Wheaton Precious Metals Corp. (WPM) Q1 2019 Earnings Report, Transcript and Summary

Good morning ladies and gentlemen. Thank you for standing by. Welcome to Wheaton Precious Metals 2019 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'd like to remind everyone that this conference call is being recorded on Thursday, May 9th at 11:00 AM Eastern Time. I will now turn the conference over to Mr. Patrick Drouin, Senior Vice President of Investor Relations. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen, and thank you for participating in today's call. I'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 on today's call may contain forward-looking statements. There could 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 Q1 2019 MD&A 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 absence of control over mining operations from which Wheaton purchases precious metals 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 the reference to Wheaton or Wheaton Precious Metals on this call includes Wheaton Precious Metals Corp and/or all of 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 joining us today to discuss Wheaton's first quarter results of 2019. I am pleased to report we delivered a very solid start to 2019 with strong operating results for our diversified portfolio of high quality assets. In the first quarter of 2019 gold sales exceeded 115,000 ounces. This is the most gold we have ever sold in a single quarter, highlighting our growing gold segment in this business. From a cash flow perspective, Wheaton generated over $115 million of operating cash flow and declared a quarterly dividend of $0.09 per common share in line with our minimum target set for 2019 by the Board of Directors. In addition we also saw one of our key growth projects advance with Hudbay announcing the conclusion of the permitting process at Rosemont and the initiation of an early works' program. With production potentially commencing as early as 2022, we are very excited for the future of Rosemont and its additional contribution to our growth profile. With that, I'd like to turn the call over to Gary Brown one of our Senior Vice Presidents and the Chief Financial Officer who will provide more details on our results. Gary?

