What a difference a quarter makes

Silver Wheaton 29 March 2017 Update
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Silver Wheaton

What a difference a quarter makes

Q4/FY16 & FY17 by quarter

Metals & mining

 

29 March 2017

Price

C$27.49

Market cap

C$12bn

C$1.3366/US$

Net debt (US$m) at 31 December 2016

1,068.7

Shares in issue

441.5m

Free float

100%

Code

SLW

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(0.8)

15.8

20.5

Rel (local)

(0.2)

14.9

4.2

52-week high/low

C$39.7

C$20.6

Business description

Silver Wheaton is the world’s pre-eminent pure precious metals streaming company, with c 30 high-quality, 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

AGM

May 2017

Q117 results

May 2017

Q2 dividend declared

May 2017

Analyst

Charles Gibson

+44 (0)20 3077 5724

Silver Wheaton is a research client of Edison Investment Research Limited

A mixed performance at Silver Wheaton’s (SLW) silver division was trumped by an exceptional performance at its gold division in Q416, such that the company’s financial results materially outperformed our prior estimates for Q416 as well as SLW’s own guidance at the time of its Q316 results. As a consequence, sales and cash flows derived by SLW from gold operations exceeded those from silver for the first time ever.

Year end

Revenue (US$m)

PBT* (US$m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

12/15

648.7

223.6

53

20

51.9

0.7

12/16

891.6

269.8

62

21

44.3

0.8

12/17e

879.7

266.6

60

26

45.8

0.9

12/18e

973.0

391.1

89

29

30.9

1.1

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

Inventories and prices see-saw in Q4 vs Q3

In addition to its quarterly results, SLW’s FY16 results were characterised by record silver and gold sales volumes and record revenues. Moreover, in contrast to its Q316 results, inventories were drawn down, rather than increasing (although the full benefit of this was masked by falling precious metals prices in Q4 in the aftermath of the US presidential election). As at 31 December, payable ounces attributable to Silver Wheaton produced but not yet delivered amounted to 3.2Moz silver and 61,700oz gold (cf 3.8Moz silver and 63,300oz gold as at end-September), equating to 1.25 months and 2.1 months of annual silver and gold production, respectively, or 1.6 months in aggregate (cf 1.9 months as at end-September) – slightly below SLW’s target level of two months.

Name change to reflect new reality

In order to better reflect Silver Wheaton’s increasingly gold-rich asset base, the board of directors has recommended that the company change its name to Wheaton Precious Metals Corp at its shareholder meeting in May. Assuming that the change is approved, the company also plans to change its TSX and NYSE ticker symbols from SLW to WPM and its web domain to www.wheatonpm.com.

Valuation: 26.3% 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$36.66, or C$49.00 (vs US$33.09, or C$44.03, previously), in FY20 (at average precious metals prices of US$23.98/oz Ag and US$1,362/oz Au), implying a 26.3% pa total internal rate of return for investors in US dollar terms over the next four years to 2020, inclusive. 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 83% of measures considered, and the miners themselves in at least 41% of measures, despite being associated with materially less operating and cost risk (see Exhibit 8). Additional potential upside exists in the form of the optionality provided by the expansion of major assets, such as Salobo (see pages 5 & 7), and the development of major assets such as Pascu-Lama and Rosemont.

Q416 in perspective

For the second quarter in succession, Silver Wheaton’s results were characterised by a mixed performance at its silver division (eg better than expected production at Antamina, but worse than expected at Penasquito), but an unequivocally positive performance at its gold division, wherein all assets outperformed our expectations. In addition, whereas Q316 results were adversely affected by an under-sale of metal relative to production and a build-up of inventory, this effect was reversed in Q416 with an over-sale (especially in the gold division) and a consequent draw down in inventory to near target levels. As a result of both the outperformance in the gold division and the inventory draw-down, SLW’s financial results materially outperformed our prior estimates during the quarter, as well as exceeding our forecasts for FY16 (albeit by a smaller margin) and SLW’s own guidance at the time of its Q316 results of 30Moz and 335,000oz of silver and gold production, respectively. A summary of SLW’s Q4 results, as calculated by Edison, relative to both Q3 and Edison’s prior expectations is as follows:

Exhibit 1: Silver Wheaton FY16 forecast, by quarter*

US$000s (unless otherwise stated)

Q116

Q216

Q316

Q416e

Q416

Chg** (%)

