Silver Wheaton — Update 18 April 2016

Metals & Mining

Silver Wheaton

Buying future growth

Bought deal detail

Metals & mining

18 April 2016

Price	C$21.49
Market cap	C$9.4bn
C$1.2860/US$
Net debt (US$m) at end-December 2015		1,363

Shares in issue*	438.5m
*Post-bought deal.
Free float	100%
Code	SLW

Primary exchange	TSX
Secondary exchange	NYSE

Share price performance

%	1m	3m	12m
Abs	(3.0)	35.2	(8.5)
Rel (local)	(4.7)	19.7	3.6

52-week high/low

C$24.82

C$14.76

Business description

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

Next events

Q1 results	9 May 2016
Second quarterly dividend payment	9 May 2016

Analysts

Charles Gibson	+44 (0)20 3077 5724
Tom Hayes	+44 (0)20 3077 5725

mining@edisongroup.com

Edison profile page

Silver Wheaton is a research client of Edison Investment Research Limited

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

Year end	Revenue (US$m)	PBT* (US$m)	EPS* (c)	DPS (c)	P/E (x)	Yield (%)
12/14	620.2	268.8	75	26	22.3	1.6
12/15	648.7	223.6	53	20	31.5	1.2
12/16e	835.3	293.4	68	25	24.6	1.5
12/17e	1,091.5	584.2	133	36	12.6	2.2

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

An additional 38.1m shares in issue

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

Extinction of net debt in the foreseeable future

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

Valuation: 42% IRR over four years

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

FY16 by quarter

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

Exhibit 1: Silver Wheaton FY16 forecasts, by quarter*

US$000s (unless otherwise stated)	FY15*	Q116	Q216	Q316	Q416e	FY16	FY17
Silver production (koz)	30,717	8,373	8,373	8,373	8,373	33,490	30,939
Gold production (oz)	228,764	63,126	63,126	63,126	63,126	252,504	254,788
AgE production (koz)	47,697	13,412	13,397	13,169	13,169	53,146	45,134

Silver sales (koz)	26,566	8,373	8,373	8,373	8,373	33,490	30,939
Gold sales (oz)	202,349	63,126	63,126	63,126	63,126	252,504	254,788
AgE sales (koz)	41,574	13,412	13,397	13,169	13,169	53,146	45,134

Avg realised Ag price (US$/oz)	15.64	14.77	15.89	16.11	16.11	15.72	24.18
Avg realised Au price (US$/oz)	1,152	1,179	1,265	1,224	1,224	1,223	1,347
Avg realised AgE price (US$/oz)	15.60	14.77	15.89	16.11	16.11	15.72	24.18

Avg Ag cash cost (US$/oz)	4.17	4.70	4.75	4.77	4.79	4.75	5.17
Avg Au cash cost (US$/oz)	393	394	394	394	394	394	396
Avg AgE cash cost (US$/oz)	4.58	4.79	4.82	4.92	4.93	4.87	5.78

Sales	648,687	198,088	212,917	212,148	212,148	835,300	1,091,451
Cost of sales
Cost of sales, excluding depletion	190,214	64,225	64,628	64,812	64,920	258,586	261,029
Depletion	198,581	60,513	60,513	60,513	60,513	242,050	207,852
Total cost of sales	388,795	124,738	125,141	125,325	125,433	500,637	468,881
Earnings from operations	259,892	73,350	87,776	86,823	86,715	334,664	622,570
Expenses and other income
- General and administrative	32,237	9,011	9,011	9,011	9,011	36,044	36,044
- Foreign exchange (gain)/loss	0	0	0	0	0	0	0
- Net interest paid/(received)	4,090	2,010	1,077	1,077	1,077	5,241	2,335
- Other (income)/expense	4,076	24	24	24	24	96	0
Total expenses and other income	40,403	11,045	10,112	10,112	10,112	41,381	38,379
Earnings before income taxes	219,489	62,305	77,664	76,711	76,603	293,283	584,191
Income tax expense/(recovery)	9,132	0	0	0	0	0	0
Marginal tax rate (%)	4.2	0.0	0.0	0.0	0.0	0.0	0.0
Net earnings	210,357	62,305	77,664	76,711	76,603	293,283	584,191

