Exceeding expectations

Silver Wheaton 24 March 2016 Update

Silver Wheaton

Exceeding expectations

Q415 and FY15 results

Metals & mining

 

24 March 2016

Price

C$23.29

Market cap

C$9.4bn

C$1.3372/US$

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

1,363

Shares in issue

403.5m

Free float

100%

Code

SLW

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

9.0

33.5

(8.6)

Rel (local)

3.8

29.5

1.2

52-week high/low

C$25.5

C$14.8

Business description

Silver Wheaton (SLW) is the world’s pre-eminent pure precious metals streaming company with 24 precious metals streaming agreements relating to assets in Mexico, Peru, Canada, Brazil, Chile, Argentina, Sweden, Greece, Portugal, the US and Guyana.

Next events

Q1 results

May 2016

Second quarterly dividend payment

May 2016

CRA court date set

Q216

Analyst

Charles Gibson

+44 (0)20 3077 5724

Silver Wheaton is a research client of Edison Investment Research Limited

Notwithstanding a maiden contribution from Antamina, a strong performance at Silver Wheaton’s (SLW) gold division was complemented by an equally impressive performance from its silver division, with records set in both the production and sales of precious metals, as each of its cornerstone assets (Salobo, Penasquito, San Dimas and Antamina) performed in tandem. Constancia – which is in the process of ramping up – also performed better than our expectations. As a result, attributable silver-equivalent (AgE) production was 47.7Moz for the full year cf our forecast of 44.8Moz (and guidance of 45.0Moz). Excluding impairments, Q4 was therefore the best quarter of FY15 and SLW’s best since Q314 (when the average silver price was US$18.98/oz).

Year end

Revenue (US$m)

PBT* (US$m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

12/14

620.2

268.8

75

26

23.3

1.5

12/15

648.7

223.6

53

20

33.0

1.1

12/16e

835.3

290.6

72

27

24.3

1.5

12/17e

1,091.5

580.5

145

39

12.1

2.2

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

Guidance in line with expectations

SLW’s guidance for FY16 is for silver-equivalent production of 54.0Moz (13.2% higher than in FY15), followed by 52Moz pa on average over the following five years. This compares to our forecast of 53.1Moz, comprising 33.5Moz Ag and 252.5koz Au, in FY16, and an average of 49.9Moz for the five years thereafter (assuming a gold:silver price ratio of 80).

Canadian Revenue Agency (CRA)

There have been no material developments regarding SLW’s dispute with the CRA since those last announced, with the exception of the fact that SLW has been allowed to post its deposit for 50% of the disputed taxes in the form of a C$191.7m (C$0.48 per share) letter of guarantee, rather than a cash deposit.

Impairments

During the quarter, SLW recognised US$230.9m (US$0.57 per share) of, albeit non-cash, impairments related to its Barrick/Pascua-Lama (US$109.7m), 777 mine (US$61.2m), Keno Hill (US$10.5m) and Sudbury (US$49.4m) interests.

Valuation: 43.0% IRR over four years

Assuming no further, material acquisitions (which is unlikely), we forecast a value per share for SLW of US$46.24, or C$61.83, in FY19, representing a total internal rate of return to investors at the current share price of 43.0% in US dollar terms over four years. In the meantime, it is trading on near-term financial ratios that are cheaper than its royalty/streaming ‘peers’ and the miners themselves in a majority of instances, despite being associated with materially less operational and cost risk.

Q415 and FY15 results

Excluding impairments, a summary of SLW’s Q415 and FY15 results, compared with our previous expectations, derived from our update note of 15 February, is as provided in Exhibit 1. Notwithstanding the inclusion of Antamina for the first time (see our update note published on 11 November 2015), a strong performance by SLW’s gold division was complemented by an equally impressive performance from its silver division.

