Q3 in perspective and Q4 preview

Silver Wheaton 6 December 2016 Update

Silver Wheaton

Q3 in perspective and Q4 preview

Results and preview

Metals & mining

 

6 December 2016

Price

C$25.03

Market cap

C$11,018m

C$1.3305/US$

Net debt (US$m) at 30 September 2016

1,219.5

Shares in issue

440.2m

Free float

100%

Code

SLW

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(21.5)

(29.8)

33.9

Rel (local)

(24.6)

(31.2)

18.5

52-week high/low

C$39.73

C$14.99

Business description

Silver Wheaton is the world’s pre-eminent pure precious metals streaming company, with more than 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

Q4/FY16 results

March 2017

Analyst

Charles Gibson

+44 (0)20 3077 5724

Silver Wheaton is a research client of Edison Investment Research Limited

Silver Wheaton’s (SLW) Q316 results were characterised by exceptionally strong production from its gold assets, supported by record quarterly output at Salobo and Minto and a strong performance at 777. Production from SLW’s silver assets was in line with our expectations. However, a 20.0% under-sale of silver relative to production (towards the upper end of the historical range) and a 22.1% under-sale of gold resulted in a return of inventory to more normal levels. This detracted from financial results, although PBT was still at its highest since Q113 (when silver and gold prices were US$29.89/oz and US$1,645/oz, respectively). Given broadly flat production expectations, however, plus the end-of-year ‘flush through’ effect, no repetition of this inventory build is expected in Q416.

Year end

Revenue (US$m)

PBT* (US$m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

12/14

620.2

268.8

74

26

25.4

1.4

12/15

648.7

223.6

53

20

35.5

1.1

12/16e

867.9

262.1

60

21

31.4

1.1

12/17e

1,122.4

462.3

105

33

17.9

1.8

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

Inventory now near target levels

Ounces produced but not yet delivered to Silver Wheaton by its operating counterparties (considered as ‘inventory’) amounted to 3.8Moz silver and 63,300oz gold as at end-September 2016, equating to 1.5 months and 2.3 months of forecast FY16 production, respectively, or 1.9 months in aggregate – close to SLW’s target level of two months.

FY16 production guidance

Official management guidance for FY16 is for gold production of 335,000oz (vs 305,000oz previously) owing to better than expected results in the first nine months of the year and expected production from Salobo and Sudbury in Q4. By contrast, attributable silver production for 2016 is now expected to be 30Moz (vs 32Moz previously) as a result of lower than expected results from Penasquito and San Dimas, partly offset by better than expected results from Antamina. On a silver-equivalent basis, however, guidance remains unchanged, at 55Moz (based on average LBMA gold and silver prices of US$1,260/oz and US$17.12/oz, respectively, for the first nine months of calendar 2016).

Valuation: 20.9% IRR in US$ over four years predicted

Assuming no material purchases of additional streams (which is unlikely), we forecast a value per share for SLW of US$33.09, or C$44.03, in FY20 (at prices of US$23.98/oz Ag and US$1,362/oz Au), implying a 20.9% pa total internal rate of return for investors in US dollar terms over the next four years. In the meantime, SLW’s shares are trading on near-term financial ratios that are cheaper than those of its royalty/streaming ‘peers’ in at least 87% of measures considered, and the miners themselves in at least 46% of measures considered, despite being associated with materially less operating and cost risk.

Q316 in perspective

Silver Wheaton’s Q316 results were characterised by exceptionally strong production from its gold assets, supported by record quarterly output at Salobo and Minto and a strong performance at the 777 mine. Production from SLW’s silver assets was in line with our expectations, with another quarter of outperformance from Antamina being offset by a subpar result at San Dimas (see page 3, below); although production from Penasquito was affected by the factors set out in our report, Q3 results scheduled for 9 November, published on 2 November, it was nevertheless ahead of our expectations and ahead of the pro rata outcome that would otherwise have been inferred from Goldcorp’s Q3 results.

The other principal feature of the results was a 20.0% under-sale of silver relative to production (towards the upper end of the historical range) and a 22.1% under-sale of gold, which resulted in a return of inventory to more normal levels of circa two months of production versus circa one month as at the end of Q216. Exhibit 1 provides a summary of SLW’s Q3 results relative to both the previous quarter (Q216) and also our prior expectations, as well as our updated forecasts for Q4 in the light of recent precious metals price weakness.

