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Wheaton Precious Metals Corp. (WPM) Q3 2017 Earnings Conference Call Transcript

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Wheaton Precious Metals Corp. (NYSE: WPM)
Q3 2017 Earnings Conference Call
Nov. 10, 2017, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to Wheaton Precious Metals 2017 third 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. If you'd like to ask a question during this time, simply press star then a number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. I would like to remind everyone that this conference call is being recorded on Friday, November 10th 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.

Patrick Drouin -- Senior Vice President, Investor Relations

Thank you, Operator. Good morning, ladies and gentlemen, and thank you for participating in today's call. I'm joined today by Randy Smallwood, Silver Wheaton's president and chief executive officer; Gary Brown, Senior Vice President and Chief Financial Officer; and Haytham Hodaly, Senior Vice President, Corporate Development.

I'd like to bring to your attention that some of the commentary on today's call may contain forward-looking statements. There can be no assurances that forward-looking statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. In addition to our financial results, cautionary note regarding forward-looking statements, please refer to the section entitled "Description of the business risk factors" in Silver Wheaton's annual information form, and the "Risks identified under risks and uncertainties in management's discussion and analysis", both available on CRN in Silver Wheaton's form 40-F and Silver Wheaton's form 6-K, both on file with the U.S. Securities and Exchange Commission.

The annual information form Q-3 2017 Management Discussion and Analysis and the press release from last night set up material assumptions and risk factors that could cause actual results to differ, including, among others, fluctuations in the price of commodities, the outcome of the challenge by CRA of Silver Wheaton's tax filings, the absence of control over mining operations for much Silver Wheaton purchases of silver or gold, and risks related to such mining operations and continued operations of Silver Wheaton's counterparties. It should be noted that all figures referred to on today's call are in U.S. dollars unless otherwise noted. Now, I'd like to turn the call over to Randy Smallwood, our President and Chief Executive Officer.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Patrick, and good morning, ladies and gentlemen. Thank you for dialing into our conference call to discuss our third quarter of 2017 results. I am pleased to report today that Wheaton Precious Metals continues to deliver solid financial results from our portfolio of high quality, low costhjy8assets. In the third quarter of 2017, we produced 7.6 million ounces of silver and 96,000 ounces of gold. From a sales perspective, we sold 5.8 million ounces of silver and 83,000 ounces of gold. These results are in line with our forecasts, and we remain on track to meet full-year production guidance.

We continue to generate strong operating margins, resulting in over $370 million in cash flow year-to-date. And with regard to cash flow, our quarterly dividend now delivers 30% of the average cash generated by operating activities in the previous four quarters. We now provide the highest dividend yield in the precious metals streaming space.

Gary Brown, one of our Senior Vice Presidents and our Chief Financial Officer, will now provide more detail on these results. Gary?

Gary Brown -- Senior Vice President and Chief Financial Officer

Thank you, Randy, and good morning, ladies and gentlemen. Prior to reviewing Wheaton Precious Metals' unaudited financial results for the three months ended September 30, 2017, I would like to remind everyone that all monetary figures discussed are denominated in U.S. dollars, unless otherwise noted. The company's precious metal interests produced 7.6 million ounces of silver and 95,900 ounces of gold in the third quarter of 2017. Relative to the third quarter of the prior year, this represented a decrease of 1% and 16% in silver and gold production respectively. With the lowered gold production being in line with expectations, and attributable primarily due to the decreased attributable percentage of gold that the company now gets from the 777 mine and lower production from Minto.

The company is reiterating its production guidance for the year of 28 million ounces of silver and 340,000 ounces of gold. Sales volumes amounted to 5.8 million ounces of silver and 82,500 ounces of gold in the third quarter of 2017, representing a decrease of 6% and 3% for silver and gold respectively. Relative to the third quarter of 2016, the decrease in the silver sales volumes was attributable primarily to the buildup during the quarter of payable silver produced but not yet delivered to Wheaton Precious Metals. The decrease in the gold sales volumes was attributable to the decreased gold production, partially offset by positive changes in the balance of payable gold produced but not yet delivered to the company.

As of September 30, 2017, approximately 5.3 million payable silver ounces and 57,200 payable gold ounces had been produced but not yet delivered to the company, representing an increase during the quarter of 1.1 million payable silver ounces and 8,200 payable gold ounces. We estimate a normal level for ounces produced but not delivered to equate to approximately two months' worth of payable production, with the balance as of September 30th being consistent with its expectation. Revenue for the third quarter of 2017 amounted to $203 million, representing a 13% decrease relative to Q3 2016, with the decrease being primarily attributable to a 14% decrease in the average realized silver price, and a 6% decrease in the number of silver ounces sold. Of this revenue, 48% was attributable to silver sales, while 52% related to gold. Growth margins for the third quarter of 2017 decreased 16% to $83 million, attributable primarily to the lower silver prices. Cash-based G&A expenses amounted to $8 million in the third quarter of 2017, virtually unchanged from Q3 2016. The company currently estimates that non-stock-based G&A expenses will be approximately $32 to $34 million for 2017. Interest costs for the third quarter of 2017 amounted to $6 million, consistent with the comparable quarter of the prior year, resulting in an effective interest rate on outstanding debt of 2.75%.