Thank you, Randy and good morning ladies and gentlemen. The company's precious metal interest produced 93,600 ounces of gold, 5.6 million ounces of silver, and 4,700 ounces of palladium in the first quarter of 2019. Relative to the first quarter of the prior year, this represented an increase of 22% in gold production and a decrease of 24% in silver production with the increase in gold production due primarily to the new streaming agreements relative to the San Dimas and Stillwater mines coupled with higher production at Sudbury, partially offset by lower production at the other gold interests including Minto which was placed under care and maintenance in October of 2018. The decrease in silver production was primarily due to the termination of the San Dimas silver stream effective May 10, 2018 and the expiry of the streaming agreement relative to the Lagunas Norte, Veladero, and Pierina mines on March 31, 2018. Sales volumes amounted to 115,000 ounces of gold, 4.3 million ounces of silver, and 5,200 ounces of palladium in the first quarter of 2019, representing an increase of 64% for gold and a decrease of 32% for silver relative to the first quarter of 2018. The increase in gold sales volumes, which represented a record for the company, was due to the higher production levels, coupled with positive changes in the balance of payable gold produced but not yet delivered to Wheaton. The decrease in the silver sales volume was attributable to the lower production levels coupled with negative changes in the balance of payable silver produced but not yet delivered. As at March 31, 2019, approximately 51,500 payable gold ounces, 3.5 million payable silver ounces and 4,800 payable palladium ounces had been produced but not yet delivered to the company, representing a decrease during the quarter of 25,500 payable gold ounces and 500 payable palladium ounces and an increase during the quarter of 400,000 payable silver ounces. We estimated normal level for ounces produced, but not delivered, to equate to approximately two to three months worth of payable production for gold and palladium and two months worth for silver, with the balances for gold at March 31 being slightly lower than its expectation, due to the significant deliveries of gold produced in Salobo in prior quarters during the first quarter of 2019. Revenue for the first quarter of 2019 amounted to $225 million, representing a 13% increase relative to Q1, 2018, primarily due to the increase in the number of gold ounces sold, partially offset by the decrease in silver sales volume. Of this revenue, 67% was attributable to gold sales, 30% was attributable to silver sales and 3% was attributable to palladium sales. Gross margin for the first quarter of 2019 increased 2% to $87 million, primarily due to the higher sales volume. Cash-based G&A expenses amounted to $15 million in the first quarter of 2019 representing an increase of $7 million from Q1, 2018, with the increase being primarily related to increased accruals relative to the outstanding performance share units, or PSUs, during Q1 2019. Interest costs for the first quarter of 2019 amounted to $13 million, resulting in an effective interest rate on outstanding debt of 4.28%, as compared to $6 million of interest costs at an effective interest rate of 3.12% incurred in Q1, 2018. Net earnings amounted to $57 million in the first quarter of 2019 compared to $68 million in Q1, 2018, with the decrease being the result of higher interest and PSU expenses. Basic adjusted earnings per share decreased 19% to $0.13, compared to $0.16 per share in the prior year. Operating cash flow the first quarter of 2019 amounted to $118 million or $0.27 per share, compared to $125 million, or $0.28 per share in the prior year, representing 4% 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 May 24, 2019. 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. For 2019, the company continues to estimate that non-stock based G&A expenses, which exclude expenses relating to the value of stock options granted and PSUs will amount to $34 million to $37 million. The operational highlights for the first quarter of 2019 included the following. Salobo generated 60,800 ounces of attributable gold production in Q1, 2019, consistent with Q1, 2018, but significantly higher than expectations, primarily driven by higher gold grades. Gold sales volumes in Q1, 2019, relative to Salobo increased 54% to 84,200 ounces, with the increase being attributable to the delivery of a significant amount of gold produced in prior periods. Attributable gold production relative to the Sudbury mines increased 186% to 10,000 ounces with Q1, 2018 production having being negatively impacted by the temporary shutdown of the Coleman mine. Attributable silver production relative to Penasquito in Q1, 2019, amounted to 1.6 million ounces, a 10% increase relative to Q1, 2018 but below our expectations. The Pyrite Leach Project operated successfully throughout the quarter. In April, 2019, Newmont Mining Corporation and Goldcorp Inc. merged to form Newmont Goldcorp Corporation and has highlighted the focus on improving mill throughput and plant reliability at Penasquito. On April 29, 2019, Newmont Goldcorp announced that it intended to temporarily suspend operations at the Peñasquito mine, pending resolution of a legal blockade. During the first quarter of 2019, the company repaid $81 million of debt outstanding under the revolving facility. Overall, net cash increased by $50 million in Q1 2019, resulting in cash and cash equivalents as at March 31 of $126 million. This combined with the $1.2 billion outstanding under the revolving facility resulted in a net debt position as at March 31 of approximately $1.1 billion. 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. With that I turn the call back over to Randy.

Thank you, Gary. Our 2019 and long-term production guidance remains unchanged. We expect to produce 690,000 gold equivalent ounces in 2019 and to average 750,000 gold equivalent ounces annually over the next five years inclusive of 2019. This strong organic growth over the next five years is mainly driven by the Peñasquito Constancia and Stillwater mines. I would like to highlight that Wheaton does -- currently does not include any production from Vale's Salobo III ongoing expansion or Hudbay's Rosemont project in its estimated average five-year production guidance, although we would expect both of these projects to begin contributing to our production towards the end of the five-year guidance period. Vale continues to advance the Salobo III which represents a 50% increase in throughput capacity from our cornerstone asset. And as highlighted earlier with the recent permitting progress, Hudbay is advancing Rosemont into development and ultimately production. We continue to believe our organic growth profile is very strong. Even so, we remain busy on the corporate development front, pursuing opportunities that will complement our portfolio of high quality assets Wheaton's sector-leading cash flow coupled with the available credit under our $2 billion revolving facility provides ample capacity for continued investments. As always, we will continue to use a disciplined approach with a 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. In summary, the first quarter of 2019 has provided a solid start to the year. 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 Peñasquito. And we look forward to our recent acquisition Stillwater contributing to a full year of both gold and palladium production. So with that, I would like to open up the call for questions. Operator?