Diff*** (%)

FY16e

FY16

Diff**** (%)

Silver production (koz)

7,570

7,581

7,651

7,911

7,589

-0.8

-4.1

30,713

30,379

-1.1

Gold production (oz)

64,942

70,249

109,193

81,626

107,332

-1.7

31.5

326,010

353,703

8.5

AgE production (koz)

12,733

12,852

15,084

13,742

15,218

0.9

10.7

54,355

56,169

3.3

Silver sales (koz)

7,552

7,142

6,122

7,911

7,506

22.6

-5.1

28,727

28,322

-1.4

Gold sales (oz)

65,258

70,757

85,063

81,626

108,931

28.1

33.5

302,704

330,009

9.0

AgE sales (koz)

12,759

12,451

11,913

13,742

15,249

28.0

11.0

50,800

52,388

3.1

Avg realised Ag price (US$/oz)

14.68

17.18

19.53

17.09

16.95

-13.2

-0.8

17.00

16.96

-0.2

Avg realised Au price (US$/oz)

1,175

1,267

1,336

1,221

1,205

-9.8

-1.3

1,254

1,246

-0.6

Avg realised AgE price (US$/oz)

14.70

17.06

19.57

17.09

16.95

-13.4

-0.8

17.08

17.02

-0.4

Avg Ag cash cost (US$/oz)

4.14

4.46

4.51

4.55

4.59

1.8

0.9

4.41

4.42

0.2

Avg Au cash cost (US$/oz)

389

401

390

395

389

-0.3

-1.5

394

391

-0.8

Avg AgE cash cost (US$/oz)

4.44

4.84

5.10

4.97

5.04

-1.2

1.4

4.84

4.86

0.4

 

 

 

Sales

187,511

212,351

233,204

234,856

258,491

10.8

10.1

867,922

891,557

2.7

Cost of sales

 

 

 

Cost of sales, excluding depletion

56,636

60,208

60,776

68,238

77,617

27.7

13.7

245,055

254,434

3.8

Depletion

71,344

75,074

73,919

76,587

88,365

19.5

15.4

296,923

308,702

4.0

Total cost of sales

127,980

135,282

134,695

144,825

165,983

23.2

14.6

541,979

563,136

3.9

Earnings from operations

59,531

77,069

98,509

90,031

92,509

-6.1

2.8

325,944

328,421

0.8

Expenses and other income

 

 

 

- General and administrative

10,844

9,959

9,513

8,293

4,123

-56.7

-50.3

38,609

34,439

-10.8

- Foreign exchange (gain)/loss

0

0

0

0

N/A 

N/A 

0

N/A 

- Net interest paid/(received)

6,932

4,590

6,007

7,680

6,664

10.9

-13.2

25,209

24,193

-4.0

- Other (income)/expense

1,160

1,599

1,380

1,126

843

-38.9

-25.1

5,265

4,982

-5.4

Total expenses and other income

18,936

16,148

16,900

17,099

11,630

-31.2

-32.0

69,083

63,614

-7.9

Earnings before income taxes

40,595

60,921

81,609

72,932

80,879

-0.9

10.9

256,861

264,807

3.1

Income tax expense/(recovery)

(384)

615

(1,377)

0

(184)

-86.6

N/A

(1,146)

(1,330)

16.1

Marginal tax rate (%)

(0.9)

1.0

(1.7)

0.0

(0.2)

-88.2

N/A

(0.4)

(0.5)

25.0

Net earnings

40,979

60,306

82,986

72,932

81,063

-2.3

11.1

258,007

266,137

3.2

Avg no. shares in issue (000s)

402,952

436,726

440,635

440,635

440,635

0.0

0.0

430,237

430,461

0.1

Basic EPS (US$)

0.10

0.14

0.19

0.17

0.18

-5.3

5.9

0.60

0.62

3.3

Diluted EPS (US$)

0.10

0.14

0.19

0.17

0.18

-5.3

5.9

0.60

0.62

3.3

Source: Silver Wheaton, Edison Investment Research. Note: *Excluding US$71m Sudbury impairment; **Q416 vs Q316; ***Q416 actual vs Q416 estimate; ****FY16 actual vs FY16 estimate.

Of note in the Q416 results is the decline in general & administrative expenses, which was occasioned, for the most part, by a US$3m reversal of a prior charge relating to management performance share units (PSUs).