Exhibit 1: Silver Wheaton FY16 forecast, by quarter*

US$000s (unless otherwise stated)

Q116

Q216

Q316e

Q316e** (Ag under-sale)

Q316a

Chg*** (%)

Diff**** (%)

Q416e (prev)

Q416e (current)

FY16e (prev)

FY16e (current)

Silver production (koz)

7,570

7,581

7,796

7,796

7,651

0.9

-1.9

8,060

7,911

31,001

30,713

Gold production (oz)

64,942

70,249

81,626

81,626

109,193

55.4

33.8

81,626

81,626

298,443

326,010

AgE production (koz)

12,733

12,852

13,355

13,355

15,084

17.4

12.9

13,930

13,742

52,779

54,355

Silver sales (koz)

7,552

7,142

7,796

7,016

6,122

-14.3

-12.7

8,060

7,911

30,550

28,727

Gold sales (oz)

65,258

70,757

81,626

81,626

85,063

20.2

4.2

81,626

81,626

299,267

302,704

AgE sales (koz)

12,759

12,451

13,355

12,576

11,913

-4.3

-5.3

13,930

13,742

52,404

50,800

Avg realised Ag price (US$/oz)

14.68

17.18

19.60

19.60

19.53

13.7

-0.4

17.59

17.09

17.29

17.00

Avg realised Au price (US$/oz)

1,175

1,267

1,335

1,335

1,336

5.4

0.1

1,265

1,221

1,265

1,254

Avg realised AgE price (US$/oz)

14.70

17.06

19.60

19.60

19.57

14.7

-0.2

17.59

17.09

17.30

17.08

Avg Ag cash cost (US$/oz)

4.14

4.46

4.66

5.18

4.51

1.1

-12.9

4.58

4.55

4.46

4.41

Avg Au cash cost (US$/oz)

389

401

395

395

390

-2.7

-1.3

395

395

398

394

Avg AgE cash cost (US$/oz)

4.44

4.84

5.14

5.45

5.10

5.4

-6.4

4.96

4.97

4.87

4.84

 

 

Sales

187,511

212,351

261,763

246,484

233,204

9.8

-5.4

245,033

234,856

906,658

867,922

Cost of sales

 

 

Cost of sales, excluding depletion

56,636

60,208

68,583

68,583

60,776

0.9

-11.4

69,158

68,238

254,585

245,055

Depletion

71,344

75,074

76,741

76,741

73,919

-1.5

-3.7

77,548

76,587

300,707

296,923

Total cost of sales

127,980

135,282

145,325

145,325

134,695

-0.4

-7.3

146,706

144,825

555,293

541,979

Earnings from operations

59,531

77,069

116,439

101,159

98,509

27.8

-2.6

98,327

90,031

351,365

325,944

Expenses and other income

 

 

- General and administrative

10,844

9,959

8,754

8,754

9,513

-4.5

8.7

8,754

8,293

38,311

38,609

- Foreign exchange (gain)/loss

0

0

0

0

0

N/A

N/A

0

0

- Net interest paid/(received)

6,932

4,590

4,811

4,811

6,007

30.9

24.9

4,811

7,680

21,144

25,209

- Other (income)/expense

1,160

1,599

814

814

1,380

-13.7

69.5

814

1,126

4,387

5,265

Total expenses and other income

18,936

16,148

14,379

14,379

16,900

4.7

17.5

14,379

17,099

63,842

69,083

Earnings before income taxes

40,595

60,921

102,060

86,781

81,609

34.0

-6.0

83,948

72,932

287,524

256,861

Income tax expense/(recovery)

(384)

615

0

0

(1,377)

-323.9

N/A

0

0

231

-1,146

Marginal tax rate (%)

(0.9)

1.0

0.0

0.0

(1.7)

-270.0

N/A

0.0

0.0

0.1

-0.4

Net earnings

40,979

60,306

102,060

86,781

82,986

37.6

-4.4

83,948

72,932

287,293

258,007

Ave. no. shares in issue (000s)

402,952

436,726

438,453

438,453

440,635

0.9

0.5

438,453

440,635

438,453

430,237

Basic EPS (US$)

0.10

0.14

0.23

0.20

0.19

35.7

-5.0

0.19

0.17

0.67

0.60

Diluted EPS (US$)

0.10

0.14

0.23

0.20

0.19

35.7

-5.0

0.19

0.17

0.67

0.60

Source: Silver Wheaton, Edison Investment Research. Note: *Forecasts exclude stock-based compensation costs. **Assumed 10% under-sale of silver relative to production. ***Q316a vs Q216a. ****Q316a vs Q316e (Ag under-sale).

