VANCOUVER Nov 4, 2015 (Thomson StreetEvents) -- Edited Transcript of Silver Wheaton Corp earnings conference call or presentation Wednesday, November 4, 2015 at 4:00:00pm GMT TEXT version of Transcript ================================================================================ Corporate Participants ================================================================================ * Patrick Drouin Silver Wheaton Corporation - VP of IR * Randy Smallwood Silver Wheaton Corporation - President, CEO * Gary Brown Silver Wheaton Corporation - SVP, CFO ================================================================================ Conference Call Participants ================================================================================ * John Bridges JP Morgan - Analyst * Cosmos Chiu CIBC - Analyst * Josh Wolfson Dundee Capital Markets - Analyst * Andrew Kaip BMO Capital Markets - Analyst * Dan Rollins RBC Capital Markets - Analyst ================================================================================ Presentation -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Silver Wheaton's 2015 third quarter results and Antamina transaction conference call. (Operator Instructions) I would like to remind everyone that this conference call is being recorded on Wednesday, November 4th, at 11 AM Eastern Time. I will now turn the conference over to Mr. Patrick Drouin, Senior Vice President of Investor Relations. Please go ahead. -------------------------------------------------------------------------------- Patrick Drouin, Silver Wheaton Corporation - VP of IR [2] -------------------------------------------------------------------------------- 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; Haytham Hodaly, Senior Vice President, Corporate Development; and Curt Bernardi, Senior Vice President, Legal and Corporate Secretary. I would like to bring to your attention today 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 Silver Wheaton's annual information form and the additional risks identified under Risks and Uncertainties in Management's Discussion and Analysis for the period ended June 30, 2015, both available on SEDAR and in Silver Wheaton's Form 40-F and Form 6-K, filed August 11, 2015, both on file with the US Securities and Exchange Commission. The annual information form and press release from last night set out the material assumptions and risk factors that could cause actual results to differ, including among others, the satisfaction of each party's obligation in accordance with the terms of the Glencore silver purchase agreement, fluctuations in the price of commodities, differences in the interpretation of applicable and applications of tax laws and regulations from those taken by Silver Wheaton, the absence of control over mining operations from which Silver Wheaton purchases silver or gold, and risk related to such mining operations. It should be noted that all figures referred to on today's call are in US dollars unless otherwise noted. We will start today's call, discussing Q3 results, followed by a discussion on the Antamina transaction. Please note that there is a presentation available on our website, that we will be referring to during the Antamina portion of the call. We did have some technical issues earlier with our website, so you may have to refresh your screen to see the presentation. Now I'd like to turn the call over to Randy Smallwood, our President and Chief Executive Officer. -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [3] -------------------------------------------------------------------------------- Thank you Patrick, and good morning, ladies and gentlemen. Thank you for dialing into our conference call to discuss the third quarter results, as well as our latest acquisition, a silver stream on the world-class Antamina mine. Gary and I will first discuss the highlights of our third record-setting quarter in a row and then we'll dive into Antamina. First, I am very pleased to announce that Silver Wheaton achieved record production and sales volumes in the third quarter of 2015. We achieved record production for the third consecutive quarter, producing 11 million silver-equivalent ounces during Q3. We also made record sales volumes for the second consecutive quarter, with sales of over 10 million silver-equivalent ounces. Our record production was driven by Salobo and Penasquito, along with the ramp up of production at Constancia, where sales were driven by record volume put us on the map. With the production and sales from our existing mines, we are well on track to reaching our previous guidance of 43.5 million silver-equivalent ounces for 2015, which is over 23% year-over-year production growth. However, with the addition of Antamina, we are now expecting production to reach 44.5 million silver-equivalent ounces in 2015, which represents an increase of over 26% compared to 2014. Our sales volumes increased 17% from the previous year, to over 10 million ounces for the quarter. Commodity price markets, however, once again affected our average realized sale price per silver-equivalent ounce, which was 21% lower than Q3 of 2014. Lower commodity prices obviously impacted our net earnings, as Gary will discuss later. Despite these lower prices, we once again maintained a healthy cash operating margin of over 70% and operating cash flows of nearly $100 million during the quarter. While speaking of cash flows, our quarterly dividend continued to deliver 20% of the average cash generated by operating activities in the previous four quarters. Our dividends remain linked to commodity prices, the company's organic growth profile and our ability to make additional accretive acquisitions. And despite the volatility of the commodity market, our dividend policy continues to prove its sustainability, as evidenced by a fourth quarterly dividend payment of 2015, of $0.05 per share. While our dividends are sustainable, the volatility in the market has continued directly affecting Silver Wheaton's share price. Our business model is focused on building a strong portfolio for our shareholders and adding value whenever possible. In the midst of the current commodity price environment, we believe that Silver Wheaton's share price does not always reflect the high quality asset base that underlies our business model and we believe that at times, our shares may represent the best investment option for our shareholders. So in order to capitalize on this opportunity, we initiated our first-ever normal course issuer bid, during the third quarter. And as Gary will discuss later, we have capitalized on this opportunity for our shareholders by actively buying shares under this NCID. Now on to other matters, as most of you already know, on September 24th, Silver Wheaton received notices of reassessment from the Canada Revenue Agency or the CRA, for the 2005 to 2010 taxation years. The notices