VANCOUVER — Since pioneering the stream financing model nearly a decade ago, Randy Smallwood and his team at Silver Wheaton (TSX: SLW; NYSE: SLW) have turned it into a multi-billion dollar business. It's been around two years since the company signed a major streaming deal, however, so market focus has now turned to organic growth and how Silver Wheaton maintains its earnings and cash flow on a quarterly basis.
And at a cursory glance Silver Wheaton's second quarter results seem underwhelming. Attributable silver equivalent production totalled 8.4 million oz. (6.3 million oz. silver and 31,400 oz. gold) which is a 4% decrease from the 8.7 million silver equivalent oz. produced during the same period last year.
Sales volumes were actually up around 4% to 7.5 million oz. compared to 7.2 million oz. over the same period in 2013, for an increase of 4%. More importantly, however, average realized silver equivalent prices were down 14% year-on-year to US$19.83 per oz.
The result was a quarterly net earnings drop of 11% to US$64 million or 18¢ per share compared to second-quarter 2013, while operating cash flows declined 18% to US$103 million or 29¢ per share. Silver Wheaton saw its average cash costs drop US5¢ year-on-year to US$4.72 per silver equivalent oz.
"Our business model is based on the premise of paying low-predictable costs for precious metal streams from a diverse portfolio of high-quality mines, so any increases in precious metal prices flow directly to our bottom line. As a result, our second quarter cash operating margin was over 75%. These numbers once again show that we can generate some of the highest margins in this industry,” Smallwood explained during a conference call.
“In terms of silver equivalent ounces produced but not yet delivered that’s going to continue. It typically represents about around two and a half months of our production. And so as our annual production climbs, that 'produced but not yet delivered' will also climb," he added when asked about around 6.3 million oz. worth of outstanding silver equivalent deliveries.
Silver Wheaton remains on track to hits its production target of 36 million silver equivalent oz. for the year and expects that annual total to increase 35% by 2018 to 48 million oz. Growth estimates are primarily attributed to Hudbay Minerals' (TSX: HBM; NYSE: HBM) Constancia and Rosemont copper projects and Vale's (NYSE: VALE) Salobo copper mine in Brazil and its Sudbury nickel mines.
Salobo was recently expanded to double its capacity, while Constancia was around 85% complete at the end of the second quarter. Silver Wheaton expects to receive production from Constancia later this year. Smallwood also highlighted record production at Goldcorp's (TSX: G; NYSE: GG) Penasquito gold mine in Mexico and a recent decision by Primero Mining (TSX: P; NYSE: PPP) to boost throughput at its San Dimas gold mine from 2,500 to 3,000 tonnes per day.
"Given the progress made in our diversified portfolio of mines and projects, we believe we’re well positioned to grow our revenues and earnings even if precious metal price maintain current levels," Smallwood added.
With a press-time cash balance of US$139 million and access to US$1 billion under a revolving credit facility, however, many observers want to know when Silver Wheaton is going to make its next streaming deal.
In early August the company exercised a right of first refusal to score a 1.5% net smelter returns royalty (NSR) on Chesapeake Gold's (TSX: CKG; US-OTC: CHPGF) Metates gold-copper project in Mexico for US$9 million. But Smallwood is quick to point out that the company won’t be making a foray into royalty acquisitions (as opposed to streaming arrangements) and the deal was predominantly driven by his familiarity with the project.
"On the corporate development front, our team remains busy pursuing acquisitions and we feel we’re still in a good market to add to our portfolio. We certainly believe that streaming provides an attractive funding solution for both large and small mining companies, particularly within the current environment of scarce capital," Smallwood added.
"Everywhere we look in the silver space we see we increasing applications on the industrial side and they are in the areas that are growth opportunities. High efficiency electronics and anti-bacterial application, for example, are areas that are just becoming more and more important on a worldwide basis"
Silver Wheaton shares have traded within a 52-week window of $20.53 and $30.56, and dropped 5% en route to a $28.13 per share close at the time of writing. The company has 358 million shares outstanding for a $10.1 billion market capitalization.
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