From an operational perspective, key features of the quarter were as follows:

Capacity utilisation across both of Salobo’s 12Mtpa lines reached 98%, resulting in record quarterly production in Q416 and record monthly production in December.

A continuation of lower mined grades at Penasquito as a result of mine sequencing.

Lower throughput and grades at Sudbury in addition to disruption caused by mine redesign and remediation work.

Higher grades at Minto and, to a lesser extent, better recoveries at 777 (both of which contribute to SLW’s gold ‘other’ business segment).

Sudbury impairment

Sudbury’s operator, Vale, has recently completed a study on the constituent mines in an effort to improve operating margins. In essence, the conclusion of the study was to axe marginal production, with the result that recoverable gold in the 2017-2032 mine plan is now calculated to be 20% less than previously estimated and giving rise to an impairment in the value of the stream (as calculated by Silver Wheaton) of US$71m.

FY17 outlook

Silver Wheaton has provided the market with production guidance of 28Moz of silver and 340,000oz of gold for FY17. Edison’s FY17 production forecasts vary slightly compared to Silver Wheaton’s, as follows:

Exhibit 2: Silver Wheaton FY17 production guidance

Asset

SLW estimated output

(koz)

Edison estimated output

(koz)

Comment

Silver

Penasquito

5,250

5,250

San Dimas

4,000

3,258

Edison assumes strike will last 4.5 months vs SLW 3mth est.

Antamina

6,000

6,000

Constancia

2,500

2,446

Other

10,250

9,564

Cessation of Cozamin stream in April 2017.

Total

28,000

26,518

Edison estimate 5.2% below SLW guidance.

Gold

Salobo

245

241

Sudbury

40

40

Constancia

10

14

Other

45

41

Assumes 21koz from Minto and 20koz from 777.

Total

340

335

Edison estimate 1.2% below SLW guidance.

Source: Silver Wheaton. Note: Totals may not add up owing to rounding.

San Dimas

As in Q316, production at San Dimas in Q4 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. In response, Primero (the mine’s operator) has begun reducing the scale and complexity of the mine, including significant decreases to the workforce. However, on 15 February, unionised employees initiated strike action, which has resulted in the complete stoppage of all mining and milling activities to date.

Silver Wheaton’s guidance (above) assumes that the strike at San Dimas will last for three months (ie approximately 1.5mths in Q1 and 1.5mths in Q2). This compares with Edison’s forecast of 4.5mths. However, investors should note that Edison’s forecast should not be taken as reflecting any unique insight or proprietary knowledge about the nature and duration of workforce strikes in Mexico, so much as a device for demonstrating the effect of the strike for an entire quarter (ie Q217 in Exhibit 5) on Silver Wheaton’s earnings.

Since Primero articulated material uncertainty surrounding its ability to continue as a going concern in its Q416 results’ Management Discussion & Analysis (MD&A), its lenders have since agreed in principle to a six month extension of the maturity of its US$75m revolving credit facility (RCF), from May to November 2017, which will ultimately provide Primero with greater flexibility to replace the RCF with a longer-dated term loan. The proposed amended credit agreement would exclude financial covenants in the amended RCF during this six month period to support the San Dimas restart plan. In the meantime, Silver Wheaton is supporting Primero by guaranteeing amounts payable under the RCF to ensure the latter’s ability to meet its financial obligations and return the San Dimas mine to profitability. Primero expects the documentation formalising this extension and the guarantee to be completed imminently. Note that since Q112, San Dimas’s production attributable to Silver Wheaton has been, on average, 1,543koz silver per quarter. The carrying value of Silver Wheaton’s streaming agreement relating to San Dimas is US$140.6m.

Sudbury

Sudbury will transition to a single furnace in 2017. To achieve this, Vale will take one of the existing furnaces offline in H117. It will then rebuild and enlarge it, prior to returning it to operation in H217, when the remaining furnace will be powered down. In addition, subsequent to the quarter end, Vale announced that the Stobie mine (representing c 5% of Silver Wheaton’s attributable production from Sudbury) will be placed on care and maintenance later in 2017, owing to a number of factors, including declining ore grades and, more recently, seismicity issues that have restricted production below the 3,000ft (910m) level. In mitigation however, Vale has embarked on a major exploration programme at Sudbury, which is designed to expand and extend the life of the asset, and from the success of which, Silver Wheaton would be an automatic beneficiary.