for reassessment were in line with the proposal letter we received and disclosed to the market back in July. And as we have mentioned before, generally, a company is taxable in Canada on its income that is earned in Canada, while non-Canadian income earned by foreign subsidiaries is not subject to Canadian income tax. With these notices of reassessment, however, the CRA is trying to subject income earned outside of Canada by our foreign subsidiaries to Canadian tax. This income related to Silver Wheaton's foreign subsidiaries buying and selling silver and gold in relation to streams that are on mines that are located outside of Canada. I would like to reiterate that Silver Wheaton is taxable on income earned in Canada, from buying and selling silver and gold from streams on mines that are located here in Canada. Management strongly believes that the company has filed its tax returns and paid applicable taxes in full compliance with Canadian tax law and we intend to vigorously defend our tax filing positions and we do not anticipate any changes in our business operations at this time. And as such, Silver Wheaton has filed notices of objection for each of the relevant taxation years. Gary Brown will also provide a bit more detail on this shortly. With respect to corporate development, I usually talk about that at this point, but I think I'm going to save that, when we dive into the Antamina discussion at the end of this conference call. So in summary, there is no doubt that 2015 has been challenging for Silver Wheaton and for the precious metals sector as a whole. While there are certain things out of our control, we can continue to focus on delivering on our growth guidance and are maintaining one of the lowest-cost profiles in the industry. The challenging commodity prices do create opportunities for us, as shown by our new stream of the world-class Antamina mine. With that, I would like to turn the call over to Gary Brown, our Senior Vice President and Chief Financial Officer, to provide a bit more detail. -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [4] -------------------------------------------------------------------------------- Thank you Randy and good morning, ladies and gentlemen. Prior to reviewing Silver Wheaton's un-audited financial results for the three months ended September 30, 2015, I would like to remind everyone that all monetary figures discussed are denominated in US dollars, unless otherwise noted. The Company's precious metal interests generated record attributable silver-equivalent production of 11 million ounces in the third quarter of 2015; 24% higher than production from the comparable period of the prior year. Approximately 63% of this production related to silver, with the remainder relating to gold. Silver-equivalent sales volumes exceeded 10 million ounces in Q3 2015, representing a 17% increase from Q3 2014, and a new record for the company. As of September 30, 2015, approximately 6.3 million payable silver-equivalent ounces had been produced by our partners, but not yet delivered to Silver Wheaton, a decrease of approximately 100,000 ounces from the balance at the end of the prior quarter. It is important to remember that we estimated normal level for ounces produced but not delivered to equate to approximately two to three months' worth of payable production, so this balance may grow over the remainder of 2015, as both Constancia and Salobo continue to ramp up production. Revenue for the third quarter of 2015 amounted to $153 million, representing an 8% decrease from the comparable period of the prior year, with a 21% decrease in the average realized silver-equivalent selling price being partially offset by increased sales volumes. Earnings from operations for the third quarter of 2015 amounted to $61 million, representing a 25% decrease relative to the third quarter of 2014, with operating margins decreasing by 9% to 40% in the third quarter of 2015, due to the lower commodity prices. Cash-based G&A expense amounted to $6 million in the third quarter of 2015, representing a decrease of 10% from Q3 2014, with such decrease being primarily attributable to lower compensation costs, which reflect the benefit of a weaker Canadian dollar. The company now estimates that non-stock-based G&A expenses, which exclude expenses relating to the value of stock options granted and performance share units, will be approximately $26 million to $28 million for 2015, slightly lower than previously estimated. Interest costs for the third quarter of 2015 amounted to $2.9 million, resulting in an effective interest rate on outstanding debt of 1.7%. Of this interest, $2.5 million was capitalized to the Pascua-Lama mineral interests, resulting in $400,000 of interest being expensed in the calculation of net income. During the third quarter of 2015, the company recognized an impairment charge of $154 million relating to its silver and gold interests in the 777 mine, as result of a number of factors, including a reduction in the estimate of future production due to lower metal prices and the lack of success in Hudbay's exploration drilling program on the property. As of September 30, 2015, we now estimate the recoverable amount relative to 777 to be $147.5 million. Net earnings, adjusted to neutralize the effect of the impairment charge, amounted to $50 million in the third quarter of 2015, compared to $73 million in the comparable period of the prior year, with adjusted basic earnings per share decreasing by 40% to $0.12 per share in Q3 2015, from $0.20 per share in Q3 2014, with the decreased being primarily attributable to a combination of lower commodity prices and a 13% increase in the number of shares outstanding. Operating cash flow for the third quarter of 2015 amounted to $100 million, or $0.25 per share, compared to $120 million, or $0.34 per share, in the third quarter of the prior year. Based on the company's dividend policies, the company's Board has declared a dividend of $0.05 per share, payable to shareholders of record on November 18, 2015. 