Net earnings amounted to $67 million in the third quarter of 2017, compared to $83 million in Q3 2016. Basic earnings per share decreased 20% to $0.15 compared to $0.19 per share in the prior year. Operating cash flow for the third quarter of 2017 amounted to $129 million, or $0.29 per share, compared to $162 million, or $0.37 cents per share, in the prior year, representing a 20% decrease on a per share basis. Based on the company's dividend policy, the company's board has declared a dividend of $0.09 a share, payable to shareholders of record on November 27, 2017, representing a 50% increase from the dividend declared relative to the comparable period of the prior year. Under the dividend reinvestment plan, the board has elected to offer shareholders the option of having their dividends reinvested in newly issued common shares of the company at a 3% discount to market.

The operational highlights for the third quarter of 2017 included the following. Attributable silver production relative to the San Dimas mine decreased 17% to one million ounces, with Primero stating that production at San Dimas has been negatively impacted during the third quarter of 2017 by persistent issues with underground equipment reliability, which has impacted development rates and underground scoping activities. Silver sales volumes in Q3 2017 relative to San Dimas decreased 10% to 962,000 ounces as a result of the lower production. Attributable silver production relative to Peñasquito in Q3 2017 amounted to 1.6 million ounces, while sales amounted to 1.1 million ounces, an increase compared to Q3 2016 of 10% and 3% respectively, with Goldcorp having indicated that the improved results were drive-by improvements at Peñasquito's mill as a result of opportunities identified to achieve sustainable efficiencies, including improved equipment reliability and higher recoveries. Goldcorp also reported that the construction of the Pyrite Leach Project was 40% complete by the end of the third quarter of 2017 and is expected to commence commissioning in the 4th quarter of 2018, three months ahead of schedule.

Attributable silver production relative to Antamina in Q3 2017 amounted to 1.7 million ounces, while sales amounted to 1.5 million ounces, an increased compared to Q3 2016 of 18% relative to production, and a decrease of 4% relative to sales, with sales being adversely impacted by negative changes in payable ounces produced but not yet delivered to Wheaton Precious Metals. Attributable silver production relative to the other silver interests in Q3 2017 amounted to 2.6 million ounces, while sales amounted to 1.7 million ounces, a decrease compared to Q3 2016 of 5% and 10% respectively, with the decrease being primarily due to the expiry of the Cosamin agreement on April 4th of this year.

Salobo generated 73,000 ounces of attributable gold production in Q3 2017, an increase compared to Q3 2016 of 7%, primarily due to the mining of higher grade material. During the quarter, the two 12 million-ton per year lines operated in excess of designed capacity. Gold sales volumes in Q3 2017 relative to Salobo increased 34%, to 67,200 ounces, with the increase being the result of the increased production, coupled with positive changes in gold ounces produced but not yet delivered to Wheaton Precious Metals.

Sudbury generated 8,400 ounces of attributable gold production in Q3 2017, a decrease compared to Q3 2016 of 22%, with the decrease being primarily the result of lower throughput. Vale has reported that the decrease was primarily due to the full operation of two furnaces in Q3 2016, while in Q3 2017, Sudbury transitioned to a single furnace operation. However, Vale has also stated that the transition has gone very well, as the newly designed furnace is already exceeding its nameplate capacity. Gold sales volumes in Q3 2017 relative to Sudbury decreased 74% to 3,200 ounces as a result of lower production coupled with negative changes in gold ounces produced but not yet delivered to Wheaton Precious Metals.

Attributable gold production relative to Constancia in Q3 2017 was in line with expectations and amounted to 2,500 ounces, while sales amounted to 2,200 ounces, a decrease compared to Q3 2016 of 33% and 35% respectively. Attributable gold production relative to the other gold interests in Q3 2017 amounted to 12,000 ounces, while sales amounted to 9,900 ounces, a decrease compared to Q3 2016 of 60% and 49% respectively, which the decreases being primarily due to two factors. First, Wheaton Precious Metals' attributable percentage of gold relative to 777 decreased from 100% to 50%, effective January 1, 2017, as a result of Hudbay successfully satisfying the completion test relating to Constancia. And second, lower throughput and the processing of lower grade material at the Minto mine as a result of mine sequencing changes to support the mine life extension.

