Buying future growth

Silver Wheaton 18 April 2016 Update

Silver Wheaton

Buying future growth

Bought deal detail

Metals & mining

 

18 April 2016

Price

C$21.49

Market cap

C$9.4bn

C$1.2860/US$

Net debt (US$m) at end-December 2015

1,363

Shares in issue*

438.5m

*Post-bought deal.

Free float

100%

Code

SLW

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(3.0)

35.2

(8.5)

Rel (local)

(4.7)

19.7

3.6

52-week high/low

C$24.82

C$14.76

Business description

Silver Wheaton (SLW) is the world’s pre-eminent pure precious metals streaming company with in excess of 25 precious metals streaming and early deposit agreements relating to assets in Mexico, Peru, Canada, Brazil, Chile, Argentina, Sweden, Greece, Portugal, the US and Guyana.

Next events

Q1 results

9 May 2016

Second quarterly dividend payment

9 May 2016

Analysts

Charles Gibson

+44 (0)20 3077 5724

Tom Hayes

+44 (0)20 3077 5725

Silver Wheaton is a research client of Edison Investment Research Limited

On 30 March, Silver Wheaton (SLW) announced a bought deal whereby a syndicate of underwriters would buy 30,125,000 common shares in the company at a price of US$16.60/share for aggregate gross proceeds of c US$500m plus an over-allotment option of a further 4,518,000 shares at the same price for proceeds of an additional c US$75m. One day later, on 31 March, the deal size was increased by 10% pro rata and it closed on 7 April (at which point SLW also took the opportunity to close its normal course issuer bid). On 11 April, the over-allotment option was exercised in full to bring total aggregate proceeds to US$632.5m. This note updates Edison’s forecasts for FY16 by quarter and valuation in the light of the increased number of shares in issue and decreased forecast net debt.

Year end

Revenue (US$m)

PBT* (US$m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

12/14

620.2

268.8

75

26

22.3

1.6

12/15

648.7

223.6

53

20

31.5

1.2

12/16e

835.3

293.4

68

25

24.6

1.5

12/17e

1,091.5

584.2

133

36

12.6

2.2

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

An additional 38.1m shares in issue

As at 31 December 2015, SLW had 402.6m shares in issue. Since then, we estimate that it re-purchased a further 2.3m shares in itself via its normal course issuer bid (NCIB) before issuing a total additional 38.1m shares as a result of its bought deal above to result in an updated total number of estimated shares in issue of 438.5m. As a result, we estimate the total average number of shares in issue in Q116 to have been 400.5m, followed by 438.5m thereafter – an increase of 8.9% compared to year-end 2015.

Extinction of net debt in the foreseeable future

Whereas we had previously estimated that SLW’s net debt would reduce to US$1,027.6m by the end of FY16 and that it would be ostensibly debt free in FY18, in the light of its March bought deal, we now estimate that its net debt will reduce to US$395.8m by the end of FY16 (equating to gearing of 8.0% and leverage of 7.4%) and that it will now be debt free in FY17 (all other things being equal).

Valuation: 42% IRR over four years

Our FY16 forecasts are near the top of the range of analysts’ estimates, but rely on little more than precious metals prices holding current levels (see overleaf). Assuming no further material acquisitions (which is unlikely), we forecast a value per share for SLW of US$42.30, or C$54.40, in FY19, based on the new number of shares in issue, representing a total internal rate of return to investors at the current share price of 42.1% in US dollar terms over four years. In the meantime, it is trading on near-term financial ratios that are cheaper than those of its royalty/streaming ‘peers’ and the miners themselves in a majority of instances, despite being associated with materially less operational and cost risk.

FY16 by quarter

SLW’s outlook for production for FY16 is 54Moz AgE, including 265koz Au, which compares to our equivalent forecast of 53.1Moz, comprising 33.5Moz Ag and 252.5koz Au. Otherwise, the table below is identical to that in our results note, published in March, in all respects with the exception of the average number of shares in issue and the net interest charge for Q216 and beyond.