Our revised EPS estimate of 17c for Q4 compares to an average consensus basic EPS estimate of 20c (vs 21c immediately before SLW’s Q3 results), within a range of 16-24c (source: Bloomberg, 2 December 2016). Our updated FY16 EPS estimate of 60c compares to an average consensus basic EPS estimate of 64c within a range of 60-70c.

San Dimas

Production at San Dimas in Q316 was affected by high unplanned worker absences and a failure to achieve mine plans, which resulted in reduced development rates and also a number of delayed ventilation improvement projects. This, in turn, limited access to certain high-grade areas of the mine. As a result of these tribulations, Primero (the mine’s operator) estimates that silver production in FY16 will now be 5.5-6.0Moz. Given that San Dimas has produced 3.8Moz of silver in the first three quarters of the year, achieving output of 5.5Moz would require the production of 1.7Moz of silver in Q4, which, while possible (San Dimas last produced in excess of this number in Q415), may prove challenging under the circumstances and during the Christmas quarter. Our forecast for production at San Dimas in Q416 is therefore 1.4Moz.

Exhibit 2: Silver production from San Dimas attributable to SLW, Q112-Q416e (koz)

Source: Edison Investment Research, Silver Wheaton

Note that since Q112, San Dimas’s production attributable to Silver Wheaton has been, on average, 1,543koz silver per quarter.

Ounces produced but not yet delivered – aka inventory

Edison’s forecasts assume parity between production and sales in Q416, compared to an average historical under-sale of 10.4% for silver in the period Q112-Q316 and 10.6% for gold (see below):

Exhibit 3: Over/(under) sale of silver and gold as a % of production, Q112-Q316

Source: Edison Investment Research, Silver Wheaton

Payable ounces attributable to Silver Wheaton produced but not yet delivered amounted to 3.8Moz silver and 63,300oz gold as at end-September 2016, equating to 1.5 months and 2.3 months of forecast FY16 production, respectively, or 1.9 months in aggregate – close to SLW’s target level of two months. Combined with broadly flat production expectations for Q416, this alone should militate against a material change in Q4 inventory. In addition, the fourth quarter, immediately before the calendar and (often) financial year ends, is traditionally the one in which operating companies typically try to ‘flush’ inventory through the sales pipeline.

Note that, for these purposes, the use of the term ‘inventory’ reflects ounces produced by SLW’s operating counterparties at the mines over which it has streaming agreements, but which have not yet been delivered to SLW. It in no way reflects the other use of the term in mining companies themselves, where it is typically used to refer to metal in circuit (among other things), and may therefore (under certain circumstances) be considered to be a consequence of metallurgical recoveries in the plant.

Exceptional business plan

Silver Wheaton acquires the right to purchase streams of precious metals from producing or near-producing mines in return for a combination of a fixed upfront payment (in US dollars, typically in either cash or SLW shares) and an ongoing payment (in US$/oz). Typically, it focuses on by-product precious metals streams as this offers the greatest arbitrage opportunity between the perceived value of the stream to the producer in the equity market and the perceived value of the stream to Silver Wheaton. Specifically, however, it seeks to build long-term value by entering streaming agreements with large, relatively financially stable counterparties operating premium high-margin projects in the lowest quartile (and certainly the lowest half) of the cost curve. As well as providing comfort regarding the sustainability of the underlying operation, this strategy also helps to mitigate geopolitical and operating risks. In addition, it provides a degree of flexibility if projects are not developed according to plan (eg as evidenced by SLW’s ability to successfully negotiate a series of amendments with Barrick regarding the latter’s Pascua-Lama project). Unlike a number of its peers, Silver Wheaton has restricted itself solely to precious metals streaming agreements and does not participate in the base metal and oil & gas markets. This strategy has the beneficial side effect that it also exposes SLW to the traditional premium multiples afforded to precious metal companies compared to base metal ones. Notwithstanding its silver heritage, however, SLW describes itself as ‘agnostic’ in terms of its preference for either silver or gold streams.

Latterly, Silver Wheaton has engaged in two ‘early deposit’ contracts whereby it has contracted to buy gold and silver streams from the Cotabambas and Toroparu mines in South America, thereby effectively becoming a relatively low-cost financing component of these projects at a time when the availability of both debt and equity financing is uncertain and their associated costs therefore relatively high.