General & administrative expenses

SLW is forecasting non-stock general & administrative expenses in the range of US$33-35m for the full year– ie c US$8.5m per quarter – including additional legal costs relating to SLW’s dispute with the Canadian Revenue Agency. Investors should note that our financial forecasts in Exhibits 5 and 9 exclude stock-based compensation costs.

Ounces produced but not yet delivered – aka inventory

Compared to a 9.9% average historical under-sale of silver relative to production and a 10.0% historical under-sale of gold, production and sales of both silver and gold were closely aligned in Q416 – demonstrating, among other things, the traditional ‘flush through’ effect in the final quarter:

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

Source: Edison Investment Research, Silver Wheaton

As at 31 December, payable ounces attributable to Silver Wheaton produced but not yet delivered amounted to 3.2Moz silver and 61,700oz gold (cf 3.8Moz silver and 63,300oz gold as at end-September), equating to 1.25 months and 2.1 months of annual silver and gold production, respectively (cf 1.5 months and 2.3 months of forecast FY16 production, as at end-September), or 1.6 months in aggregate (cf 1.9 months as at end-September) – slightly below SLW’s target level of two months.

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 the mining industry itself, 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.

Medium-term outlook
Production

Over the next five years, management estimates average annual production of approximately 29Moz of silver and 340,000oz of gold. These compare with Edison’s medium-term forecasts, as follows:

Exhibit 4: Edison forecast SLW precious metals production

FY17e

FY18e

FY19e

FY20e

Silver production (Moz)

26.5

28.7

28.7

31.8

Gold production (koz)

335

291

330

323

Source: Edison Investment Research.

In the immediate future, silver output from Penasquito attributable to Silver Wheaton is expected to recover back to its steady-state level of 7Moz as grades improve once again with mine sequencing. From 2019 onwards, it will also benefit from the development of the Pyrite Leach Project, which will add an additional 1.0-1.5Moz of silver attributable to SLW pa.

Apart from exploration success however, the other major source of organic production growth for Silver Wheaton is Salobo (which already accounts for 72% of Silver Wheaton’s gold division’s output). The operator, Vale, is in the process of studying expansion scenarios and is deploying four drill rigs to test the deposit at depth. Given the open-ended nature of the deposit and depending on the work that Vale does and the decision that it makes, any expansion could add as much as 100% to gold output attributable to Silver Wheaton from Salobo per year – albeit at the cost of an additional payment from SLW. Mill throughput at the Salobo mine is currently running at 98% of its 24Mtpa nameplate capacity. If throughput capacity is expanded within a predetermined period and depending on the grade of material processed, SLW will be required to make an additional payment to Vale regarding its 75% gold stream. The additional payments range in size from US$113m if throughput is expanded beyond 28Mtpa by 1 January 2036, to US$953m if throughput is expanded beyond 40Mtpa by 1 January 2021.

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 with SLW’s production of 30.4Moz Ag in FY16 – ie SLW estimates that it has penetrated a mere 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 four that may be of interest to Silver Wheaton in due course and regarding which it already has strong, existing counterparty relationships:

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

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

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

The 50% of the gold output at Constancia that is currently not subject to any streaming arrangement.

FY17 by quarter

Edison’s updated basic EPS estimate for FY17 of 60c (see Exhibit 5 for revisions) compares to an average consensus estimate of 66c within a range 38-80c (cf a consensus of 91c within a range of 64-135c in December). However, it also compares with our forecast of 57c in December in the event that silver and gold prices remained at their then levels of US$16.40/oz and US$1,172/oz, respectively. Broken down by quarter, our estimates are as follows:

Exhibit 5: Silver Wheaton FY17 forecast, by quarter*

US$000s (unless otherwise stated)

Q117e

Q217e

Q317e

Q417e

FY17e

(current)

FY17e

(previous)

FY17e

(previous at spot)

FY18e

Silver production (koz)

6,467

5,815

7,118

7,118

26,518

30,939

30,939

28,701

Gold production (oz)

83,765

83,765

83,765

83,765

335,062

335,062

335,062

290,642

AgE production (koz)

12,564

12,019

13,322

13,322

50,269

49,940

54,883

45,166

Silver sales (koz)

6,467

5,815

7,118

7,118

26,518

30,939

30,939

28,701

Gold sales (oz)

83,765

83,765

83,765

83,765

335,062

335,062

335,062

290,642

AgE sales (koz)