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 the third quarter of 2015 included the following. Attributable production, relative to the San Dimas mine, amounted to 1.4 million ounces, representing a 22% increase compared to the third quarter of 2014, partially offset by the cessation of the supplemental silver deliveries from Goldcorp, which occurred in August of 2014. The increase in production is attributable primarily to higher grades, partially offset by an increase in the amount of silver that Primero is entitled to retain above the 6 million ounce sharing threshold. Silver sales, relative to San Dimas, amounted to 2 million ounces; 56% higher than sales volumes for the comparable period of the prior year. The difference between production and sales for Q3 2015, was due primarily to the reinstatement of Primero's import and export licenses, which expedited the delivery of silver produced in the prior quarter. As of September 30, 2015, approximately 200,000 ounces of payable silver had been produced at San Dimas, but not yet delivered to the company, representing an decrease of 600,000 ounces from the prior quarter. Silver production relative to Yauliyacu amounted to 700,000 ounces for Q3 2015, consistent with production from the prior quarter, but 20% lower than the comparable quarter of the prior year, with such decrease being attributable to the mining of lower grade material. Silver sales amounted to 400,000 ounces in Q3 2015, compared to 1.4 million ounces in the third quarter of the prior year, with the variance being due to changes in payable silver produced but not yet delivered to Silver Wheaton. As at September 30, 2015, approximately 900,000 ounces of payable silver had been produced relative to Yauliyacu, but not yet delivered to Silver Wheaton. Penasquito generated attributable silver production of 2.1 million ounces, representing a 28% increase from the comparable period of the prior year, with such being attributable to the processing of higher-grade material. Silver sales volumes relative to Penasquito increased by 24% relative to Q3 2014, consistent with the increased production. As of September 30, 2015, approximately 700,000 ounces of payable silver had been produced relative to Penasquito, but not yet delivered to Silver Wheaton. The Barrick mines generated attributable silver production and sales volumes of over 500,000 ounces, representing a 27% increase in production and a 36% increase in sales, relative to the third quarter of 2014. These increases are attributable to the processing of higher-grade ore at Veladero, combined with improved recoveries at Lagunas Norte. Gold production from the 777 mine for the third quarter of 2015 amounted to 6,300 ounces, or 476,000 silver-equivalent ounces, which represented a 48% decrease from Q3 2014, with the decrease being primarily attributable to lower throughput. Gold sales relative to 777, amounted to 11,000 ounces or 793,000 silver-equivalent ounces, representing a 31% decrease from the comparable quarter of the prior year, due to lower production, combined with the timing of concentrate shipments from the mine. The Sudbury mines produced 6,000 ounces of gold, or 448,000 silver-equivalent ounces in Q3 2015, representing a 51% decrease relative to the comparable quarter of the prior year, due primarily to lower throughput, which in turn was attributable to planned maintenance shutdowns of the Sudbury surface plants, combined with production in the comparable quarter of the prior year being positively affected by the processing of a significant quantity of feedstock inventories. Gold sales relative to Sudbury amounted to 6,700 ounces, or 501,000 silver-equivalent ounces, representing an 20% increase relative to Q3 2014, with positive variances in payable gold ounces produced but not shipped more than offsetting the lower production. As at September 30, 2015 approximately 8,200 ounces of payable gold or 600,000 silver equivalent ounces had been produced relative to the Sudbury mines and not yet delivered to Silver Wheaton. Salobo produced a record 33,000 ounces of gold or 2.5 million silver equivalent ounces, an increase of 216% from the comparable quarter of the prior year, with such increase being attributable to the ramping-up of the second line and the doubling of Silver Wheaton's attributable percentage of gold from 25% to 50%, effective January 1, 2015. The two lines operated at an average rate of approximately 88% of capacity during the third quarter of 2015. Gold sales relating to Salobo amounted to 22,000 ounces or 1.7 million silver equivalent ounces, more than three times the sales of volume of the comparable quarter of the prior year, despite an estimated build-up of 9,400 payable ounces of gold produced, but not delivered to Silver Wheaton during the most recent quarter. As of September 30, 2015, payable gold produced at Salobo but not yet delivered to Silver Wheaton, amounted to approximately 24,000 ounces or 1.8 million silver-equivalent ounces. During the third quarter of 2015, the company generated $100 million of cash flow from operations, repaid $68 million of debt under its revolving facility and dispersed $17 million in dividends. As of September 30, 2015, the company had $81 million of cash and cash equivalents on hand and $647 million of debt outstanding under its revolving facility, resulting in a net-debt position of $566 million. In relation to the normal course issuer bid, that the Company implemented during Q3, 2015, the company has repurchased 764,789 common shares, at an average price of $11.92 per share, or just under 4% the maximum allowed under the program. With respect to the reassessments of the company taxation years for 2005 to 2010, by the Canada Revenue Agency, the company has filed notices of objection to such. The company is required to make a deposit of 50% of the amount the CRA has claimed are owing, or CAD177 million in relation to those taxation years. And the company is in the process of seeking to post security in the form of letters of credit for this amount, as opposed to making a cash deposit. That concludes the financial summary. And with that, I turn the call back over to Randy. -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [5] -------------------------------------------------------------------------------- Thank you, Gary. We're now going to move on to a discussion on Antamina. As Patrick mentioned at the start of this call, there is a presentation available on our website. That will guide through the page numbers that we reference will equal the page numbers on that website. So that presentation is titled Antamina, more high-quality silver ounces, aptly titled, I might add; November 4, 2015. I'm going to start on slide 3. There is some forward-looking statements and the risks associated with such are described in slide 2. But on slide 3, this transaction with Glencore provides immediate production and cash flow from a world-class mine. Antamina is one of the best in the world. And Glencore's percentage of ownership of this mine is 33.75%. So we're going to be getting 33.75% of the silver deliveries from Antamina, which begins accruing as of October 2015, so it starts with the beginning of this first quarter. Once we've received 140 million ounces, it will drop down by a third, down to 22%. We do also get a silver payable rate of 100% through this transaction. So 100% of whatever silver is produced gets delivered to us. This production should average about 4.7 million ounces of silver per year over the first 20 years, based on the current mine plans. We expect to see a little bit over 5 million ounces for the next couple of years here, and as I said over 4.7 million ounces over the first 20 years. This asset fits