Streaming agreement characteristics

While royalty companies compete with Silver Wheaton to some extent in the provision of capital to the mining industry, there are notable differences between the two business plans. Royalties are typically linked to tenement areas, for example, and also typically relate to a mine’s primary output, whereas streaming arrangements are governed by a commercial agreement between two companies (albeit typically relating to a single mine) and relate to a mine’s secondary, or by-product, output. A summary of the unique features of Silver Wheaton’s streaming business plan and how it distinguishes itself from other investment opportunities in the mining industry is provided below.

Compared to exchange traded funds (ETFs), Silver Wheaton:

has exposure to exploration success in the form of extended mine lives;

has exposure to levels of production;

is operationally geared to changes in metals prices; and

pays a dividend.

Compared to mining companies, Silver Wheaton:

has no exposure to capital cost overruns;

has no exposure to operating cost overruns;

is only exposed to grade fluctuations inasmuch as they affect production levels rather than margins;

has a predetermined level of inflation applied to its own unit cash costs; and

is unaffected by changes in a host country’s mining tax and regulatory regimes.

Compared to royalty companies, Silver Wheaton:

has geared exposure to metals prices; and

typically negotiates and exploits the value differential around a secondary, or by-product, metal stream, rather than being applied to all metals streams including the primary one.

A key advantage for Silver Wheaton compared to potential competitors is its size, scale and valuation, which allows it to raise equity on a non-dilutive basis to fund new streams, or even to issue counterparties with equity in consideration of new streams.

Cornerstone assets

Silver Wheaton has four cornerstone assets (San Dimas, Penasquito, Antamina and Salobo). The following is an analysis of the financial returns generated as a result of the application of SLW’s investment criteria to one of its cornerstone assets – Penasquito.

Penasquito

A gold-silver-lead-zinc mine, located in Mexico and operated by Goldcorp, Penasquito has consistently been regarded as one of Silver Wheaton’s key cornerstone assets. The stream relating to this asset was acquired late in 2007 for US$485m plus US$3.56m in costs and US$15.761m in capitalised interest. The first silver-bearing lead and zinc concentrate was delivered from the mine in 2009 after production at its first 50,000tpd sulphide process line was ramped up on schedule and on budget. During the ramp-up period, metal recoveries, concentrate grades and concentrate quality were within expected ranges. At the same time, construction of a second 50,000tpd sulphide process line was progressing towards planned completion in Q310. After exceeding ramp-up expectations, Penasquito became Silver Wheaton’s second largest contributor of silver production in 2010 and, after further expansions, it finally surpassed San Dimas to become Silver Wheaton’s largest contributor of silver production in 2012, by which time it held the title of Mexico’s largest precious metals mine, one of the world’s largest and lowest-cost gold-silver mines and one of Goldcorp’s most significant cash flow generators. After adjusting the mine’s production schedule to reflect a targeted mill throughput rate of 110,000tpd, rising to in excess of 115,000tpd beyond 2015, Penasquito is now forecast to yield average annual production attributable to Silver Wheaton of 7Moz Ag per year over the next two years, plus an additional 4-6Moz pa (of which 25% will be attributable to SLW) once the Pyrite Leach Project is commissioned in FY19.

Compared to an initial investment of US$504.3m, Penasquito has yielded the following historical and forecast cash flows to Silver Wheaton:

Exhibit 4: Penasquito cash flows to Silver Wheaton, 2008-26 (US$m)

Historical

Forecast

Year

2008

2009

2010

2011

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Cash flow

2.3

6.9

52.2

126.8

162.2

105.2

106.0

85.1

57.7

128.0

121.2

140.1

162.3

159.3

150.0

148.7

145.9

143.8

146.1

Source: Edison Investment Research, Silver Wheaton

On an undiscounted basis therefore, Penasquito paid back Silver Wheaton’s initial investment in 2014. When discounted at Edison’s standard mining discount rate of 10%, the mine has already returned US$412.3m to Silver Wheaton (as at end FY16e) in 2007 money terms and is also worth a residual US$878.0m in 2017 money terms. Applying a 10% discount/hurdle rate, pay back is indicated in late 2018/early 2019 in 2007 money terms.

