatted, you were still in the discovery phase, the oral discovery phase. I’m wondering if you can confirm if the discovery phase has now ended?

Dan, it’s Gary. I mean it’s largely complete, but I -- we can’t say that it’s totally over at this point. There is a chance that the Crown could request additional follow-up queries, and so we’re close to the end, but we’re -- it’s not complete.

Okay. And that was originally supposed to be sort of finished up by the end of last year, correct, the original timeline?

Yeah. It got pushed out for a number of reasons. My understanding, thankfully, I have not been through this process before, but my understanding is that this is pretty standard for cases like this.

Okay. So now actually having a set court date in 2019 really does avoid any potential future delays on basically coming to finalization of this dispute with the CRA.

I -- we’re very encouraged by the fact that we got a court date set. That should keep timelines fairly rigid, but we can’t guarantee that that won’t change. It certainly won’t change as a result of anything we do. We will be pushing forward as expeditiously as possible.

Okay. Perfect. And then maybe, Randy, I don’t know if Haytham’s there, but any change to the size of the pipeline, last time we chatted it was fairly -- getting fairly deep, some pretty chunky assets in there, I think, Haytham had hopes that you build the consummated deal before the end of the year, has anything changed on that front or are you still fairly optimistic of being able to put another accretive deal into the portfolio this year?

Yeah. Dan, I’ll let Haytham take that.

Hey. Good morning, Dan. We’re actually seeing a fairly robust pipeline of opportunity still, you know they still fall between $100 million and $600 million in value each one. I would say, we probably have between six and eight opportunities that we’re looking at here that could get consummated throughout the streaming space over the next 12 months. So in total I said as you know as much as a $1.5 billion worth of streaming opportunities out there.

Perfect. Thanks very much and congratulations on a good start to the year.

Thank you, Dan, and given that there’s no more questions. Thank you everyone for dialing in today. We believe Wheaton offers the best option for gaining exposure to precious metals for a number of different reasons. Firstly, by having low and predictable costs resulting in some of the highest margins in the entire precious metal space; secondly, through our portfolio of long life low cost assets and a 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 solid ounces, not acres. We do 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.