Thank you. Ladies and gentlemen, we will not conduct a question and answer session. [Operator Instructions] Your first question comes from Cosmos Chiu with CIBC.

Good morning Cosmos. Cosmos?

Hello, can you hear me? Hello.

Yes, I can.

Okay. So, I guess, the first few questions I'm going to ask. I'm just trying to figure how I should approach modeling Q2. So maybe first off on Salobo, clearly as Gary had mentioned it was a good Q1 from the perspective of Wheaton Precious Metals. But if we were to have looked at Vale's reporting yesterday, their copper concentrate was down 22% year-over-year, gold production as a company was down quarter-over-quarter. I'm just wondering, is there usually a time lag between production at Salobo and when Wheaton Precious Metals will receive that payment and if we're going to see any kind of the lower grade come through for example in Q2 for Wheaton Precious Metals?

The only consistent pattern that we've ever seen with respect to production produced but not yet delivered is that consistently across our entire portfolio you usually see the fourth quarter squeeze up and tighten up. So, the fact that we have gained a bit here in the first quarter. Yes it's tough to predict where that's going to go over the next while. We do know that Vale is continuing to advance on the construction side down there to push that project forward. Tough to sort of forecast where that runs. I mean, it's – the one advantage with the Salobo mine is that it's got a really good rapid connection to Tidewater. And so those concentrates do move out. We typically see – on assets like that we typically guide for a two-month sort of lag time in terms of produced but not yet delivered. And so – but it's going to fluctuate back and forth between sometimes one month and sometimes three months. And now we're down closer to the month. So remains to be seen. I mean, we haven't seen any consistent patterns other than as I said typically our fourth quarter is usually where it gets squeezed a little bit tighter and so seeing a bit of a gain in the first quarter was a nice pleasant surprise.

Cosmos, this is Patrick.

Hi, Patrick.

Hi, Cosmos.

Yeah. My question was more – Patrick was more I guess on the 61,000 ounces that was produced in Q1 2019 and that was pretty consistent with Q1 2018 for Wheaton Precious Metals. I'm just trying to figure out that disconnect between Vale's reporting and what you've kind of received.

Yes. No, and If you – let's talk production first. We did see – actually a stronger Q1 production than what we were forecasting. They actually had better weather down in Brazil which allowed them to do more run-of-mine processing the material they were processing and not having to pull some low-grade stockpiles. You can imagine when you get really wet weather down in Brazil it's hard to get into the pit and consistently mine that run-of-mine material. So this was a good quarter. And if you look at the concentrate – copper concentrate production from Salobo alone not from their other operations which includes Sossego and others, it was only down about 6%, 6.5%. So not the 22% I think you referenced. So copper production was a little bit lighter but even better than what Vale was looking for. So it was actually quite a good quarter for Salobo from what we see. We actually the production was better on the gold front because we did see better recoveries of gold in the processing plant. So that's why we were flat in our production quarter – year-over-year versus Vale being down again just about 6 – just over 6%. On a go-forward basis as I think we've tried to allude to we did see a 20,000 ounce plus draw-down in produced but not yet delivered inventories. We would not expect to see another draw-down of that magnitude by any means. They are getting down to around a one month level of inventory. We would think it to be conservative if you want to at least keep that flat. So production and sales should be fairly – closer to being equal while adjusting for payable rates as well in Q2. So again, we're not looking for a big D, you get these inventory draws occasionally. You could even see a slight inventory build going forward.

And going back to Randy's explanation, I think I know these inventory draw-downs pretty well, but could you confirm or remind me once again just based on the timing of the sales at Salobo it's not up to the discretion of Wheaton Precious Metals it's really driven by the producer?

It totally is. We don't carry anything over at quarter-end if we can help it. If it gets delivered to us it gets sold. So it really comes down to the timing of shipments from the asset itself. And then when it actually hits the smelters.