beautifully within our portfolio. Those that know Silver Wheaton, know that we have a high-quality portfolio. We really strive on investing into assets in the bottom half of the cost curve. And this asset is well down, I would argue in the lowest decile of the copper cost curve. And so it fits very nicely in with some of our other assets. Transactional review on Slide 4, the Antamina Stream, as I mentioned, is with Glencore. Glencore and Silver Wheaton Caymans, we get 33.75% of whatever silver is produced at Antamina and that dropped to 22.5% after we've received 140 million ounces. Payable rates are at a 100%. Deliveries start on October 1, and we do expect to close this transaction by the end of November, and so should be funding that to Glencore by the end of November of this year. The upfront payment for this transaction is $900 million, again to be paid upon closing. And the production payments are 20% of the spot silver price, on per ounce delivered basis. So the stream deliveries, the structure on slide 5, we get to know a bit of structure overview. The stream deliveries are to be made at the end of every month, end of the month, following the month in which offtake deliveries are made. And the upfront payment is considered an advance payment against the purchase price. From the guarantee perspective, we do have an overall guarantee from Glencore Plc, which is the overall parent company. But, we also have strong guarantees and commitments at the [whole-toll] level on this asset. There are limits with respect to debt with that asset moving forward. And the area of interest does apply to every and all the existing claims and concessions that are owned by Antamina in the area of the mine site. The area does have an excellent exploration potential and so, quite excited to have that full exposure to everything at the site. A bit of detail on Antamina, here on slide 6; 74% of the revenue at Antamina comes from copper, 16% comes from zinc and 7% comes from the silver side. It is the eighth largest copper mine in the world. It's been operating for about 14 years now, and is easily one of the lowest cost operations in the world. There's steady and uninterrupted operations. The infrastructure is wholly-owned, produces a concentrate, which is shipped by pipeline to a privately-owned, wholly-owned port facility, which is important. I know some of the ports in Peru are having challenges. With respect to capacity this one is wholly-owned by Antamina, so shouldn't be any issues on that side itself. Slide 7, sort of gives the perspective of the incredible deposit, the open pit facilities there. It is a partnership between Glencore, BHP, Teck and Mitsubishi, world-class asset with a very strong operating history and strong operating partners, I would add. To our credit, immediate production. I mean, this asset is an open pit, it's been operating, as we said, for about 14 years, started up in October of 2001. It should average over 5 million ounces early and 4.7 million ounces of silver per year for us for the next 20 years. That's 75 million ounces of reserves, an additional 56 million ounces of resources, and then extensive inferred resources. And as I mentioned, a very first quartile, I would say, first decile of the copper cost curve, so a very very attractive asset. Slide number 9, highlights what we see as incredible exploration potential, just on the immediate deposit itself; it doesn't really represent the regional opportunities. But there's no doubt this mineralization does continue to depth. As we can see, there's numerous intercepts below the current open pit area and substantially below the bottom of the block model itself. And so we do think that this has a great exploration and expansion potential. This is one of the best assets we've seen. It's just about as good as Salobo. On slide 10, as you can see, the property holdings in the area, it is extensive land package here. This slide here is about 30 miles across, or I'd call it 50 kilometers across, by about 60 kilometers or 70 kilometers north/south. And so, good strong property package in the area, as I said, 700 square kilometers. And so, lots of other targets in the area, even beyond the current ore body. This is very strong asset. And you can see where it falls on our portfolio. On slide 11, as mentioned first quartile, it is a strong focus on Silver Wheaton to try and invest into assets that are in bottom half of the cost curve. We have confidence in these assets to continue moving forward and delivering metal to us. And we know that they are profitable and therefore, keep our partners happy. It's a very important part of successful lease streaming. And so as you can see, we are up to about 88% in the bottom half of the cost curve by 2019. I'll turn the next couple of slides over to Gary, to talk about how we're going to finance this. -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [6] -------------------------------------------------------------------------------- Thank you, Randy. I'm on page 12, for those following along in the presentation. The company will fund the upfront cash payment of $900 million with cash on hand and borrowings under a $2 billion revolving credit facility. As of September 30, 2015, the company was in a net debt position of $566 million. Without accounting for cash flows generated prior to the closing, the company would be in a net debt position of about $1.47 billion, after making the $900 million upfront payment. We are very comfortable with this level of debt for a number of reasons. First, it is important to remember how attractive the cost of this debt capital is, with the interest rate being based on LIBOR plus a small spread, which ranges from 120 to 220 basis points. Second, we've generated almost $400 million of operating cash flow on a trailing four-quarter basis, which is consistent with the operating cash flows generated in the most recent quarter. Antamina is expected to contribute an additional $65 million of operating cash flow annually. In addition, we expect production growth of 24% from 2015 to 2019. This all translates into a very strong cash flow profile, whereby the company expects to generate close to $2 billion of operating cash flow, even at current commodity prices, over the next four and a quarter years alone. And it is important to remember that this cash flow comes from a very high quality, low cost portfolio of assets, for which there are no additional upfront payments required to be made. Finally, when we amended our revolving credit facility in the first quarter of this year, we moved to a much more flexible covenant package. On page 13 of the presentation, we outlined how comfortably, we should be able to comply with these covenants. First, we need to maintain a net debt to tangible net worth ratio of less than 0.75. As can be seen in the graph in the presentation material, after paying