12,564

12,019

13,322

13,322

50,269

49,940

54,883

45,166

Avg realised Ag price (US$/oz)

17.41

17.53

17.53

17.53

17.50

22.48

16.40

21.54

Avg realised Au price (US$/oz)

1,218

1,248

1,248

1,248

1,241

1,275

1,172

1,220

Avg realised AgE price (US$/oz)

17.41

17.53

17.53

17.53

17.50

22.48

16.40

21.54

Avg Ag cash cost (US$/oz)

4.66

4.70

4.63

4.63

4.66

5.09

4.67

5.25

Avg Au cash cost (US$/oz)

395

395

395

395

395

395

395

396

Avg AgE cash cost (US$/oz)

5.03

5.03

4.96

4.96

5.09

5.81

5.05

5.89

Sales

214,611

206,479

229,321

229,321

879,732

1,122,410

900,087

973,039

Cost of sales

Cost of sales, excluding depletion

63,204

60,451

66,084

66,084

255,822

289,976

277,103

265,965

Depletion

74,428

73,705

75,151

75,151

298,435

306,059

306,059

265,935

Total cost of sales

137,632

134,156

141,235

141,235

554,258

596,035

583,161

531,900

Earnings from operations

76,979

72,323

88,086

88,086

325,474

526,375

316,926

441,138

Expenses and other income

- General and administrative

8,500

8,500

8,500

8,500

34,000

38,609

38,609

34,000

- Foreign exchange (gain)/loss

0

- Net interest paid/(received)

6,225

6,225

6,225

6,225

24,901

25,458

25,458

15,995

- Other (income)/expense

843

843

843

843

3,372

Total expenses and other income

15,568

15,568

15,568

15,568

62,273

64,067

64,067

49,995

Earnings before income taxes

61,411

56,755

72,518

72,518

263,202

462,308

252,858

391,143

Income tax expense/(recovery)

0

0

0

0

0

0

Marginal tax rate (%)

0.0

0.0

0.0

0.0

0.0

0.0

0.0

0.0

Net earnings

61,411

56,755

72,518

72,518

263,202

462,308

252,858

391,143

Ave. no. shares in issue (000s)

440,635

440,635

440,635

440,635

440,635

440,635

440,635

440,635

Basic EPS (US$)

0.14

0.13

0.16

0.16

0.60

1.05

0.57

0.89

Diluted EPS (US$)

0.14

0.13

0.16

0.16

0.60

1.05

0.57

0.89

Source: Silver Wheaton, Edison Investment Research. Note: *Forecasts exclude stock-based compensation costs.

Edison’s financial forecasts for Q217 are notable for the fact that they assume the continuation of the strike at San Dimas for the entire quarter (vs half of the first quarter) and therefore provide investors with an indication of the financial cost of the strike to Silver Wheaton on a quarterly basis.

Edison’s financial forecasts for FY18 are also notable for the fact that our production forecasts are at or near the bottom of the range (especially for gold), as a result of which they therefore almost exclusively demonstrate Silver Wheaton’s operational gearing to (in this case) a normalisation of the silver price relative to the gold price from its current, unprecedented level:

Exhibit 6: Gold price as a multiple of silver price, 1792-2016

Source: Edison Investment Research (underlying data South African Chamber of Mines and www.kitco.com)

Valuation and sensitivities

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 26.5x current year basic EPS (cf 45.8x Edison FY17e and 30.9x FY18e – 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$1.38 in FY20 (at Edison’s average long-term precious metals prices of US$23.98/oz Ag and US$1,362/oz Au in FY20), implies a potential share value of US$36.66, or C$49.00, in that year.

Currently, Edison makes no provision for either future expansion at Salobo or related expansion payments in its long-term forecasts. However, in the event that Salobo were to be expanded from 24Mtpa to 48Mtpa by the addition of a further two 12Mtpa processing lines by 1 January 2021 – thereby attracting the maximum incremental payment from Silver Wheaton to Vale – we estimate that it would increase our estimate of SLW’s earnings in FY20 by a material US$0.19/share. This, in turn, would increase our forecast value per share for the company to US$41.67, implying an internal rate of return to investors buying Silver Wheaton shares currently at C$27.51, equivalent to 29.2% pa in US dollar terms over four years.