Of course. And then maybe turning to Penasquito here. I guess my first question is on – the production – silver production was pretty good in Q1 2019. It opened a literature coming from the producer and certainly for Wheaton Precious Metals and some of the other royalty companies as well. I think Penasquito has seen some lower grades, but I want to confirm I think the lower grade is only for the gold production, silver production isn't impacted. Is that still the case?

Yeah. The model has some of the highest silver grades of the entire deposit being mined over the next few years. They're gradually moving into this; it's been pretty well-telegraphed that they're having some challenges with harder rock than expected a little bit more sedimentary rock than what they expected. And so it's having an impact on some of the throughput. But the models -- the highest silver grades of that entire deposit are expected over the next couple of years from that southwest corner of the Penasquito pit. And so we'll see.

Yeah. And following up on Penasquito here. Again what's a usual time lag between production at Penasquito and contribution to Wheaton Precious Metals? I guess there is this ongoing temporary suspension at Penasquito. I'm just wondering, for example, if it goes off another 10, 15 days, is it going to impact Wheaton Precious Metals in Q2 or is it more so in Q3?

I mean, we will see some impact in Q2 because again the concentrate most of our production at Penasquito comes from concentrates - base metal concentrates that are being shipped off. And so it deals with a similar timeline that Salobo does with their copper concentrates, Penasquito with its lead and zinc concentrates. We have to deal with those same type of delays. And so again the guidance I would say is about a two to three-month lag. So there will be a bit of an impact on Q2. We're hopeful that Newmont and Goldcorp gets the issue resolved. We are supportive in terms of the approach they're taking and do hope that they are successful in finally resolving this. It seems to be an issue that happens on a regular basis down there. And so they're trying to do their best to try and stop it from happening on a regular basis.

Of course. Maybe I guess switching gears a little bit here on Rosemont. The receipt of the water permit is certainly positive, very positive for both Hudbay and Wheaton Precious Metals. Could you remind me in terms of the $230 million funding, the timing of that funding, and how that potentially coincides with the need to fund Salobo III? I know they haven't really talked about Salobo III of late. I'm just wondering if there is any overlap?

We wouldn't expect it. So funding, I mean if everything goes forward, Hudbay has still got some work to do before they totally commit towards funding it, but our expectations are that our first tranche of the $230 million will be by the end of this year. The first step is a $50 million payment once they commence work. It does kick-start a timeline in terms of having to deliver it. And so we did renegotiate that deal recently with Hudbay that gives our shareholders -- we advance our money a little bit earlier in the process, but we also get a little bit more protection in the event of delays. We get compensation for that. So we felt the benefits were worth putting our money in a little bit early. So we would expect that first tranche before the end of this year that would be $50 million. And we would expect the rest of it to be paid sometime next year assuming construction is going on a forward basis. With respect to Salobo III, our funding for that happens after they satisfy a completion test. And that completion test is a 90-day test that would happen once they have that third phase up and running. Now if we look at the first two phases that were built down at Salobo those things typically about 12 to 18 months to get up to full production to ramp up to full production levels. Their internal targets have Salobo III processing first ores early in 2022. And so that would -- our expectations are that any funding from our side towards that Salobo III expansion wouldn't happen until 2023 just in the sense of them ramping that up to full production and then having to run for a 90-day, a full quarter essentially of operations to show what production levels they can achieve and so on. And so that's a long ways out before we have to deal with the Salobo III, any expansion payments relative to Salobo III.

Great. Thanks again, Randy, Gary, and Patrick and team. Those were the questions I have. Thanks again.

Thanks, Cosmos.

[Operator Instructions] Your next question comes from Ralph Profiti with Eight Capital. Please go ahead.

Thanks, operator. Good morning. Randy, I want to just talk a little bit about the Rosemont amendment if I may. You -- can you just mentioned this timeline to deliver. Should we be thinking about that in terms of time throughput level or say percentage of construction? How do we think about those delay payments potentially being active?

It's based on time. Once they kick-start production and sort of trigger the first payment from us, it initiates a timeline that says that they have to have it up and running and satisfy the completion test by a certain point in time. And if that -- as long as they do that if it's for some reason delayed beyond that we get compensated for those delays.

