Wheaton Precious Metals Corp. (WPM) Q2 2018 Earnings Report, Transcript and Summary

Good morning, ladies and gentlemen and thank you for standing by. Welcome to Wheaton Precious Metals’ 2018 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] I would like to remind everyone that this conference call is being recorded on Wednesday, August 15th at 11 o’ clock 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’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 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 Q2 2018 Management’s Discussion and Analysis and the press release from last night set out the material assumptions and risks that could cause the actual results to differ, 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 precious metals, 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. In addition, reference to Wheaton or Wheaton Precious Metals on this call include Wheaton Precious Metals Corp and or its wholly owned subsidiaries as applicable. 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 second quarter results of 2018. I am pleased to announce that we delivered yet another solid quarter with strong financial results from our portfolio of high quality assets. And since the beginning of the year, Wheaton has been very active on the corporate development front. With the restructuring of the San Dimas stream and the acquisition of two new streams on Vale’s Voisey's Bay and Sibanye’s Stillwater and East Boulder mines. Stillwater has already begun to contribute to production and cash flow here in the third quarter of 2018 and we expect Voisey’s Bay to start in January of 2021. With the addition of the new streams, Wheaton has reconfirmed its production guidance which I will discuss later in the call. 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 gentleman. Prior to reviewing Wheaton’s unaudited financial results for the three months ended June 30th 2018, I would like to remind everyone that all monetary figures discussed are denominated in US dollars unless otherwise noted. The company's precious metal interest produced 6.1 million ounces of silver and 85,300 ounces of gold in the second quarter of 2018. Relative to the second quarter of the prior year, this represented a decrease of 15% in silver production and an increase of 7% in gold production, with this change being primarily due to the termination in the San Dimas silver stream, effective May 10, 2018 and concurrently entering into a new San Dimas gold stream with silver production being further impacted by the expiry of the streaming agreements relative to the Lagunas Norte, Veladero and Pierina mines on March 31st 2018 combined with the expected lower production at Antamina primarily due to lower silver grades resulting from mine sequencing in the open pit. Sales volumes amounted to 6 million ounces of silver and 87,100 ounces of gold in the second quarter of 2018, representing a decrease of 6% for silver and an increase of 21% for gold, relative to the second quarter of 2017. The decrease in the silver sales volumes was attributable to the decrease production, largely offset by relative changes to payable silver produced, but not yet delivered to Wheaton. The increase in gold sales volumes was attributable to a combination of increased production and positive changes in the balance of payable gold produced, but not yet delivered to Wheaton. As at June 30th, 2018 approximately 4.3 million payable silver ounces and 75,600 payable gold ounces had been produced, but not yet delivered to the company, representing a decrease during the quarter of 0.6 million payable silver ounces and 6,400 payable gold ounces. We estimated normal level for ounces produced, but not delivered to equate to approximately 2 months’ worth of payable production for silver and 2 to 3 months for gold with the balance as of the June 30th being consistent with this expectation. Revenue for the second quarter of 2018 amounted to $212 million, representing a 6% increase, relative to Q2 2017, due primarily to the increase in gold sales volumes. Of this revenue, 46% was attributable to silver sales, while 54% related to gold. Gross margin for the second quarter of 2018 increased 5% to $87 million, attributable primarily to the increased gold sales volumes. Cash based G&A expenses amounted to $11 million in the second quarter of 2018, representing an increase of $3 million from Q2 2017, due primarily to higher crude costs associated with the company's performance share units or PSUs during Q2 2018. The company estimates that non-stock based G&A expenses, which exclude expenses relating to the value of stock options granted in PSUs to be in the lower end of the $34 million to $36 million range previously provided for 2018. Interest costs for the second 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 3.44%. During the quarter, the company recognized the $246 million gain on the termination of the silver stream at San Dimas. Net earnings amounted to $318 million in the second quarter of 2018 compared to $68 million in Q2 2017. After negating the effect of the gain on the disposition of the San Dimas silver stream and various other non-cash charges, adjusted net earnings in the second quarter of 2018 amounted to $73 million compared to $67 million in Q2 2017. Basic adjusted earnings per share increased 9% to $0.16 compared to $0.15 per share in the prior year. Operating cash flow for the second quarter of 2018 amounted to $135 million or $0.31 per share compared to $125 million or $0.28 per share in the prior year, representing an 8% 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 August 29, 2018. 