In the meantime, from a relative perspective, it is notable that SLW is cheaper than its royalty/streaming ‘peers’ on at least 83% of the valuation measures used in Exhibit 8 on an individual company basis (ie in 20 out of 24 measures) and on multiples that are cheaper than the miners themselves in at least 41% of the same valuation measures (ie 37 out of 90 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

69.9

58.3

1.3

1.4

25.4

23.1

Royal Gold

43.8

39.1

1.4

1.4

16.2

14.8

Sandstorm Gold

93.1

79.3

0.0

0.0

15.9

15.1

Osisko

49.6

46.2

1.1

1.1

29.5

27.4

Average

64.1

55.7

1.0

1.0

21.7

20.1

Silver Wheaton (Edison forecasts)

34.5

23.2

1.3

1.4

16.0

13.8

SLW (consensus)

31.4

27.5

1.4

1.4

15.7

14.6

Gold producers

Barrick

22.6

21.7

0.6

0.6

7.4

8.0

Newmont

32.7

27.6

0.8

0.8

8.5

7.7

Goldcorp

43.8

32.5

0.5

0.5

10.4

9.5

Newcrest

23.1

18.4

1.0

1.5

10.1

8.8

Kinross

103.9

39.4

0.0

0.0

4.5

4.2

Agnico-Eagle

116.8

62.2

0.9

0.9

14.1

12.6

Eldorado

35.9

22.1

0.3

0.2

13.6

9.0

Yamana

98.9

16.8

1.1

1.6

5.3

3.6

Randgold Resources

27.6

22.7

2.0

2.2

14.8

12.9

Average

56.2

29.3

0.8

0.9

9.9

8.5

Silver producers

Hecla

33.2

28.4

0.2

0.2

9.5

8.9

Pan American

33.9

21.7

0.5

0.6

12.3

9.6

Coeur Mining

20.8

15.3

0.0

0.0

7.3

5.5

First Majestic

74.2

33.9

0.0

0.0

12.2

9.0

Hocschild

37.3

19.6

1.3

1.9

6.1

5.1

Fresnillo

32.6

25.0

1.4

1.9

18.0

13.6

Average

38.7

24.0

0.6

0.8

10.9

8.6

Source: Bloomberg, Edison Investment Research. Note: Peers priced on 24 March 2017.

Financials

As at 31 December, SLW had US$124.3m in cash and US$1,193.0m of debt outstanding under its US$2bn revolving credit facility (RCF), such that it had net debt of US$1,068.7m overall after US$175m of (US$0.40/share) of operating cash flows and a calculated US$150.8m of net cash inflows. Relative to the company’s equity, this level of net debt equates to a financial gearing (net debt/equity) ratio of 21.6% and a leverage (net debt/[net debt+equity]) ratio of 17.8%. It also compares with a net debt position of US$1,219.5m as at the end of September 2016 and US$1,362.7m as at the end of December 2015 and is consistent with SLW generating c US$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 Exhibits 5 and 9, we estimate that SLW’s net debt position will decline organically, to US$686.5m by the end of FY17 (equating to gearing of 13.5% and leverage of 11.9%), 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 by its banking covenants that:

net debt should be no more than 0.75x tangible net worth (which was US$4,940.0m as at end-December 2016 and is forecast, by Edison, to be US$5,089.6m as at end-December 2017); and

interest should be no less than 3x covered by EBITDA (we estimate that net interest will be 23.7x covered in FY17).

On 27 February, the term of the revolving term loan was extended, such that it now matures on 27 February 2022.

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 to the mining industry).

Earlier this month, Silver Wheaton’s CEO, Randy Smallwood, was quoted as saying that the company is willing to settle its tax dispute with the CRA via a payment of C$5-10m “with gritted teeth” but still believes no payment should be required. As such, the C$5-10m quoted reflects no admission or error, but rather an appreciation of the costs involved in going to a full trial and also of the effect that the issue is having on SLW’s share price.

In the meantime, Silver Wheaton is approximately halfway through the case ‘discovery process’ with the CRA, designed to provide both sides with the opportunity to arrive at an out-of-court settlement before formal proceedings commence. This discovery process is likely to end in July 2017. Any potential settlement therefore is likely to occur shortly after the discovery process. Otherwise, however, the company has stated that it is willing to go to trial if a ‘principled’ settlement is not possible (which is likely to be towards the middle of 2018).