for the Antamina deal, we're far below this covenant level, at a 0.34 times ratio on a pro forma basis. The other covenant requires that we maintain a minimum interest coverage ratio of greater than 3 times. Again, on a pro forma basis, we expect this ratio to be over 17. So, as should be apparent, Silver Wheaton can comfortably service and repay the debt levels that will result following the funding in this transaction. And with that, I'll turn the call back over to Randy. -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [7] -------------------------------------------------------------------------------- Slide 14, highlights how accretive this transaction is for us all the way across the board. This is all of course based on the current mine plans. But you can see it definitely adds value all the way across; significant increases in cash flow reserves and resources and of course production. The next few slides, I'll talk about the overall impact of Silver Wheaton as a whole. Slide 16, again, highlights our portfolio. We now have 29 assets under contract, and as you can see, very very politically stable jurisdictions. Antamina itself is within Peru. Peru is a country that we are very comfortable in; we think it's a country that's already a very attractive investment climate and getting better and better all the time. And so very very comfortable in Peru with Antamina. On slide 17, it talks about our production growth forecast and the impact that Antamina has had on this. But you can see how strong our growth is over the next while. Last year, we did just over 35 million ounces of silver equivalent production. This year, now with Antamina coming onboard, we'll be up over 44 million ounces, well over 44 million ounces of silver equivalent production. And as you can see here, we will climb now to 55 million ounces of silver equivalent production by 2019. It's important to note, we have to pay the $900 million obviously by the end of November, but other than that, this is fully funded. There is no capital commitments that we have for that. We do have some optionality, some upside with respect to Rosemont and Pascua Lama and Toroparu, that themselves would add over and above that 55 million ounce target. But we are fully funded to that 55 million ounce target. Slide 18, sort of highlights the impact on our own reserves and resources, from a silver only perspective or silver equivalent perspective. And you can see, it's a definite add-on value all the way across the board. Again with the excellent exploration potential that we see at Antamina, I would argue that this is only the start of the positives for this asset. So in summary on slide 19, increase in the immediate cash flow, which of course also leads right back down to our dividend, which is tied to our cash flows. Another partnership with Glencore; we been a partner with Glencore since 2005 on the Yauliyacu assets and this is an extension of that relationship. It's been a very good relationship with Glencore over that period. First cost quartile mine; Antamina is one of the best in the world. It's definitely an asset that we are very excited to bring into our portfolio. We think it fits well with the rest of our portfolio. This all delivers growth on a per share basis, which is what we all strive towards here at Silver Wheaton. And of course, it further diversifies production, you know, a step back into a pure silver stream and we're quite excited about the sliver side. Slide 20 shows a nice night view of the site down there. Operator, we would like to open up the telephone for questions, the conference for questions please. ================================================================================ Questions and Answers -------------------------------------------------------------------------------- Operator [1] -------------------------------------------------------------------------------- (Operator Instructions) John Bridges, Morgan Stanley. -------------------------------------------------------------------------------- John Bridges, JP Morgan - Analyst [2] -------------------------------------------------------------------------------- Morgan Stanley now; interesting. Randy, I just wondered, when we do our sums, it looks like you've got about a 4.3% return compared to the previous deal, on Antamina, which is a bit above that. We're just curious as to what might be driving that? Is that differences in the guarantees from the sellers? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [3] -------------------------------------------------------------------------------- Well, there is a number of differences. I mean, we don't do a lot of comparing to the previous transactions. I mean, I think this thing stands on its own. And so this thing fits in. I mean first off, this asset; we see a lot of hidden value in this asset in terms of the potential for exploration success, expansion potential, etc. So that's something that plays into how we value an asset and you know, that definitely comes into play. There are a lot of differences between this transaction and even previous transactions that we have done. This one has a 20% of spot price production payment. We are getting a 100% payable, which is also different. It's for obviously a 33.75% share of the production, so it's larger on that side. And then, our transaction of course is between Glencore's company and our Silver Wheaton Caymans subsidiary. So there are some key differences. I can't comment on how it's different from peer group transactions. We value this based on what we think it's worth. And so, John, I can't really comment on the key differences there, because I am not sure what went into their calculations. -------------------------------------------------------------------------------- John Bridges, JP Morgan - Analyst [4] -------------------------------------------------------------------------------- Okay, well, thanks for that. And just a second one, maybe. The resources; what do you understand is needed to bring those resources into reserves? Is there a strip ratio issue with that underground mining? What do you see that being developed? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [5] -------------------------------------------------------------------------------- It's even simpler than that John. It's tailings pond capacity. The reserves are defined by having to fit into the existing tailings pond capacity. They have already got substantive design work and properties in place to deal with that in the future. But until it's fully permitted and going forward, and that's a process that they don't have to worry about for a while, but they're working on it. They have already got those plans in place, but it's strictly tailings pond capacity that stops the M&I from turning into P&B or the bulk of the M&I. -------------------------------------------------------------------------------- John Bridges, JP Morgan - Analyst [6] -------------------------------------------------------------------------------- Excellent, excellent well, I'll get out of the way. Congratulations on the deal. -------------------------------------------------------------------------------- Operator [7] -------------------------------------------------------------------------------- Cosmos Chiu, CIBC. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC - Analyst [8] -------------------------------------------------------------------------------- Andy, Gary and team, a few questions here maybe on Antamina first as well, following up on the question previously. Essentially, I guess, there has been two streaming deals completed on the same asset in the past month and a bit. I am just wondering if there were any kind of possibilities in terms of a syndication, like cooperation between the royalty companies and a streaming companies, that could have driven returns higher for the entire industry? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [9] -------------------------------------------------------------------------------- Well, Cosmos, I mean I will tell you, there is always possibilities. I would argue that if you are selling an asset, you probably don't like syndication. And so, there are challenges there. To me, syndication has only a real chance of happening if there is a capacity issue, unless there is other sort of subtle, slight differences that may be advantaged by syndicating. We work with our partners to try and have strong relationships that work best for both parties; for us and our partners. If my partners aren't happy with the transaction, I am not really interested in entering into it, because these are very long-term relationships and that's not the way to start off the long-term relationship. And so, with respect to the returns, I mean, I think the only time syndication actually makes sense is if there is a lack of capacity and we definitely have the capacity to manage this transaction on our own. And we are quite happy with the expected rate of returns. What we expect to see is the potential of this property and this asset and what it delivers to us. And so syndication may happen, but it's going to come down to, if it does happen, it will be because there is a lack of capacity on the streaming side. Before that, I can tell you that if I was in a vendor's wall, I think as the vendor of anyone that does a syndication or that allows the syndication, is probably doing their own shareholders a disservice by reducing the competitive tension in that environment, and I am just looking for a healthy business environment here. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC - Analyst [10] -------------------------------------------------------------------------------- I fully understand, but it's always nice to have a higher IRR, no matter how high, the base is and that was a purpose of my question. But may be switching gears a little bit here in terms of the debt; Gary and Randy, you've talked about how comfortable are you with the debt, but how aggressively do you think you will be, in terms of trying to pay that down? -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [11] -------------------------------------------------------------------------------- Well, I mean because it is a revolving facility, we will direct all of our free cash flow to repaying that debt. And again, even at the current commodity prices, our operating cash flow should be up north of $465 million a year. And that grows, as Constancia and Salobo come online. So, we will easily be repaying that debt over the next few years. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC - Analyst [12] -------------------------------------------------------------------------------- So potentially, if I work out the math correctly, you can potentially pay that back within like three years. -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [13] -------------------------------------------------------------------------------- Yes. I mean it all comes down to making the best decision forward. I mean, we all recognize that having a bit of leverage also helps if there is opportunities. This is a good opportunity set out there, but our focus is obviously, every dollar that comes in, we would be putting against that revolver, but the fact that revolver does also free that up and those dollars up to help us in terms of new opportunities that may come through the pipeline. -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [14] -------------------------------------------------------------------------------- Yes, and it's also important to remember that we've got almost 4.5 years left on the term of that debt revolver. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC - Analyst [15] -------------------------------------------------------------------------------- And then on that revolver as well, Gary, you mentioned that, I believe you paid about 1.7% interest this past quarter. Understanding that, you know, the basis points [prime dollar] added to the LIBOR rate, between 120 basis points to 220 basis points, is also dependent on your leverage ratios. Given the additional debt, what should be modeling in terms of interest rate? -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [16] -------------------------------------------------------------------------------- Well, we should be initially at the top of that range, that 220 basis points range, but we will quickly drop down below that. And so, we should be at 1.7%, which is the next tier down from the 220 basis points, Q1 of next year. -------------------------------------------------------------------------------- Cosmos Chiu, CIBC - Analyst [17] -------------------------------------------------------------------------------- And the base LIBOR rate, that's based on the US dollar LIBOR rate, right? -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [18] -------------------------------------------------------------------------------- That's right. -------------------------------------------------------------------------------- Operator [19] -------------------------------------------------------------------------------- Josh Wolfson, Dundee Capital Markets. -------------------------------------------------------------------------------- Josh Wolfson, Dundee Capital Markets - Analyst [20] -------------------------------------------------------------------------------- Quick ones. First one relates to I guess the letter of credit you guys are proposing for CRA deposit. Have you been able to confirm whether you can use that or is that not going to happen I guess until, I guess you have to post the capital up? -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [21] -------------------------------------------------------------------------------- We're still in discussions with the