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 second quarter of 2018 included the following. Attributable silver production relative to the silver stream at San Dimas for the 40 days ended May 10, 2018 being the date this stream was terminated and replaced with the gold stream relative to this mine, amounted to 608,000 ounces, while sales amounted to 1.1 million ounces, a decrease compared to Q2 2017 of 38% relative to production and an increase of 27% relative to sales with the significant increase in sales being due to positive changes in payable ounces produced, but not yet delivered to Wheaton. Attributable silver production relative to Penasquito in Q2 2018 amounted to 1.3 million ounces, while sales amounted to 1.5 million ounces, a decrease compared to Q2, 2017 of 15% and 6% respectively, resulting primarily from lower production from the oxide heap leach. Goldcorp also reported that the construction of the Pyrite leach project has been completed and is now expected to commence commissioning in the third quarter of 2018, two quarters ahead of schedule. Antamina generated 1.5 million ounces of attributable silver production in Q2, 2018, a decrease compared to Q2, 2017 of 23% with the decrease being due to the expected lower silver grades, resulting from mine sequencing in the open pit, resulting in more copper zinc ore and less lead rich ore being mined in the quarter. Silver sales volumes in Q2, 2018 relative to Antamina decreased 2% to 1.4 million ounces with the decreased production being offset by positive changes in silver ounces produced but not yet delivered to Wheaton. Attributable silver production relative to the other silver interests in Q2, 2018 amounted to 2.2 million ounces, while sales amounted to 1.5 million ounces, a decrease compared to Q2, 2017 of 6% and 19% respectively with the decrease being primarily due to the expiry of the Lagunas Norte, Veladero and Pierina streams at the end of March 2018. Attributable gold production relative to the Salobo in Q2 2018 amounted to 63,900 ounces while sales amounted to 70,700 ounces, an increase compared to Q2 2017 of 11% and 40% respectively with the sales during the quarter benefiting from positive changes in gold ounces produced, but not yet delivered to Wheaton. Attributable gold production relative to Sudbury in Q2 2018 amounted to 4,900 ounces, while sales amounted to 4,400 ounces, a decrease compared to Q2 2017 of 34% and 24% respectively, with the decrease in production being due in part to the extended, unscheduled maintenance at the Coleman mine, which had been shut down since November 2017 and was returned to production in April 2018. Attributable gold production relative to Constancia in Q2 2018 amounted to 3,200 ounces, in line with expectations, while sales amounted to 2,200 ounces, an increase compared to Q2 2017 of 37%, relative to production and a decrease of 8% relative to sales. Attributable gold production relative to the new gold stream at San Dimas which was acquired on May 10, amounted to 5,700 ounces, while sales amounted to 3,700 ounces. Attributable gold production relative to other gold interests in Q2 2018 amounted to 7,500 ounces while sales amounted to 6,100 ounces, a decrease compared to Q2 2017 of 39% and 54% respectively primarily due to the mining of lower grade material at Minto. During the second quarter of 2018, the company repaid $79 million on the revolving facility, made dividend payments totaling $65 million, which represented dividend payments relative to two quarters, received $10 million relative to the termination of the San Dimas silver stream and made an upfront cash payment of $390 million to Vale relative to the newly acquired Cobalt stream at Voisey’s Bay, which was partially funded by drawing down $373 million from the revolving facility. As a reminder, the company also received common shares of First Majestic with a fair value of $151 million as partial consideration for the termination of the San Dimas silver interest, which is not reflected as part of the company's cash flow. Overall, net cash decreased by $23 million in Q2 2018, resulting in cash and cash equivalents at June 30th 2018 of $92 million. This combined with $957 million outstanding under the revolving facility resulted in a net debt position, as of June 30th 2018, of approximately $864 million. Subsequent to June 30, 2018, the company dispersed $500 million in relation to closing the Stillwater precious metal purchase agreement. The company’s cash positions, strong forecast, future operating cash flows combined with available credit capacity and 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. As a reminder, the Tax Court has scheduled the trial to commence in mid-September of 2019 with the trial process set to be conducted over a 2 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’d turn the call back over to Randy.