Exhibit 1: Silver Wheaton FY16 forecasts, by quarter*

US$000s (unless otherwise stated)

FY15*

Q116

Q216

Q316

Q416e

FY16

FY17

Silver production (koz)

30,717

8,373

8,373

8,373

8,373

33,490

30,939

Gold production (oz)

228,764

63,126

63,126

63,126

63,126

252,504

254,788

AgE production (koz)

47,697

13,412

13,397

13,169

13,169

53,146

45,134

Silver sales (koz)

26,566

8,373

8,373

8,373

8,373

33,490

30,939

Gold sales (oz)

202,349

63,126

63,126

63,126

63,126

252,504

254,788

AgE sales (koz)

41,574

13,412

13,397

13,169

13,169

53,146

45,134

Avg realised Ag price (US$/oz)

15.64

14.77

15.89

16.11

16.11

15.72

24.18

Avg realised Au price (US$/oz)

1,152

1,179

1,265

1,224

1,224

1,223

1,347

Avg realised AgE price (US$/oz)

15.60

14.77

15.89

16.11

16.11

15.72

24.18

Avg Ag cash cost (US$/oz)

4.17

4.70

4.75

4.77

4.79

4.75

5.17

Avg Au cash cost (US$/oz)

393

394

394

394

394

394

396

Avg AgE cash cost (US$/oz)

4.58

4.79

4.82

4.92

4.93

4.87

5.78

Sales

648,687

198,088

212,917

212,148

212,148

835,300

1,091,451

Cost of sales

Cost of sales, excluding depletion

190,214

64,225

64,628

64,812

64,920

258,586

261,029

Depletion

198,581

60,513

60,513

60,513

60,513

242,050

207,852

Total cost of sales

388,795

124,738

125,141

125,325

125,433

500,637

468,881

Earnings from operations

259,892

73,350

87,776

86,823

86,715

334,664

622,570

Expenses and other income

- General and administrative

32,237

9,011

9,011

9,011

9,011

36,044

36,044

- Foreign exchange (gain)/loss

0

0

0

0

0

0

0

- Net interest paid/(received)

4,090

2,010

1,077

1,077

1,077

5,241

2,335

- Other (income)/expense

4,076

24

24

24

24

96

0

Total expenses and other income

40,403

11,045

10,112

10,112

10,112

41,381

38,379

Earnings before income taxes

219,489

62,305

77,664

76,711

76,603

293,283

584,191

Income tax expense/(recovery)

9,132

0

0

0

0

0

0

Marginal tax rate (%)

4.2

0.0

0.0

0.0

0.0

0.0

0.0

Net earnings

210,357

62,305

77,664

76,711

76,603

293,283

584,191

Ave. no. shares in issue (000s)

395,755

400,520

438,453

438,453

438,453

428,970

438,453

Basic EPS (US$)

0.53

0.16

0.18

0.17

0.17

0.68

1.33

Diluted EPS (US$)

0.53

0.16

0.18

0.17

0.17

0.68

1.33

Source: Silver Wheaton, Edison Investment Research. Note: *Excluding impairments.

Our EPS estimate of 16c for Q116 compares to an average consensus basic EPS estimate of 13.1c from revenue of US$193.0m, EBITDA of US$123.2m, operating profit of US$62.2m and net income of US$54.0m (source: Bloomberg, 18 April 2016). Consensus EPS estimates for Q216, Q316 and Q416 are 13.8c, 14.6c and 15.7c respectively.

Our estimate of 68c for FY16 compares to an average consensus basic EPS estimate of 59.0c within the range 36-71c (source: Bloomberg, 18 April 2016) and compares to an average of 59.4c as at 17 March 2016 – ie estimates have been moving downwards since SLW’s FY15 and Q415 results on 16 March. By contrast, our basic EPS estimate of 133c for FY17 compares to an average consensus estimate of 65.7c, within the range 34-84c (excluding Edison) and compares to an average of 70.8c as at 17 March 2016, albeit this depends on higher precious metals prices (see Exhibit 1). Should silver and gold prices remain at the current levels of US$16.18/oz and US$1,236/oz (at the time of writing), we estimate that basic EPS in FY17 will instead be 73c per share (all other things being equal). In any event however, it is readily apparent that Edison’s near-term forecasts are at the top of the range of analysts’ estimates, although we believe that this is eminently justifiable within the context of current precious metals prices and production guidance.

Financials

As at 31 December, SLW had US$1,362.7m of net debt on its balance sheet (vs US$566.5m as at end-September), which is consistent with its financial performance of generating c US$100m from operating activities per quarter and paying US$900m for the Antamina stream acquisition in Q4.

Previously we had estimated that SLW’s net debt would reduce to US$1,027.6m by the end of FY16 and that it would be ostensibly debt free in FY18. In the light of its March bought deal, we now estimate that its net debt will reduce to US$395.8m by the end of FY16 and that SLW will be ostensibly debt free in FY17, all other things being equal and contingent on it making no further major acquisitions, which is unlikely.