By contrast, applying a 10% discount/hurdle rate over the entire stream of income yields an ultimate value of US$784.6m, which is directly comparable to the stream’s acquisition cost of US$504.3m in 2007 money terms. Stated alternatively, the stream will provide Silver Wheaton with an internal rate of return of 15.6% from the point of acquisition in 2007 to 2026. In addition, there is substantial underground potential beneath the current open pits, providing excellent opportunities for further exploration growth and expanded and/or extended silver production.

 

Silver Wheaton’s assets

As at Q316, Silver Wheaton has agreements over more than 20 major metals streams, summarised in Exhibit 5 below.

Exhibit 5: Silver Wheaton precious metals streaming and dearly deposit agreements

Asset

Owner/operator

Location

Attributable production to be purchased (%)

Per ounce cash payment (US$/oz)

Term of agreement

Date of original contract

Silver

Gold

Silver

Gold

San Dimas

Primero

Mexico

6.0Moz + 50% of excess

0

4.24

Life of mine

Oct 2004

Yauliyacu*

Glencore

Peru

1.5Moz + 50% of excess

0

8.70

Life of mine

Mar 2006

Penasquito

Goldcorp

Mexico

25

0

4.09

Life of mine

Jul 2007

Salobo

Vale

Brazil

0

75

400

Life of mine

Feb 2013

Sudbury

Vale

Canada

0

70

400

20 years

Feb 2013

Antamina**

Glencore

Peru

33.75/22.5

0

20% of spot

Life of mine

Nov 2015

Barrick

Pascua-Lama

Barrick

Chile/Argentina

25

0

3.90

Life of mine

Sep 2009

Lagunas Norte

Barrick

Peru

100

0

3.90

8.5 years

Sep 2009

Pierina

Barrick

Peru

100

0

3.90

8.5 years

Sep 2009

Veladero

Barrick

Argentina

100

0

3.90

8.5 years

Sep 2009

Other

Los Filos

Goldcorp

Mexico

100

0

4.26

25 years

Oct 2004

Zinkgruvan

Lundin

Sweden

100

0

4.27

Life of mine

Dec 2004

Stratoni

Eldorado

Greece

100

0

4.14

Life of mine

Apr 2007

Minto

Capstone

Canada

100

100

4.10

315

Life of mine

Nov 2008

Cozamin

Capstone

Mexico

100

0

4.24

10 years

Apr 2007

Neves-Corvo

Lundin

Portugal

100

0

4.14

50 years

Jun 2007

Aljustrel

I’M SGPS

Portugal

100

0

4.06

50 years

Jun 2007

Keno Hill

Alexco

Canada

25

0

3.90

Life of mine

Oct 2008

Rosemont

Hudbay

US

100

100

3.90

450

Life of mine

Feb 2010

Loma de La Plata (Navidad)

Pan American

Argentina

12.5

0

4.00

Life of mine

Not finalised

777

Hudbay

Canada

100

100/50***

5.96

404

Life of mine

Aug 2012

Constancia

Hudbay

Peru

100

50

5.90

400

Life of mine

Aug 2012

Early deposit

Toroparu

Sandspring

Guyana

50

10

400

Life of mine

Nov 2013

Cotabambas

Panoro

Peru

100

25

5.90

450

Life of mine

Not finalised

Source: Silver Wheaton, Edison Investment Research. Note: *In the fourth quarter of 2015, SLW amended its silver purchase agreement with Glencore at Yauliyacu, such that the term of the agreement, which was set to expire in 2026, was extended to the life of mine; in addition, with effect from 1 January 2016, Glencore was obliged to deliver to SLW a per annum amount equal to the first 1.5Moz of payable silver produced at Yauliyacu plus 50% of any excess at a price that was increased by US$4.50/oz from the original agreement plus, if the market price of silver exceeds US$20/oz, 50% of the excess, to a maximum of US$10/oz. **SLW is entitled to 33.75% of silver production at Antamina until 140Moz have been delivered and 22.5% thereafter, for a 50-year term that can be extended in increments of 10 years at the company’s discretion. ***Silver Wheaton is entitled to acquire 100% of the life-of-mine gold production from Hudbay’s 777 mine until Hudbay’s Constancia project satisfies a completion test, or the end of 2016, whichever is the later, at which point Silver Wheaton’s share of gold production from 777 will be reduced to 50% for the remaining life of the mine.