CRA on that front. It's unclear as to whether they're going to accept the letter of credit or not, at this point. -------------------------------------------------------------------------------- Josh Wolfson, Dundee Capital Markets - Analyst [22] -------------------------------------------------------------------------------- Okay, but I guess you'll probably find out about that in the next relatively short period of time, I assume, right? -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [23] -------------------------------------------------------------------------------- Yes, I would think we'll have clarity on it by the end of the year. -------------------------------------------------------------------------------- Josh Wolfson, Dundee Capital Markets - Analyst [24] -------------------------------------------------------------------------------- Okay. And then just nuance, I guess for deal, because you are receiving 100% payability, do you to expect to be paid at the time of production or is it going to be shipment from the mine or is it going to be, I guess, net small [smelter] production? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [25] -------------------------------------------------------------------------------- We get paid at the end of the month that follows the month of deliveries. And s, anything that's delivered in say October, we would be paid at the end of November. -------------------------------------------------------------------------------- Josh Wolfson, Dundee Capital Markets - Analyst [26] -------------------------------------------------------------------------------- Okay. So you'll have your same sort of variance you have with most of your production base and you will see some increase in inventories, I guess, over the next however long period? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [27] -------------------------------------------------------------------------------- Yes, that's right. It is a shorter inventory pipeline, I guess is the way to describe it; mainly because it's upon delivery. But there will be fluctuations in this. This is a pretty large operation, as I mentioned, the eighth largest copper mine in the world. And the fact that it's got a pipeline that moves down and stockpiles. But as there is with concentrate-producing mines, there's always going to be some ups and downs with respect to that. We'd probably estimate this one will have about a one month delay. -------------------------------------------------------------------------------- Josh Wolfson, Dundee Capital Markets - Analyst [28] -------------------------------------------------------------------------------- Okay. And then last question. I guess Glencore made a comment today, saying that they expected to do more streaming deals in the market. When you look at that opportunity and I'm sure that this has probably come up in your discussions. Looking at your current exposure with Antamina to Glencore, would you feel comfortable accepting additional assets that they have put on the market or are you sort of at your max at the current time? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [29] -------------------------------------------------------------------------------- No, we're always looking at all these opportunities. This market is, and I said this before, this is the strongest market I've seen in the close to 11 years that we've run this company. It is 11 years now that we've run this company. This is the strongest market we've seen in terms of opportunities. So we will have a look at what else is available. I know Glencore does have some other top quality copper assets that they are working on and as I said, we've got a good strong relationship with Glencore. So, we'd obviously be talking with them. -------------------------------------------------------------------------------- Operator [30] -------------------------------------------------------------------------------- Andrew Kaip, BMO. -------------------------------------------------------------------------------- Andrew Kaip, BMO Capital Markets - Analyst [31] -------------------------------------------------------------------------------- Look, I've got a question just regarding the impairment with 777. Can you give us a sense of what the breakout between the change in metal price assumptions versus your view geologically on how long that stream would be able to deliver? Is there like a percentage breakout that you can provide for us? -------------------------------------------------------------------------------- Gary Brown, Silver Wheaton Corporation - SVP, CFO [32] -------------------------------------------------------------------------------- Yes, Andrew. I mean, roughly one-third of the impairment was attributable to a drop in metal prices, and two-thirds was due to the lack of exploration success. -------------------------------------------------------------------------------- Andrew Kaip, BMO Capital Markets - Analyst [33] -------------------------------------------------------------------------------- Okay. And then just on the Antamina stream, you're getting 100% payability of production, but there is an adjustment of that production through the treatment and refining. Can you give us a sense of what that adjustment would be? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [34] -------------------------------------------------------------------------------- I'm not sure what you are talking about Mr. Kaip. -------------------------------------------------------------------------------- Andrew Kaip, BMO Capital Markets - Analyst [35] -------------------------------------------------------------------------------- Well, the mine produces the concentrate and there is a payability factor at the refinery. So what is the payability factor? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [36] -------------------------------------------------------------------------------- We get 100% of whatever goes in that concentrate. Whatever is in the concentrate, we get 100% of. And you have keep in mind that lot of these concentrates, Glencore is an active trading and smelting company also. And although the payability factor is there, because the lot of this goes into the Glencore trading world, as we know, a lot of these companies actually do much better than what they actually pay for. -------------------------------------------------------------------------------- Operator [37] -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [38] -------------------------------------------------------------------------------- Thanks. So Randy, congrats on the deal. You guys are now getting over that 50 million mark, you've always talked about, as you guys got critical math and I see you there with the free cash flow, you are kicking out on the quarterly basis. What are your thoughts on the dividend going forward? Are you at a point now where we can start to see that 20% threshold begin to increase or is the opportunity set too large right now, at this time? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [39] -------------------------------------------------------------------------------- Well, I think as Gary sort of highlighted earlier on, I think probably the more important thing is to just bring our debt levels down with the cash flow that we're generating over the next while. I mean obviously, if we see some opportunities, we're not taking ourselves out of the market for that. But our primary focus will be there, but we are getting pretty close to that cash flow capacity. And I've always said, this company will eventually turn into a yield-focused. We are still growth focused. I'd have to say, Dan, that this is the best environment that I've seen out there right now for growing a streaming company in terms of the quality of the assets. And so I don't know if this is the right time to turn it into a dividend-focused, or shift to bit a focus in yield. In fact, I would suggest it's not. I think it's the time to sort of build your foundations and then when we start seeing a bit of a commodity price rebound, which we are confident that we're near our bottom; at our bottom or near bottom right now. When we start to seeing that kind of movement, I think that's the point where you're going to start seeing less opportunities available. You'll get probably, I would suggest, the potential of a real strong movement in our dividend, because you get a combination of higher commodity price. Our growing profile, assuming it happens within the next few years, although we have growth beyond that. And that's the time that I would suggest we'd be likely looking at potentially raising that dividend rate. And so all of that combined would add some strength. But right now, I think, our focuses on capital management and also making sure that the best environment that I've seen to grow this company ever, in the history of streaming, that we make sure we're positioned well to also take advantage of any opportunities that come through that. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [40] -------------------------------------------------------------------------------- Just given the number of large deals you've done over the 1.5-2 years, do you think, are you guys looking at maybe potentially just talking a little bit of time to harvest the cash flow you're not going to generate from Salobo, and Antamina, and Constancia and then wait to see some opportunities? Or if the right opportunity comes out, do you guys still have the ability to go and jump at it? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [41] -------------------------------------------------------------------------------- As Gary highlighted, with respect to our covenants, we've still got plenty of capacity. And so, I look across the table here and Haytham is shaking his head, saying no way we're slowing down; there's lots of good opportunities out there. So I mean, we're not interested in levering up. We do want to be responsible with the balance sheet. So there's a fine balance there, but we're definitely going to be having a look at that out there. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [42] -------------------------------------------------------------------------------- Okay. And then may be just changing gears, sort of still in the corporate development side. But, are you guys seeing any opportunities to put the advance deposit agreement to work on more of an active basis? Obviously, there are probably some projects that are of decent quality that have run into balance sheet issue and are now seeing management teams maybe willing to bring in a partner. Is that an opportunity set that is increasing and competing with some of these larger opportunities now? -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [43] -------------------------------------------------------------------------------- There's no doubt. The current market is extremely tough on those single asset development companies in early stage or late stage exploration/development companies. They don't have the same access to debt that the rest of this market has. And of course, the equity market is non-supportive right now. And so we do see some opportunities in there. I mean, the one challenge we're facing is finding good quality assets, good quality opportunities. The market is pretty selective; there are few bright stars in this space. Our trick is to find and identify those, the ones that the market doesn't recognize and those are the ones that we hope to be able to step in and work with to help. And so, it's definitely got some appeal. I like the concept, because it gives us some long-term optionality, where we get to bring some very promising projects into our portfolio. And that's the stuff that's going to deliver the long-term growth for us, along with continued acquisitions in the development and operating stages. So this environment, as I said, it's the best I've ever seen and it's not just -- there are very high profile companies with high profile assets like Antamina and others, that are available to us right now. But there are also a lot of the single asset juniors that are looking for that support. And we're happy to work with them too. -------------------------------------------------------------------------------- Dan Rollins, RBC Capital Markets - Analyst [44] -------------------------------------------------------------------------------- Great, thanks again and congrats on the deal and congrats on another great quarter, guys. -------------------------------------------------------------------------------- Randy Smallwood, Silver Wheaton Corporation - President, CEO [45] -------------------------------------------------------------------------------- Thank you, Dan and thanks to everyone for dialing in today. Silver Wheaton is on track for a record year of production and sales in 2015. And given our fully-funded organic growth profile, we look forward to that continuing strength over the coming years. And then demonstrated with the Antamina acquisition, we remained focused on building our portfolio of streams on low-cost, high-quality assets. We continue to believe that Silver Wheaton offers the best option for gaining exposure to precious metals by offering a proven track record of accretive acquisitions and tangible organic growth. So I want to thank everyone for dialing in today and we do look forward to speaking with you all again soon. Thank you. -------------------------------------------------------------------------------- Operator [46] -------------------------------------------------------------------------------- This concludes this conference call for today. Thank you for participating. Please disconnect your lines.
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