Exhibit 1: Silver Wheaton FY15, by quarter*

US$000s (unless otherwise stated)

FY14**

Q115

Q215

Q315

Q415e

Q415a

Variance1 (%)

Change2 (%)

FY15e

FY15a

Silver production (koz)

25,674

6,342

7,201

6,890

7,567

10,284

35.9

49.3

28,000

30,717

Gold production (oz)

142,815

55,106

50,509

54,513

69,872

69,176

-1.0

26.9

230,000

228,764

AgE production (koz)

35,285

10,371

10,904

10,993

12,687

15,463

21.9

40.7

44,840

47,697

 

 

 

 

Silver sales (koz)

23,484

5,665

5,575

6,575

7,509

8,751

16.5

33.1

25,324

26,566

Gold sales (oz)

139,522

28,399

60,974

48,077

72,661

64,899

-10.7

35.0

210,111

202,349

AgE sales (koz)

32,891

7,723

10,043

10,194

12,833

13,614

6.1

33.5

40,732

41,574

 

 

 

 

Avg realised Ag price (US$/oz)

18.92

16.95

16.42

15.05

14.75

14.75

0.0

-2.0

15.69

15.64

Avg realised Au price (US$/oz)

1,261

1,214

1,195

1,130

1,081

1,100

1.8

-2.7

1,143

1,152

Avg realised AgE price (US$/oz)

18.86

16.90

16.38

15.03

14.75

14.73

-0.1

-2.0

15.65

15.60

 

 

 

 

Avg Ag cash cost (US$/oz)

4.14

4.14

4.26

4.26

4.56

4.06

-11.0

-4.7

4.32

4.17

Avg Au cash cost (US$/oz)

386

388

395

389

385

396

2.9

1.8

389

393

Avg AgE cash cost (US$/oz)

4.59

4.46

4.76

4.58

4.85

4.50

-7.2

-1.7

4.69

4.58

 

 

 

Sales

620,176

130,504

164,435

153,251

189,290

200,497

5.9

30.8

637,480

648,687

Cost of sales

 

 

 

Cost of sales, excluding depletion

151,097

34,464

47,795

46,708

62,214

61,247

-1.6

31.1

191,182

190,214

Depletion

160,180

32,045

53,327

45,248

62,455

67,962

8.8

50.2

193,075

198,581

Total cost of sales

311,277

66,509

101,122

91,956

124,670

129,208

3.6

40.5

384,256

388,795

Earnings from operations

308,899

63,995

63,313

61,295

64,621

71,289

10.3

16.3

253,224

259,892

Expenses and other income

 

 

 

- General and administrative

37,860

8,170

7,886

7,170***

6,486**

9,011

38.9

25.7

29,712

32,237

- Foreign exchange (gain)/loss

(609)

(373)

0

0

0

373

N/A 

N/A 

(373)

0

- Net interest paid/(received)

2,277

1,500

798

428

428

1,364

218.7

218.7

3,154

4,090

- Other (income)/expense

2,439

2,297

992

763

1,148

24

-97.9

-96.9

5,200

4,076

Total expenses and other income

41,967

11,594

9,676

8,361

8,062

10,772

33.6

28.8

37,693

40,403

Earnings before income taxes

266,932

52,401

53,637

52,934

56,559

60,517

7.0

14.3

215,531

219,489

Income tax expense/(recovery)

(1,045)

2,982

(89)

3,133****

0

3,107****

N/A

-0.8

6,026

9,132

Marginal tax rate (%)

-0.4

5.7

-0.2

5.9

0.0

5.1

N/A

-13.6

2.8

4.2

Net earnings

267,977

49,419

53,726

49,801

56,559

57,410

1.5

15.3

209,505

210,357

 

 

 

Basic EPS (US$)

0.75

0.13

0.15

0.12

0.14

0.14

0.0

16.7

0.53

0.53

Diluted EPS (US$)

0.74

0.13

0.15

0.12

0.14

0.14

0.0

16.7

0.53

0.53

Source: Silver Wheaton, Edison Investment Research. Note: *Excluding impairments. **Excluding stock-based compensation. ***Includes 1,419 of equity settled stock-based compensation. ****After excluding taxation effect of impairments. 1Q415a vs Q415e. 2Q415a vs Q315a.