Medium- and near-term outlook
Production

Official management guidance for FY16 is for gold production of 335,000oz (vs 305,000oz previously) owing to better than expected results in the first nine months of the year and expected production from Salobo and Sudbury in Q4. By contrast, attributable silver production for 2016 is now expected to be 30Moz (vs 32Moz previously) as a result of lower than expected results from Penasquito and San Dimas, partly offset by better than expected results from Antamina. On a silver-equivalent basis, however, it remains unchanged, at 55Moz (based on average LBMA gold and silver prices of US$1,260/oz and US$17.12/oz, respectively, for the first nine months of calendar 2016).

Over the next five years (including 2016), management estimates average annual production of approximately 330,000oz of gold and 31Moz of silver.

These compare with our medium-term forecasts, as follows:

Exhibit 6: Edison forecast SLW precious metals production

FY16

FY17

FY18

FY19

FY20

Silver production (Moz)

30.7

30.9

28.7

28.7

31.8

Gold production (koz)

326.0

335.1

290.6

329.9

322.6

Silver equivalent production (Moz)*

54.4

49.9

45.2

47.4

50.1

Source: Edison Investment Research. Note: *Calculated at Edison’s long-term metals price forecasts for FY17 and beyond (see our report Gold and other metals: Normalisation augurs well for exploration, published in October 2016).

General & administrative

SLW now forecasts non-stock general & administrative expenses in the range of US$31-32m for the full year (cf US$31-34m previously) – ie c US$8m per quarter – including additional legal costs relating to SLW’s dispute with the Canadian Revenue Agency. Investors should note that our financial forecasts in Exhibit 1 specifically exclude stock-based compensation costs.

FY16 risks and upside

In the first three quarters of the year, silver production attributable to Silver Wheaton was 22.8Moz (the equivalent of 7.6Moz per quarter, on average). For SLW to meet its guidance of 30.0Moz in FY16, production in Q416 would have to be 7.2Moz during the three-month period. While our estimate of production attributable to Silver Wheaton from San Dimas is conservative for Q416 in the order of 0.3Moz (see page 3), we are somewhat optimistic in our estimate of 3.0Moz of output from its ‘other’ assets cf an average of 2.7Moz in the first three quarters of the year. Again, while we recognise that 3.0Moz is optimistic, we believe it is achievable if all of the assets perform in tandem. Self-evidently, an optimistic estimate in the order of 0.3Moz of production from SLW’s ‘other’ assets approximately offsets a pessimistic estimate in the same order relating to San Dimas.

FY17

Edison has adjusted its FY17 forecasts to reflect our updated annual precious metals price forecasts, as set out in our report Gold and other metals: Normalisation augurs well for exploration, published in October 2016. In the wake of this adjustment, our basic EPS estimate for FY17 of 105c compares to an average consensus estimate of 91c within a range of 64-135c. Note that, if silver and gold prices remain at the current levels of US$16.40/oz and US$1,172/oz, respectively, at the time of writing, we estimate that basic EPS in FY17 will instead be 57c per share (all other things being equal).

Valuation

Excluding FY04 (part year) and FY08 (when 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 30.2x Edison FY16e or 28.3x consensus FY16e, currently – see Exhibit 8).

Exhibit 7: Silver Wheaton’s 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$1.28 in FY20, at Edison’s revised long-term precious metals prices (US$23.98/oz Ag and US$1,362/oz Au in FY20), implies a potential share value of US$33.09, or C$44.03, in that year.

In the meantime, from a relative perspective, it is notable that SLW is cheaper than its royalty/streaming ‘peers’ in at least 87% of the valuation measures used in Exhibit 8 and on multiples that are cheaper than the gold miners themselves in at least 48% of the same valuation measures, despite being associated with materially less operational and cost risk, in particular.

Exhibit 8: Silver Wheaton comparative valuation vs a sample of operating and royalty/streaming companies

P/E (x)

Yield (%)

P/CF (x)

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

Royalty companies

Franco-Nevada

62.7

51.6

1.5

1.5

22.3

21.2

Royal Gold

35.8

30.4

1.4

1.4

15.1

13.5

Sandstorm Gold

79.4

46.7

0.0

0.0

13.4

12.2

Osisko

41.3

37.5

1.1

1.2

26.2

24.4

Average

54.8

41.6

1.0

1.0

19.3

17.8

Silver Wheaton (Edison forecasts)

30.2

17.3

1.2

1.8

13.7

10.3

SLW (consensus)

