Exceeding expectations

Silver Wheaton 24 March 2016 Update

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Silver Wheaton

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

mining@edisongroup.com

Edison profile page

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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