VANCOUVER — A strong fourth quarter capped off another banner year for Vancouver-based streaming outfit Silver Wheaton (SLW-T, SLW-N). On March 21 the company reported record production and financial results during 2012, and according to president and CEO Randy Smallwood it looks like the market is shaping up to provide Silver Wheaton with a wealth of growth opportunities going forward.
The company achieved its fourth-consecutive year of record attributable silver equivalent production, registering a 17% increase to 29.6 million oz. compared to 25.4 million oz. of silver equivalent in 2011. Silver Wheaton's fourth quarter was notable as it managed to sell more gold than it produced, with 9.1 million oz. of sales compared to 8.5 million oz. of production.
“It was sort of a one-off situation, since we did the HudBay Minerals (HBM-T, HBM,N) transaction last August we didn't get the first shipments from them until just after the third quarter, and that was a little bit longer than expected,” explains Smallwood during an interview. “And that weakened our third quarter results since typically the delays on smelter deliveries are six to eight weeks, though it had the effect of adding value to our fourth quarter.”
Silver Wheaton also enjoyed strong contributions from its Latin American assets, including: Goldcorp's (G-T, GG-N) Penasquito gold-silver-lead-zinc mine in Mexico, Glencore International's (GLEN-L) Yauliyacu zinc-lead-silver mine in Peru, and Primero Mining's (P-T, PPP-N) San Dimas gold-silver mine. Smallwood is quick to point out that Silver Wheaton’s foundation is built on a strong portfolio of proven operations that have long histories of successful production.
“You know we're actually really happy with that. I mean every single one of our assets has matured nicely,” he comments, citing Primero’s performance at San Dimas and Lundin Mining’s (LUN-T) ongoing success at its Zinkgruvan pollymetallic mine in Sweden. “I have some people asking me if there are any deals I regret doing, and they have all really worked out. The assets that were development-stage have really moved along nicely, and we have a stable of very reliable and long-term mines that continue to operate well.”
As a result Silver Wheaton posted record operating cash flows in 2012 totalling US$719 million or C$2.03 per share, which represents a 15% increase over the company's 2011 numbers. Net earnings jumped 7% year-on-year and clocked in at US$585 million or C$1.66 per share. Cash costs were on the rise, jumping from US$4.07 per silver equivalent oz. to US$4.30 per oz., but Smallwood attributes that to Silver Wheaton's greater exposure to gold, which carries higher relative production costs.
And the company increased its gold portfolio in late February when it inked a US$1.9-billion agreement with mining giant Vale (VALE-N), and acquired 25% of life-of-mine gold production from Vale's Salobo copper-gold mine in Brazil and 70% of gold production over a 20-year term from Vale's Sudbury pollymetallic operation in Ontario.
Smallwood explains that Silver Wheaton has always focused on precious metals, but silver's nature as an industrial and consumer metal, often produced as a by-product, has made it a bit more accessible and attractive than gold to date. The company may see gold jump to around 25% of its production ratio following the Vale agreement over the interim, but incoming streams should balance it out and Smallwood doesn't see Silver Wheaton ever going over around 30% in attributable gold production.
“When we have the opportunity with assets like in the Vale transaction we will jump on it,” he continues. “I mean Solobos is one of the most incredible assets I've seen, and I have been in the business for ... well almost too many years now. But the potential of that project to grow from where it is now — I mean they have just scratched the surface on that one. And we're strong believers in the fact precious metal prices are going to continue to rise over time, as you see issues like countries the size of Cyprus impacting fiscal structures.”
In 2013 Silver Wheaton expects a 13% year-on-year jump in production to around 33.5 million silver equivalent oz., including 145,000 oz. of gold. By 2017 the company is aiming to produce 53 million silver equivalent oz., which represents a 79% increase over a five-year period. As of March 19 the company reported proven and probable reserves totalling 851 million oz. of silver and 4.96 million oz. of gold.
“You know for the first time in my career I'm actually worried about whether I can find the money to pay for all the opportunities,” Smallwood says. “Our challenge has always involved finding good projects, and we've always been very selective and very focused on our due diligence. And once we've passed those quality tests I've never really had a problem paying for those assets, but all of a sudden we're looking at some decent-sized assets and I'm wondering how we can find the capital to afford them all. But that is a great problem to have.”
Silver Wheaton is keenly aware of developing opportunities in the junior space, where falling market valuations and a lack of available capital have made it difficult on exploration-stage companies. Smallwood explains that Silver Wheaton used to take equity investments in earlier-stage deals and become a large-supportive shareholder in a bid to assist in eventual financing when it came to development. But since junior valuations are so low, companies are less willing to issue shares due to dilution concerns.
“We've come up with what we call an 'early-advance structure', which focuses on projects that sort of fall in the exploration category before any prefeasibility studies or anything,” Smallwood says, explaining that Silver Wheaton will essentially negotiate a stream on expected project parameters and front 8% to 10% of that upfront payment ahead of time. After a specified term the company can then opt to either convert its investment into a stream or requests its money back in cash or shares.
“It means that our partners can advance their project and avoid raising money in today’s markets,” he concludes.
Silver Wheaton’s plan is part of a wide-spread adaptation in exploration financing, where junior companies are looking at creative opportunities to raise capital in the face of failing public equity options. Smallwood says there is “a lot of appetite” for a new takes on junior-stage financing, and predicts that once Silver Wheaton announces the first of its early-advance agreements the company should be very busy on the small-cap front.
Silver Wheaton's shares jumped C34¢ on March 22 following its annual report, en route to a C$32.03 close. The company reported US$778 million in cash to end 2012, and declared a quarterly dividend of C14¢ per share. Silver Wheaton had 354 million shares outstanding at the time of writing for a C$11.4 billion press-time market capitalization.
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