28.3

19.9

1.2

1.7

13.3

11.1

Operators

Barrick

22.1

15.1

0.6

0.6

6.5

5.7

Newmont

19.0

17.5

0.4

0.8

6.7

6.5

Goldcorp

46.8

22.3

0.9

0.6

9.2

7.0

Newcrest

18.1

14.9

1.1

1.6

8.3

7.3

Kinross

27.6

16.0

0.0

0.0

4.2

3.4

Agnico-Eagle

61.7

36.4

0.9

1.0

11.3

9.9

Eldorado

38.9

18.8

0.1

0.5

14.6

8.8

Yamana

29.8

15.2

0.9

0.8

4.6

3.8

Randgold Resources

24.3

18.5

1.0

1.2

14.2

10.6

Average

32.0

19.4

0.6

0.8

8.8

7.0

Source: Bloomberg, Edison Investment Research. Note: Edison SLW FY17 forecasts assume precious metals prices of US$22.48/oz Ag and US$1,275/oz Au. Peers priced on 2 December 2016.

Potential future stream acquisitions

SLW estimates the size of the potential market open to it to be the 70% of silver production of c 870Moz in FY16 that is produced as a by-product of either gold or base metals mines, ie approximately 609Moz silver per year. This compares to SLW’s estimated production of 30.7Moz Ag in FY16, ie SLW estimates that it has penetrated only c 5.0% of its potential market.

While it is difficult/impossible to predict potential future stream acquisition targets with any degree of certainty, it is perhaps possible to highlight three that may be of interest to Silver Wheaton in due course and regarding which it already has strong, existing counterparty relationships:

The 75% silver stream at Penasquito that is currently not subject to any streaming arrangement.

The platinum group metal (PGM) by-product stream at Sudbury.

The 75% silver stream at Pascua-Lama that is currently not subject to any streaming arrangement (subject to permitting and development).

Financials

SLW had net debt of US$1,219.5m as at the end of September 2016 after US$161.6m of cash inflows from operations (equivalent to 36.7c/share). This compares with US$582m as at the end of June 2016, US$1,284.2m as at the end of March and US$1,362.7m as at the end of December 2015 and is consistent with SLW generating c US$100-150m per quarter from operating activities before financing and investing activities. Most recently, these investing activities involved the acquisition of an additional 25% of the gold output from the Salobo mine in Brazil for an immediate cash payment of US$800m, announced in August (see our note Going for gold, published on 30 August 2016). Otherwise, assuming the operational performance set out in Exhibit 1, we estimate that SLW’s net debt will be US$1,092.6m by the end of FY16 (equating to gearing of 22.1% and leverage of 18.1%), and that SLW will be substantially net debt free early in FY19, all other things being equal and contingent on it making no further major acquisitions (which is unlikely). 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$4,963.2m as at end-September 2016 and is forecast, by Edison, to be US$4,945.6m as at end-December 2016); and

interest should be no less than 3x covered by EBITDA (we estimate that net interest will be 23.2x covered in FY16).

Note that the C$191.7m letter of guarantee that SLW has posted re 50% of the disputed taxes relating to its dispute with the CRA (see below) has been determined under a separate agreement and is therefore specifically excluded from calculations regarding SLW’s banking covenants. In the meantime, SLW’s revolving debt facility attracts an interest rate of Libor plus 120-220bp.

Canadian Revenue Agency (CRA)

There have been no further substantive developments regarding SLW’s dispute with the CRA since our update note of 15 February 2016.

SLW notes that the CRA’s position is that the transfer pricing provisions of the Income Tax Act (Canada) in relation to income earned by SLW’s foreign subsidiaries should apply “such that the income of Silver Wheaton subject to tax in Canada should be increased by an amount equal to substantially all of the income earned outside of Canada by the Company’s foreign subsidiaries for the 2005-2010 taxation years”. Should this interpretation be upheld, we would expect it to have potentially profound consequences for Canada’s status as an investment destination for suppliers of finance and capital to overseas destinations in general (ie not just for the mining industry).

Otherwise, any further developments will be communicated to investors as and when they occur.

Exhibit 9: 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

867,922

1,122,410

Cost of Sales

(117,489)

(139,352)

(151,097)

(190,214)

(245,055)

(289,976)

Gross Profit

732,071

567,120

469,079

458,473

622,867

832,434

EBITDA

 

 

701,232

531,812

431,219

426,236

584,258

793,825

Operating Profit (before amort. and except.)