During the third quarter of 2017, the company repaid $99 million on the revolving facility and dispersed $37 million in dividends. Overall, net cash decreased by $7 million in Q3 2017, resulting in cash and cash equivalents at September 30th of $70 million. This, combined with the $854 million outstanding under the revolving facility, resulted in a net debt position as of September 30, 2017 of approximately $784 million. The company's cash position, strong, forecast future operating cash flows, combined with available credit capacity under the revolving facility, positions the company well to satisfy its funding commitments, sustain its dividend policy, while at the same time, providing flexibility to consummate additional accretive precious metal purchase agreements.

Finally, there is no material update relative to the company's ongoing dispute with CRA. We continue to work diligently with counsel to advance the case as expeditiously as possible. That concludes the financial summary. And with that, I turn the call back over to Randy.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Gary. As I previously mentioned, with these solid third-quarter results, Wheaton Precious Metals remains on track to achieve our 2017 production guidance of 340,000 ounces of gold and 28 million ounces of silver. That being said, we remain focused on continuing to add additional production from the corporate development front. There are a number of high quality accretive opportunities that we are pursuing related to both operating and development assets. In August, we announced the signing of a non-binding term sheet with Desert Star Resources to enter into an early deposit precious metals purchase agreement for the Kutcho Project, located here in British Columbia. We are very impressed with the Kutcho Project and believe the project has excellent potential for both expansion and exploration. For relatively little upfront capital, the early deposit model provides us with access to high quality, early-stage projects with significant optionality, while providing the mine developer with a non-dilutive form of financing.

And as Wheaton has by far the strongest free cash flow in the entire streaming space, at well over $100 million per quarter and over $1 billion of current capacity, we still have plenty of firepower for continued investments. As always, we remain disciplined and continue to focus on acquiring streams that are accretive to our current shareholders and come from high-quality assets producing in the lowest half of their respective cost curves.

In summary, the third quarter was in line with our forecast and guidance. Our production remains founded on the highest quality portfolio of precious metal streams in the industry, underpinned by very low-cost mining operations. Wheaton produces more metal, generates more cash flow, and now delivers the highest yield in the streaming space. And we are also optimistic about our ability to capitalize on the favorable corporate development environment, and to add additional top-tier assets to our portfolio. With that, I'd like to open up the call for questions. Operator?

Questions and Answers:

Operator

At this time, I'd like to remind everyone we will now conduct a question and answer session. If you'd like to ask a question, please press star, then the number one on your telephone keypad. If you'd like to withdraw your question, press the pound key. There will be a brief pause while we compile the Q&A roster. Your first question comes from the line of Kevin Chiew with CIBC. Your line is open.

Kevin Chiew -- CIBC -- Analyst

Well, hi. Good morning, Randy, Gary, and Haytham.

Randy Smallwood -- President and Chief Executive Officer

Morning.

Kevin Chiew -- CIBC -- Analyst

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

Randy Smallwood -- President and Chief Executive Officer

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

Kevin Chiew -- CIBC -- Analyst

Okay. I guess in past years, though, we've typically seen a larger draw down on the yet to be delivered inventory. Anything we should watch out for when comparing sort of past Q4 performances in terms of timing of shipments, that sort of thing?

Randy Smallwood -- President and Chief Executive Officer

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

Kevin Chiew -- CIBC -- Analyst

Right, absolutely. And then just on the balance sheet, you've paid down a good amount on your revolver. Just wondering how aggressive do you plan to take down the remaining amount? And all things being equal, do the past three quarters sort of represent a good run rate to model out?

Randy Smallwood -- President and Chief Executive Officer

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

Gary Brown -- Senior Vice President and Chief Financial Officer

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

Kevin Chiew -- CIBC -- Analyst

Right. Okay. Very helpful. That's all for me. Thank you.

Randy Smallwood -- President and Chief Executive Officer

Thanks, Kevin.

Operator

Once again, if you'd like to ask a question, please press star, then the number one on your telephone keypad. Your next question comes from the line of Anita Soni with Credit Suisse. Your line is open.

Anita Soni -- Credit Suisse Securities (Canada), Inc. -- Analyst

Good morning, gentlemen. Thanks for taking my call. I just wanted to know if you have any idea if an asset goes into receivership or bankruptcy in Mexico, does the party -- so, would Primero still hold title to that, hold title to the asset, or does it go back to the government?

Randy Smallwood -- President and Chief Executive Officer

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

Anita Soni -- Credit Suisse Securities (Canada), Inc. -- Analyst

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

Randy Smallwood -- President and Chief Executive Officer

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

Anita Soni -- Credit Suisse Securities (Canada), Inc. -- Analyst

All right. And so, at this stage, I mean, would we expect another extension, or the 23rd is the deadline?