Total silver-equivalent ounces produced reached a record for a fifth successive quarter, while total silver and gold ounces reached a record for a fourth successive quarter, driven by strong results at all four of the company’s cornerstone assets (Salobo, Penasquito, San Dimas and Antamina).

Undersales of material compared to production at Sudbury, Antamina and SLW’s ‘other’ silver assets broadly offset oversales at Yauliyacu, Penasquito and Salobo.

Outlook and quarterly forecasts

Silver Wheaton’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, as shown in Exhibit 2 below.

Exhibit 2: 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

- Net interest paid/(received)

4,090

2,010

2,010

2,010

2,010

8,040

6,063

- Other (income)/expense

4,076

24

24

24

24

96

Total expenses and other income

40,403

11,045

11,045

11,045

11,045

44,180

42,107

Earnings before income taxes

219,489

62,305

76,731

75,778

75,670

290,484

580,463

Income tax expense/(recovery)

9,132

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

76,731

75,778

75,670

290,484

580,463

Basic EPS (US$)

0.53

0.15

0.19

0.19

0.19

0.72

1.45

Diluted EPS (US$)

0.53

0.15

0.19

0.19

0.19

0.72

1.45

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

Our estimate of 72c for FY16 compares to an average consensus basic EPS estimate of 59.4c within the range 38-74c (source: Bloomberg, 17 March 2016). By contrast, our basic EPS estimate of 145c for FY17 compares to an average consensus estimate of 70.8c, within the range 72-97c (excluding Edison), albeit this depends on higher precious metals prices (see Exhibit 2). Should silver and gold prices remain at the current levels of US$15.89/oz and US$1,265/oz (at the time of writing), we would instead forecast that basic EPS in FY17 will be 79c per share (all other things being equal).

Canadian Revenue Agency (CRA)

There have been no material developments regarding SLW’s dispute with the Canadian Revenue Agency since those last announced, with the exception of the fact that SLW has been allowed to post its deposit for 50% of the disputed taxes in the form of a C$191.7m (C$0.48/share) letter of guarantee, rather than a cash deposit. SLW has exercised its right to pursue a resolution of the dispute through a judicial court process rather than via the CRA’s internal appeals process. This process is expected to begin around mid-year and will then be followed by a ‘discovery phase’, during which the strengths and weaknesses of each side’s legal arguments will be considered (and it is possible – but by no means certain or even likely – that an out-of-court settlement could be reached). The ‘discovery phase’ typically takes six to nine months. Assuming no resolution of the matter is forthcoming at that point however (ie around the end of the year, at the earliest), a court date will then be set and the case will proceed to litigation.

Valuation

Excluding FY04 (part year) and FY08 (during which there was an exceptional write-down), SLW’s shares have historically traded on an average P/E multiple of 25.9x current year basic EPS (cf 24.0x Edison FY16e or 30.2x consensus FY16e, currently).

Exhibit 3: Silver Wheaton historic current year P/E multiples

Source: Edison Investment Research. Note: FY14 EPS excludes impairment charge.

Applying this multiple to our long-term EPS forecast of US$1.79 per share in FY19 implies a potential share value of US$46.24, or C$61.83. Note that this EPS forecast depends on a continued recovery in the gold price to US$1,483/oz and a rebalancing of the gold:silver ratio from an unprecedented 80x currently to 56x – implying a silver price of US$26.57/oz. In the event that silver and gold prices remain at current levels, our FY19 EPS forecast moderates to 87cps and our share value to US$22.45 (C$30.02), implying a still respectable 11.1% IRR to investors at the current share price.

From a relative perspective, meanwhile, it is notable that SLW trades on multiples that are cheaper than its royalty/streaming ‘peers’ in 92% of instances considered (79% using consensus forecasts). and on multiples that are cheaper than the gold miners themselves in c 78% of instances considered (67% using consensus forecasts), despite being associated with materially less operational and cost risk, in particular.