600,003

387,659

271,039

227,655

287,335

487,766

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)

(5,265)

0

Operating Profit

600,791

376,457

201,058

(161,343)

282,070

487,766

Net Interest

0

(6,083)

(2,277)

(4,090)

(25,209)

(25,458)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

262,126

462,308

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

256,861

462,308

Tax

(14,755)

5,121

1,045

3,391

1,146

0

Profit After Tax (norm)

586,036

375,495

267,977

222,880

258,007

462,308

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

258,007

462,308

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

430.2

440.6

EPS - normalised (c)

 

 

166

106

75

53

60

105

EPS - normalised and fully diluted (c)

 

165

105

74

53

60

105

EPS - (IFRS) (c)

 

 

166

106

56

(41)

60

105

Dividend per share (c)

35

45

26

20

21

33

Gross Margin (%)

86.2

80.3

75.6

70.7

71.8

74.2

EBITDA Margin (%)

82.5

75.3

69.5

65.7

67.3

70.7

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

70.6

54.9

43.7

35.1

33.1

43.5

BALANCE SHEET

Fixed Assets

 

 

2,403,958

4,288,557

4,309,270

5,526,335

6,064,000

5,829,941

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

6,031,802

5,797,743

Tangible Assets

1,347

5,670

5,427

12,315

12,430

12,430

Investments

121,377

40,801

32,872

19,776

19,768

19,768

Current Assets

 

 

785,379

101,287

338,493

105,876

4,324

327,366

Stocks

966

845

26,263

1,455

1,946

2,517

Debtors

6,197

4,619

4,132

1,124

2,378

3,075

Cash

778,216

95,823

308,098

103,297

0

321,774

Other

0

0

0

0

0

0

Current Liabilities

 

 

(49,458)

(21,134)

(16,171)

(12,568)

(259,708)

(30,504)

Creditors

(20,898)

(21,134)

(16,171)

(12,568)

(26,074)

(30,504)

Short term borrowings

(28,560)

0

0

0

(233,634)

0

Long Term Liabilities

 

 

(32,805)

(1,002,164)

(1,002,856)

(1,468,908)

(863,054)

(863,054)

Long term borrowings

(21,500)

(998,136)

(998,518)

(1,466,000)

(859,000)

(859,000)

Other long term liabilities

(11,305)

(4,028)

(4,338)

(2,908)

(4,054)

(4,054)

Net Assets

 

 

3,107,074

3,366,546

3,628,736

4,150,735

4,945,562

5,263,749

CASH FLOW

Operating Cash Flow

 

 

720,209

540,597

434,582

435,783

590,762

796,988

Net Interest

0

(6,083)

(2,277)

(4,090)

(25,209)

(25,458)

Tax

(725)

(154)

(204)

(208)

2,292

0

Capex

(641,976)

(2,050,681)

(146,249)

(1,791,275)

(834,596)

(72,000)

Acquisitions/disposals

0

0

0

0

0

0

Financing

12,919

58,004

6,819

761,824

627,274

0

Dividends

(123,852)

(160,013)

(79,775)

(68,593)

(90,454)

(144,121)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

270,069

555,408

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

1,092,634

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

1,092,634

537,226

Source: Silver Wheaton sources, Edison Investment Research

 

Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Silver Wheaton and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers’ exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Edison, the investment intelligence firm, is the future of investor interaction with corporates. Our team of over 100 analysts and investment professionals work with leading companies, fund managers and investment banks worldwide to support their capital markets activity. We provide services to more than 400 retained corporate and investor clients from our offices in London, New York, Frankfurt, Sydney and Wellington. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison and is not regulated by the Australian Securities and Investment Commission. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2016 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Silver Wheaton and prepared and issued by Edison for publication globally. All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Aus and any access to it, is intended only for "wholesale clients" within the meaning of the Australian Corporations Act. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US relies upon the "publishers’ exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. This document is provided for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research. Edison has a restrictive policy relating to personal dealing. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (ie without taking into account the particular financial situation or goals of any person). 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Germany

London +44 (0)20 3077 5700

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United Kingdom

New York +1 646 653 7026

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US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

245 Park Avenue, 39th Floor

10167, New York

US

Sydney +61 (0)2 9258 1161

Level 25, Aurora Place

88 Phillip St, Sydney

NSW 2000, Australia

Wellington +64 (0)48 948 555

Level 15, 171 Featherston St

Wellington 6011

New Zealand

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