Silver Wheaton hangs tough amidst lower metal prices

VANCOUVER — Despite a sharp fall in profits due to declining precious-metal  prices, streaming outfit Silver Wheaton (TSX: SLW; NYSE: SLW) remains a favourite amongst analysts and investors. The company recorded its fifth straight year of record production and sales volume in 2013 — despite underperforming during the fourth quarter — and looks on pace to grow and hit new highs this year.

The company posted a 17% jump in silver-equivalent production during 2013, with precious-metal streams from 19 operating mines chipping in 27 million oz. silver and 151,000 oz. gold.

Silver Wheaton saw its first full year of gold and silver streaming from Hudbay Minerals’ (TSX: HBM; NYSE: HBM) 777 zinc–copper–lead–silver mine in Manitoba and signed a US$1.9-billion deal with Vale (NYSE: VALE) on the company’s Salobo copper–gold mine in Brazil and Sudbury nickel operations in Ontario.

“I can put everything back to the commodity markets, and we were pretty heavily hit by falling precious-metal prices,” notes president and CEO Randy Smallwood during an interview. “In our company, however, there are two end points in how we operate. If we see stable or dropping commodity prices, it opens up opportunities for us. We like investing in that space and finding high-quality assets that will survive through tougher periods and really prosper when commodity prices climb.”

Silver Wheaton was hit by a 24% drop in average realized silver-equivalent prices during 2013 to US$23.58 per oz. As a result the company saw its net earnings fall 36% year-on-year — down from US$586 million, or $1.66 per share in 2012 to US$376 million, or $1.06 per share in 2013. Operating cash flows decreased by 26% to US$534 million, with average cash costs jumping to $4.65 per equivalent oz. silver, compared with $4.30 in 2012.

Silver Wheaton has avoided writedowns and related impairment charges despite lower precious-metal prices and a diverse portfolio. While many companies saw steep drops in reserve and resource statements, Silver Wheaton saw its silver-equivalent reserves increase by 4% year-on-year to 1.2 billion oz.

The company says that Goldcorp’s (TSX: G; NYSE: GG) Penasquito “had the most negative impact,” and that “when you look at our portfolio most of our assets are high grade, so they are not as hit by changes in commodity prices.” Smallwood points out that 88% of Silver Wheaton’s annual production came from first-quartile producers on the cost curve.

“I don’t know of any mining company that has 19 assets delivering metal to them that has that high a percentage in the first quartile. It’s a high-quality portfolio, and I think it resonates that when a lot of people lost reserves and resources, we actually went up. We test our projects on a quarterly basis, and I can tell you we’re still quite robust, there was nothing that was even close to being a writedown,” he adds.

Silver Wheaton dodged another bullet when Barrick Gold (TSX: ABX; NYSE: ABX) suspended work at its US$8.5-billion Pascua-Lama gold–silver project on the Argentina–Chile border to conserve cash.

The companies had amended an outstanding streaming agreement at Pascua-Lama to provide Silver Wheaton with 100% of silver production from Barrick’s Lagunas Norte, Pierina and Veladero mines until the end of 2016. According to Smallwood the company is being “well compensated” for the delay, and the nature of the agreement helped Silver Wheaton avoid any impairments.

Silver Wheaton is also indirectly involved with an ongoing US$540-million hostile bid by Hudbay for junior Augusta Resource (TSX: AZC; NYSE-MKT: AZC) and its Rosemont copper project in Arizona. The company has a US$230-million streaming agreement at Rosemont, and signed a US$750-million agreement with Hudbay in mid-2012 on its 777 mine and Constancia mine under construction in southern Peru.

“We’re obviously partners with both companies. Augusta has done great work in terms of progressing through a challenging permitting process, and obviously it’s frustrating on their side,” Smallwood says when asked about the takeover bid. “We’re eager to move that project forward with Augusta, but at the same time, Hudbay has great project experience. We don’t really have a preference one way or another because we know how great an asset Rosemont represents.”

Silver Wheaton is also wading into the financing pool for juniors. The company has been rolling out the service over the past year, and signed its first deal in November with Sandspring Resources (TSXV: SSP; US-OTC: SSPXF) on the developer’s Toroparu gold project in Guyana.

Silver Wheaton would buy 10% of the life-of-mine gold production from Toroparu for US$148.5 million, plus ongoing payments of US$400 per oz.

Smallwood says Silver Wheaton spent “a lot of time” last year going through a database of junior projects, as it whittled its list down from 60 assets. He notes a few juniors have been tentative to accept the concept, but after the market response to the Sandspring deal his team has attracted attention.

“We’re getting lots of interest on the junior side,” Smallwood says. “It’s the only form of financing juniors have that doesn’t dilute their existing shareholders. Every so often you have to remind management of these small companies that they work for their shareholders. The challenge is finding good projects. Due to the lack of dollars there hasn’t been a lot of new exploration. I’m concerned about the lack of dollars in that space because it will have a long-term negative impact on our industry.”

Silver Wheaton estimates it will receive 36 million oz. in silver-equivalent attributable production in 2014, with the number rising by  35% to 48 million equivalent oz. silver by 2018. Smallwood highlights that the company has 6.4 million equivalent oz. silver produced but not yet delivered that should help its performance during the first quarter.

“I sure would like to get a few more acquisitions done before we see commodity prices run,” Smallwood says. “I’ve actually been surprised with the strength we’ve seen in precious metals recently. I thought silver and gold were going to be relatively flat for the first part of the year. There is definitely some longer-term strength, and on a macro basis I do believe it will just keep climbing in value. We feel that if you’re focused on precious metals the best exposure is holding [our shares].”

Silver Wheaton shares have traded in a 52-week range of $18.59 and $32.71, and closed at $26.07 at press time. The company has  US$900 million in debt, and Smallwood says the company may complete an equity raise, assuming it signs more streaming deals this year. Silver Wheaton has invested US$3 billion since its last equity raise in September 2009.

BMO Capital Markets analyst Andrew Kaip maintains an “outperform” rating on Silver Wheaton’s stock and boosted his target price from $30 to $31 after the company’s annual report.


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