Thank you, Gary. As mentioned, Wheaton has been very active on the corporate development front since the beginning of 2018. During the second quarter of 2018, we closed the new precious metal streaming agreement with First Majestic Silver on the San Dimas mine, which is the asset that Wheaton was first founded on back in 2004. The terms of the new streaming agreement entitled Wheaton to 25% of gold production plus an additional amount of gold equal to 25% of silver production converted to gold at a fixed gold to silver exchange ratio of 70:1. Also in the second quarter of 2018, Wheaton entered into an agreement to acquire from Vale 42.4% of the Voisey’s Bay Cobalt production until the delivery of 31 million pounds of cobalt and thereafter 21.2% for an upfront payment of $390 million. Delivery of Cobalt production will commence in January of 2021. And finally subsequent to the quarter end, Wheaton entered into an agreement to acquire from Sibanye Stillwater, a fixed percentage of gold and palladium production from the Stillwater and East Boulder mines, starting on July 1st of 2018 for an upfront payment of 500 million. Given our sector leading cash flow and revolving credit facility, Wheaton was able to complete these transactions without having to access additional sources of capital. We believe that both new acquisitions are accretive on all metrics and fit very well within our existing portfolio of low cost, long life assets. Wheaton now not only has a solid growth profile, but also the most diversified production base that it has ever had. And with regard to production, we have reconfirmed our guidance which reflects the changes to the San Dimas streaming agreement and the addition of the new asset. Wheaton’s estimated attributable production for -- in 2019 is forecast to be approximately 355,000 ounces of gold, 22.5 million ounces of silver and 10,400 ounces of Palladium. Estimated average annual attributable production over the next five years is anticipated to be approximately 385,000 ounces of gold, 25 million ounces of silver, 27,000 ounces of palladium and starting in 2021, 2.1 million pounds of Cobalt per year. In summary, I believe our production remains founded on the highest quality portfolio of precious and specialty metal streams in the industry, underpinned by very low cost mining operations such as Salobo, Antamina and Penasquito. We are very excited about our most recent acquisitions, which will add immediate production and cash flow from Stillwater and future Cobalt production from Voisey’s Bay starting in 2021. And we look forward to working with our new partner, First Majestic, as they focus on several quarters -- in the next several quarters on optimizing the operation and reestablishing San Dimas as one of the most prominent silver and gold mines in Mexico. We're still committed to precious metals and we remain disciplined and focused 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. And so with that, operator, I would like to open up the call for questions.

[Operator Instructions] Your first question today comes from the line of Anita Soni of Credit Suisse. Please go ahead.

My apologies if you've addressed this in the comments. I jumped on a little bit late, but I'm just trying to clarify the tax situation. So in terms of the domestic case that the CRA has against you at this point, I think you’d mentioned that there would be no material impact to the taxes payable in 2014, ’15, ’16, ‘17 potentially if they bring up a similar suite, but when you look at the table that you have, identifying taxes payable, there's a difference from Q1 to Q2 and I was just wondering where that difference is arriving from? I think it was like 903 million this quarter and prior quarter, saying 725 million.

So just to clarify, the CRA has reassessed us domestically, relative to the way that we deduct the upfront payment relative to streams that have been entered into since 2008, which we have taken the position and we still very strongly believe in this position that we're not taxable until the upfront deposit has been reduced to zero. The CRA has taken the position that we should be taxable or including in taxable income, income based on the accounting basis, which differs from our tax filing position in that, we deplete the upfront payment over the number of expected ounces that we received. That reassessment domestically has very, very little impact. It does affect the timing of loss carrybacks, but the net result is immaterial. We have updated the table for our international dispute that we've got ongoing with the CRA to reflect the potential obligation on the basis of this new position that the CRA has taken and that's where you'll see the difference from Q1 to Q2 and we've foot noted what the numbers would be if under the old basis.