Okay. Are you able to disclose what that time is or is that confidential?

I think, it is 30 months, 2.5 years. I'm looking around here and everyone is nodding yes. So it is 2.5 years from the point that they accept first payment on our side. So -- and given that the forecast -- the timing forecasts in terms of construction are estimated to be around a 2-year period maybe a little bit more than two years. The fact that we give them 2.5 years, plenty of capacity.

Okay. And I just want to touch on another aspect of the agreement. This financing condition that is out there, is that going to come out at the MOU basis or when there's a letter of intent or do you actually need the financing to be closed when that payment comes due? Timing difference on -- depending on how the negotiation is going how long it takes.

The condition is satisfied with us being comfortable that Hudbay has sufficient resources to complete Rosemont. So undoubtedly Hudbay will be relying partially upon cash flows from operations. They will need to satisfy us that we can rely on those in combination with other sources of capital that will need to be available to them at the time that we advance the remainder.

So I think with respect to the potential for a joint venture partner there, it's dependent on our comfort level with respect to where that stands. It's not defined by any point in those discussions. It's with respect to how comfortable we are with that -- with whatever stage is that at.

Right. And so Randy does that mean that that comfort level could perhaps be a function of the actual partner that they do wind up bringing in?

Of course, yes.

Thanks very much.

Your next question comes from Charles Gibson with Edison. Please go ahead.

Thank you very much. Good morning Randy and congratulations if I may. I think that Cosmos has probably asked all of my questions. One additional question I did have though was just it's a slightly technical housekeeping question I suppose. But I may -- just the depletion charge in dollars per ounce fell quite sharply particularly your gold and silver other assets and I just wondered what underlay that or it is just the joys of accounting?

Gary is having a look right now.

I'll put it down to the joys of accounting.

Yes well.

It's going to be a combination of things Charles. But the biggest one will be just the mix of assets that we're deriving sales from. So you'll see in our MD&A, we disclosed what the depletion charges on a per ounce basis. It has decreased in a number of cases and that's going to be a function of conversion of resources to reserves and the impact that that has on lowering -- generally that will lower the depletion charge. But I think the bigger effect is just the sales mix. So deriving sales from assets that have lower depletion charges this quarter versus Q1 of 2018.

Excellent, all right, lovely. Thank you very much. Appreciate it.

Your next question comes from Carey MacRury with Canaccord Genuity. Please go ahead.

Hi. Good morning. Just a question on the CRA, I know you settled last -- late last year. Just wondering are all the final amounts owing finally settled and is it officially closed now?

Hi, Carey, it's Gary. We're still working through those housekeeping items. We did make a payment in Q1 2019 of just under $4 million in -- on account of the taxes that we believe arrives from the settlement from 2011 to 2017, to stop any interest accruing on those balances. But, we're still waiting for notices of reassessment from the CRA for 2005 to 2010. And the application of the agreement to subsequent years, we're working through the refilling of those agreements. But -- and that will take some time. We would expect that the notices of reassessment related to 2005 to 2010, will be issued in Q2, at some point.

So to sum it up, we're still waiting for some final paperwork from the other side. But we've made the tax payment to reflect the settlement.

Okay great, thank you.

Well, thank you, everyone, for dialing in today. To sum-up, we believe Wheaton is well positioned to continue to deliver value to our shareholders, for a number of different reasons. Firstly, by having low and predictable costs that result in not only some of the highest margins in the entire precious metal space but also sector-leading operating cash flows. Secondly, through our steady organic growth profile over the next few years and a proven track record of accretive quality acquisitions, thirdly, by offering our shareholders exposure to some of the best mines in the world, through our high quality portfolio of long-lived, low cost assets. And lastly, by being a leader, amongst precious metal streamers and supporting our partners and the communities in which we live and operate. I do look forward to speaking with you all again soon. Thank you.

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