Randy Smallwood -- President and Chief Executive Officer

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

Anita Soni -- Credit Suisse Securities (Canada), Inc. -- Analyst

Yeah. Okay. Thank you very much.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Anita.

Operator

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

Dan Rollins -- RBC Capital Markets -- Analyst

Yeah, thanks very much. Randy, I was wondering if you might be able to comment on some of the size of the potential opportunities you're looking at, specifically with the assets that are producing. Are you looking $200 to $300 million, or are you looking something that potentially could be north of $500 million?

Randy Smallwood -- President and Chief Executive Officer

Dan, I'm gonna let Haytham answer that one.

Dan Rollins -- RBC Capital Markets -- Analyst

Great, thanks.

Haytham Hodaly -- Senior Vice President, Corporate Development

Thanks for the question, Dan. We continue to be very proactive, obviously, in this challenged equity environment, and there's definitely companies looking at other sources of capital, including streaming. If I had to put a size factor for potential streams, it's anywhere between -- we'll call it $50 to $500 million at this stage. We're seeing a number of opportunities specifically related to advancing projects through the feasibility or the development stage. We're also working with precious metals producing companies that are looking to expand certain projects without having to tack on additional debts. And lastly, we continue to look at opportunities to work with companies as they consider using streams as a source of funding for potential M&A transactions.

All that being said, our focus continues to be on accretive transactions, together with assets falling to the lowest half of the cost curve that continue to complement our current portfolio of assets. So, in conclusion, any transaction we undertake has to fit in with our high quality portfolio of assets we have.

Dan Rollins -- RBC Capital Markets -- Analyst

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

Haytham Hodaly -- Senior Vice President, Corporate Development

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

Dan Rollins -- RBC Capital Markets -- Analyst

Okay. And just on, I think, the Kutcho deal, you've done a convertible also with that company. Is that a new element you're looking at adding into that advanced assets type acquisition?

Haytham Hodaly -- Senior Vice President, Corporate Development

Yeah. I mean, these are partnerships that we look at, and when we see an asset that -- I mean, one of the things that our team, going through the Kutcho Project, were pretty impressed with the way this looks. And so, from a competitive space, it just looked like the right thing to do.

Randy Smallwood -- President and Chief Executive Officer

We also -- we strive to be a competitive source of capital, Dan. While we obviously like to prefer to stick to streams, we recognize that in the current environment, competition is offering multifaceted financing solutions. So, we are trying to continue to be fluid in this environment and provide the counterparties with what they're looking for.

Dan Rollins -- RBC Capital Markets -- Analyst

Okay, that's great color. And then, Randy, I don't know if you can comment on it, but I will try. When would you expect maybe to have an answer here on the San Dimas stream? Obviously, you're not running the process. It's up to Primero. But are you hopeful to have something by year-end, or could this be something that maybe drags into the beginning of the new year?

Randy Smallwood -- President and Chief Executive Officer

Well, you sort of answered the question. It is up to Primero. This is something that could happen relatively quickly, but it comes down to Primero making some decisions, so. We are patient and waiting for them to work their way through this process.

Dan Rollins -- RBC Capital Markets -- Analyst

Great. Thanks for the color. Appreciate it. Enjoy the weekend.

Haytham Hodaly -- Senior Vice President, Corporate Development

Thanks.

Randy Smallwood -- President and Chief Executive Officer

Thank you, and thanks, everyone, for dialing in today. Wheaton Precious Metals is on track for another strong year of production and sales here in 2017, and we believe that Wheaton offers the best option for gaining exposure to precious metals for a number of different reasons. Firstly, by having some of the highest margins in the precious metals space. Secondly, through our portfolio of long live, low-cost assets, and proven track record of accretive acquisitions. Thirdly, by now delivering the highest yield in the streaming space; and finally, by delivering our shareholders optionality measured in ounces, not acres. We look forward to speaking with you again soon. Thank you.

Operator

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

Duration: 27 minutes

Call participants:

Patrick Drouin -- Senior Vice President, Investor Relations

Randy Smallwood -- President and Chief Executive Officer

Gary Brown -- Senior Vice President and Chief Financial Officer

Haytham Hodaly -- Senior Vice President, Corporate Development

Kevin Chiew -- CIBC -- Analyst

Anita Soni -- Credit Suisse Securities (Canada), Inc. -- Analyst

Dan Rollins -- RBC Capital Markets -- Analyst

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This article is a transcript of this conference call produced for The Motley Fool. While we strive for our Foolish Best, there may be errors, omissions, or inaccuracies in this transcript. As with all our articles, The Motley Fool does not assume any responsibility for your use of this content, and we strongly encourage you to do your own research, including listening to the call yourself and reading the company's SEC filings. Please see our Terms and Conditions for additional details, including our Obligatory Capitalized Disclaimers of Liability.

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