So that’s basically taking a read through of what they're looking at domestically if they were then to take that internationally the impact that would have?

That’s correct. But again, we feel very strongly that we -- our position will be upheld here. We’re in the process of objecting to the 2013 reassessment.

[Operator Instructions] Your next question comes from the line of Michael Gray of Macquarie. Please go ahead.

One question just related to how active you’ve been on corporate development, I believe on previous conference calls, you’ve indicated the search for new streams, you’re willing to go a little bit further afield including Africa. Can you provide some color on your appetite for such diversification and how active you might be on that front?

As you can see, obviously, by our recently announced transactions, we've been quite successful on capitalizing some of our larger opportunism in the first half of the year. Your question was in regards to, whether we’d look to add. What we're looking for is high quality assets. So jurisdictionally, we will have to consider each one. Obviously, we’ll have to await the pros and cons of the country we enter into. What we're now seeing is a number of opportunities in the pipeline that fall between, call it, $100 million and $300 million in value. These are primarily development stage financing opportunities that would require very little upfront capital as any spending would actually be staged through a development timeline, which is typically 12 to 36 months. So there are opportunities that we are looking at. In Africa, I would say there's always been some opportunities. We have not found historically opportunities that we feel are worth jumping into at the level that's required, but we will continue to look in those jurisdictions.

Michael, if I just add, it does relate, I mean, Africa as a whole of course is the continent that the most important thing is the actual countries that we invest in. There are a few countries in Africa that we do feel are investable, but as I would say, it's a few. There is more of -- so we will be very selective from that front and focus on -- comes down to which country we're talking about. There are definitely some attractive jurisdictions in Africa.

Your next question comes from the line of Charles Gibson of Edison. Your line is open.

And congratulations if I may on a very solid quarter. I have two questions if I could. Not at all, thank you. Two questions if I could. One is, I just wanted to know in relation to the CRA, are you still in dialog with them, are you still in the case discovery process or have you basically broken up communications and the situation is, we’ll see you in court.

Yeah. It's no longer, the CRA, when we petition the case in the tax court, the case gets handed off to the Ministry of Justice. So, there are hearings scheduled for the fall here that to determine whether we are through the discovery process or not. We believe that we are, although there is potential that the Ministry of Justice seeks additional time for discovery. So we will hopefully have a better understanding as to whether the discovery process is concluded. We still believe that we’ll hold regardless of whether the discovery process is – it needs to continue that will still be holding that September 2019 court date. So the interaction with the Ministry of Justice really is limited to the discovery interactions.

And if I could, a rather different question. My second question, I just wanted to ask about the depletion charge on the gold stream at San Dimas. I mean, even accounting for the fact the 70 for 1 gold to silver ratio, if you compare the depletion on the silver stream compared to the depletion of the gold stream, the gold stream, it seems to be relatively larger and I was just wondering if we should be entering into that.

Charles, that just really reflects that we disposed of the old silver stream and when we entered into the new gold stream, we made an upfront payment of $220 million, which was more reflective of the current market value of gold. So as a result, the depletion rate has increased there.

I think the way to look at it is, it’s essentially a new stream that was placed in the context of today's market.

Thank you, Charles and thank you everyone for dialing in today. I want to reiterate what a strong start that we have had here for the first half of 2018. Firstly, we successfully restructured that San Dimas stream and now have a new partner with a strong long term vision that is focused on deploying capital back into San Dimas. Secondly, we completed two new streaming transactions or acquisitions that will both add immediate and future production and cash flow with Stillwater already contributing to the third quarter of 2018. Thirdly, our existing portfolio of high quality assets generated over 260 million in cash flows in the first half of 2018 and with this solid foundation in place, a strong growth profile going forward and optionality measured in ounces, not acres, we believe we are very well positioned to continue to deliver value back to our shareholders. So 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 now.