Exhibit 4: Silver Wheaton comparative valuation vs a sample of operating and royalty/streaming companies

P/E (x)

Yield (%)

P/CF

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

Royalty companies

Franco-Nevada

103.7

89.8

1.3

1.3

28.9

28.0

Royal Gold

48.3

36.2

1.8

1.8

16.0

12.4

Sandstorm Gold

N/A

N/A

0.0

0.0

12.6

12.0

Osisko

44.0

38.6

1.2

1.2

27.6

27.8

Average

65.3

54.9

1.1

1.1

21.2

20.0

Silver Wheaton (Edison forecasts)

24.0

12.0

1.6

2.3

12.8

8.8

SLW (consensus)

30.2

26.1

1.4

1.4

14.1

13.2

Operators

Barrick

35.8

27.9

0.5

0.5

8.0

7.2

Newmont

38.4

24.1

0.4

0.4

7.4

6.3

Goldcorp

148.6

60.4

0.7

0.5

10.4

9.4

Newcrest

44.0

21.8

0.1

0.9

11.2

9.0

Kinross

N/A

N/A

0.0

0.0

3.8

3.9

Agnico-Eagle

249.5

70.5

0.8

0.8

12.7

11.5

Eldorado

63.8

1,690.6

0.6

0.4

11.2

11.3

Yamana

344.9

51.7

1.0

0.7

5.2

4.7

Randgold Resources

39.3

31.9

0.7

0.7

18.8

16.0

Average

120.5

278.2

0.5

0.6

9.9

8.8

Source: Bloomberg, Edison Investment Research. Note: Peers priced on 18 March 2016.

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 and our previous forecast of US$1,483m, which assumed that SLW would post a US$133m deposit relating to 50% of the disputed tax, interest and penalties relating to its dispute with the CRA). As it is, SLW will now post security for the CRA deposit in the form of a letter of guarantee to the amount of C$191.7m, as opposed to a cash deposit. As such, SLW’s year-end net debt is consistent with its financial performance of generating c US$100m from operating activities per quarter in the context of its paying US$900m for the Antamina stream acquisition in Q4.

SLW has TSX approval to repurchase up to 20,229,671 common shares (representing 5% of the total outstanding common shares at 11 September 2015) under an enhanced normal course issuer bid (NCIB), according to which its broker may also purchase shares for the same purpose over 12 months until 22 September 2016. To date, SLW has repurchased 2,887,854 shares under the NCIB, including 2,123,065 in FY16, although potential future repurchases are excluded from our forecasts on the basis of the uncertainty surrounding the size, price and timing of any such transactions.

SLW’s current net debt equates to a gearing (net debt/equity) ratio of 32.8% and a leverage (net debt/[net debt+equity]) ratio of 24.7%. 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

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

Assuming no further material acquisitions, we forecast that SLW’s net debt will reduce to US$1,027.6m by the end of FY16 and that it will be ostensibly debt free in FY18.

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

Exhibit 5: Financial summary

US$'000s

2012

2013

2014

2015

2016e

2017e

Dec

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)

(8,040)

(6,063)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

290,580

580,463

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

290,484

580,463

Tax

(14,755)

5,121

1,045

3,391

0

0

Profit After Tax (norm)

586,036

375,495

267,977

222,880

290,484

580,463

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

290,484

580,463

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

401.6

400.5

EPS - normalised (c)

 

 

166

106

75

53

72

145

EPS - normalised and fully diluted (c)

 

165

105

74

53

72

145

EPS - (IFRS) (c)

 

 

166

106

56

(-41)

72

145

Dividend per share (c)

35

45

26

20

27

39

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

5,385,848

5,249,996

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

5,353,757

5,217,905

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

442,529

1,001,628

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

438,367

996,191

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

4,332,060

4,755,067

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)

(8,040)

(6,063)

Tax

(725)

(154)

(204)

(208)

0

0

Capex

(641,976)

(2,050,681)

(146,249)

(1,791,275)

(101,564)

(72,000)

Acquisitions/disposals

0

0

0

0

0

0

Financing

12,919

58,004

6,819

761,824

0

0

Dividends

(123,852)

(160,013)

(79,775)

(68,593)

(109,158)

(157,456)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

335,070

557,824

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

1,027,633

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

1,027,633

469,809

Source: Company sources, Edison Investment Research

 

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