We estimate that net debt of US$395.8m as at end-2016 will equate to a gearing (net debt/equity) ratio of 8.0% (vs 32.8% previously) and a leverage (net debt/[net debt+equity]) ratio of 7.4% (vs 24.7% previously). Self-evidently, such a level of debt is well within the tolerances required of its banking covenants that:

net debt should be no more than 0.75x tangible net worth (which was US$4,151m as at end-December 2015 and is forecast to be US$4,967m as at end-December 2016); and

interest should be no less than 3x covered by EBITDA.

Note that the interest rate associated with SLW’s revolving debt facility is Libor plus 120-220bp.

Canadian Revenue Agency (CRA)

There have been no further substantive developments regarding SLW’s dispute with the CRA since our March update note. Any further developments will be communicated to investors as and when they occur.

Exhibit 2: Financial summary

US$000s

2012

2013

2014

2015

2016e

2017e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

849,560

706,472

620,176

648,687

835,300

1,091,451

Cost of Sales

(117,489)

(139,352)

(151,097)

(190,214)

(258,586)

(261,029)

Gross Profit

732,071

567,120

469,079

458,473

576,714

830,422

EBITDA

 

 

701,232

531,812

431,219

426,236

540,670

794,378

Operating Profit (before amort. and except.)

600,003

387,659

271,039

227,655

298,620

586,526

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

0

0

(68,151)

(384,922)

0

0

Other

788

(11,202)

(1,830)

(4,076)

(96)

0

Operating Profit

600,791

376,457

201,058

(161,343)

298,524

586,526

Net Interest

0

(6,083)

(2,277)

(4,090)

(5,241)

(2,335)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

293,379

584,191

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

293,283

584,191

Tax

(14,755)

5,121

1,045

3,391

0

0

Profit After Tax (norm)

586,036

375,495

267,977

222,880

293,283

584,191

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

293,283

584,191

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

429.0

438.5

EPS - normalised (c)

 

 

166

106

75

53

68

133

EPS - normalised and fully diluted (c)

 

165

105

74

53

68

133

EPS - (IFRS) (c)

 

 

166

106

56

(41)

68

133

Dividend per share (c)

35

45

26

20

25

36

Gross Margin (%)

86.2

80.3

75.6

70.7

69.0

76.1

EBITDA Margin (%)

82.5

75.3

69.5

65.7

64.7

72.8

Operating Margin (before GW and except.) (%)

70.6

54.9

43.7

35.1

35.7

53.7

BALANCE SHEET

Fixed Assets

 

 

2,403,958

4,288,557

4,309,270

5,526,335

5,388,766

5,252,914

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

5,356,675

5,220,823

Tangible Assets

1,347

5,670

5,427

12,315

12,315

12,315

Investments

121,377

40,801

32,872

19,776

19,776

19,776

Current Assets

 

 

785,379

101,287

338,493

105,876

1,074,350

1,636,432

Stocks

966

845

26,263

1,455

1,873

2,447

Debtors

6,197

4,619

4,132

1,124

2,288

2,990

Cash

778,216

95,823

308,098

103,297

1,070,189

1,630,995

Other

0

0

0

0

0

0

Current Liabilities

 

 

(49,458)

(21,134)

(16,171)

(12,568)

(27,408)

(27,649)

Creditors

(20,898)

(21,134)

(16,171)

(12,568)

(27,408)

(27,649)

Short term borrowings

(28,560)

0

0

0

0

0

Long Term Liabilities

 

 

(32,805)

(1,002,164)

(1,002,856)

(1,468,908)

(1,468,908)

(1,468,908)

Long term borrowings

(21,500)

(998,136)

(998,518)

(1,466,000)

(1,466,000)

(1,466,000)

Other long term liabilities

(11,305)

(4,028)

(4,338)

(2,908)

(2,908)

(2,908)

Net Assets

 

 

3,107,074

3,366,546

3,628,736

4,150,735

4,966,800

5,392,789

CASH FLOW

Operating Cash Flow

 

 

720,209

540,597

434,582

435,783

553,832

793,343

Net Interest

0

(6,083)

(2,277)

(4,090)

(5,241)

(2,335)

Tax

(725)

(154)

(204)

(208)

0

0

Capex

(641,976)

(2,050,681)

(146,249)

(1,791,275)

(104,481)

(72,000)

Acquisitions/disposals

0

0

0

0

0

0

Financing

12,919

58,004

6,819

761,824

632,500

0

Dividends

(123,852)

(160,013)

(79,775)

(68,593)

(109,718)

(158,201)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

966,892

560,806

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

395,811

HP finance leases initiated

0

0

0

0

0

0

Other

0

(12,139)

(1,003)

(5,724)

0

0

Closing net debt/(cash)

 

 

(728,156)

902,313

690,420

1,362,703

395,811

(164,995)

Source: Silver Wheaton, Edison Investment Research

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