Exhibit 9: Financial summary

US$000s

2012

2013

2014

2015

2016

2017e

2018e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

849,560

706,472

620,176

648,687

891,557

879,732

973,039

Cost of Sales

(117,489)

(139,352)

(151,097)

(190,214)

(254,434)

(255,822)

(265,965)

Gross Profit

732,071

567,120

469,079

458,473

637,123

623,910

707,073

EBITDA

 

 

701,232

531,812

431,219

426,236

602,684

589,910

673,073

Operating Profit (before amort. and except.)

600,003

387,659

271,039

227,655

293,982

291,474

407,138

Intangible Amortisation

0

0

0

0

0

0

0

Exceptionals

0

0

(68,151)

(384,922)

(71,000)

0

0

Other

788

(11,202)

(1,830)

(4,076)

(4,982)

(3,372)

0

Operating Profit

600,791

376,457

201,058

(161,343)

218,000

288,102

407,138

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,901)

(15,995)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

269,789

266,574

391,143

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

193,807

263,202

391,143

Tax

(14,755)

5,121

1,045

3,391

1,330

0

0

Profit After Tax (norm)

586,036

375,495

267,977

222,880

266,137

263,202

391,143

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

195,137

263,202

391,143

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

430.5

440.6

440.6

EPS - normalised (c)

 

 

166

106

75

53

62

60

89

EPS - normalised and fully diluted (c)

 

165

105

74

53

62

60

89

EPS - (IFRS) (c)

 

 

166

106

56

(41)

45

60

89

Dividend per share (c)

35

45

26

20

21

26

29

Gross Margin (%)

86.2

80.3

75.6

70.7

71.5

70.9

72.7

EBITDA Margin (%)

82.5

75.3

69.5

65.7

67.6

67.1

69.2

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

70.6

54.9

43.7

35.1

33.0

33.1

41.8

BALANCE SHEET

Fixed Assets

 

 

2,403,958

4,288,557

4,309,270

5,526,335

6,025,227

5,798,792

5,604,857

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

5,948,443

5,722,008

5,528,073

Tangible Assets

1,347

5,670

5,427

12,315

12,163

12,163

12,163

Investments

121,377

40,801

32,872

19,776

64,621

64,621

64,621

Current Assets

 

 

785,379

101,287

338,493

105,876

128,092

510,494

969,531

Stocks

966

845

26,263

1,455

1,481

1,579

1,747

Debtors

6,197

4,619

4,132

1,124

2,316

2,410

2,666

Cash

778,216

95,823

308,098

103,297

124,295

506,504

965,118

Other

0

0

0

0

0

0

0

Current Liabilities

 

 

(49,458)

(21,134)

(16,171)

(12,568)

(19,057)

(25,460)

(26,460)

Creditors

(20,898)

(21,134)

(16,171)

(12,568)

(19,057)

(25,460)

(26,460)

Short term borrowings

(28,560)

0

0

0

0

0

0

Long Term Liabilities

 

 

(32,805)

(1,002,164)

(1,002,856)

(1,468,908)

(1,194,274)

(1,194,274)

(1,194,274)

Long term borrowings

(21,500)

(998,136)

(998,518)

(1,466,000)

(1,193,000)

(1,193,000)

(1,193,000)

Other long term liabilities

(11,305)

(4,028)

(4,338)

(2,908)

(1,274)

(1,274)

(1,274)

Net Assets

 

 

3,107,074

3,366,546

3,628,736

4,150,735

4,939,988

5,089,551

5,353,654

CASH FLOW

Operating Cash Flow

 

 

720,209

540,597

434,582

435,783

608,503

592,748

673,650

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,901)

(15,995)

Tax

(725)

(154)

(204)

(208)

28

0

0

Capex

(641,976)

(2,050,681)

(146,249)

(1,791,275)

(805,472)

(72,000)

(72,000)

Acquisitions/disposals

0

0

0

0

0

0

0

Financing

12,919

58,004

6,819

761,824

595,140

0

0

Dividends

(123,852)

(160,013)

(79,775)

(68,593)

(78,708)

(113,638)

(127,041)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

295,298

382,209

458,614

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

1,068,705

686,496

HP finance leases initiated

0

0

0

0

0

0

0

Other

0

(12,139)

(1,003)

(5,724)

(1,300)

0

0

Closing net debt/(cash)

 

 

(728,156)

902,313

690,420

1,362,703

1,068,705

686,496

227,882

Source: Silver Wheaton sources, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 2017 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). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. 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 2017 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). As such, it should not be relied upon in making an investment decision. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2017. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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