Ave. no. shares in issue (000s)	395,755	400,520	438,453	438,453	438,453	428,970	438,453

Basic EPS (US$)	0.53	0.16	0.18	0.17	0.17	0.68	1.33
Diluted EPS (US$)	0.53	0.16	0.18	0.17	0.17	0.68	1.33

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

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

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

Financials

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

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

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

■

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

■

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

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

Canadian Revenue Agency (CRA)

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

Exhibit 2: Financial summary

	US$000s	2012	2013	2014	2015	2016e	2017e
Year end 31 December		IFRS	IFRS	IFRS	IFRS	IFRS	IFRS
PROFIT & LOSS
Revenue		849,560	706,472	620,176	648,687	835,300	1,091,451
Cost of Sales		(117,489)	(139,352)	(151,097)	(190,214)	(258,586)	(261,029)
Gross Profit		732,071	567,120	469,079	458,473	576,714	830,422
EBITDA		701,232	531,812	431,219	426,236	540,670	794,378
Operating Profit (before amort. and except.)		600,003	387,659	271,039	227,655	298,620	586,526
Intangible Amortisation		0	0	0	0	0	0
Exceptionals		0	0	(68,151)	(384,922)	0	0
Other		788	(11,202)	(1,830)	(4,076)	(96)	0
Operating Profit		600,791	376,457	201,058	(161,343)	298,524	586,526
Net Interest		0	(6,083)	(2,277)	(4,090)	(5,241)	(2,335)
Profit Before Tax (norm)		600,003	381,576	268,762	223,565	293,379	584,191
Profit Before Tax (FRS 3)		600,791	370,374	198,781	(165,433)	293,283	584,191
Tax		(14,755)	5,121	1,045	3,391	0	0
Profit After Tax (norm)		586,036	375,495	267,977	222,880	293,283	584,191
Profit After Tax (FRS 3)		586,036	375,495	199,826	(162,042)	293,283	584,191

Average Number of Shares Outstanding (m)		353.9	355.6	359.4	395.8	429.0	438.5
EPS - normalised (c)		166	106	75	53	68	133
EPS - normalised and fully diluted (c)		165	105	74	53	68	133
EPS - (IFRS) (c)		166	106	56	(41)	68	133
Dividend per share (c)		35	45	26	20	25	36

Gross Margin (%)		86.2	80.3	75.6	70.7	69.0	76.1
EBITDA Margin (%)		82.5	75.3	69.5	65.7	64.7	72.8
Operating Margin (before GW and except.) (%)		70.6	54.9	43.7	35.1	35.7	53.7

BALANCE SHEET
Fixed Assets		2,403,958	4,288,557	4,309,270	5,526,335	5,388,766	5,252,914
Intangible Assets		2,281,234	4,242,086	4,270,971	5,494,244	5,356,675	5,220,823
Tangible Assets		1,347	5,670	5,427	12,315	12,315	12,315
Investments		121,377	40,801	32,872	19,776	19,776	19,776
Current Assets		785,379	101,287	338,493	105,876	1,074,350	1,636,432
Stocks		966	845	26,263	1,455	1,873	2,447
Debtors		6,197	4,619	4,132	1,124	2,288	2,990
Cash		778,216	95,823	308,098	103,297	1,070,189	1,630,995
Other		0	0	0	0	0	0
Current Liabilities		(49,458)	(21,134)	(16,171)	(12,568)	(27,408)	(27,649)
Creditors		(20,898)	(21,134)	(16,171)	(12,568)	(27,408)	(27,649)
Short term borrowings		(28,560)	0	0	0	0	0
Long Term Liabilities		(32,805)	(1,002,164)	(1,002,856)	(1,468,908)	(1,468,908)	(1,468,908)
Long term borrowings		(21,500)	(998,136)	(998,518)	(1,466,000)	(1,466,000)	(1,466,000)
Other long term liabilities		(11,305)	(4,028)	(4,338)	(2,908)	(2,908)	(2,908)
Net Assets		3,107,074	3,366,546	3,628,736	4,150,735	4,966,800	5,392,789

CASH FLOW
Operating Cash Flow		720,209	540,597	434,582	435,783	553,832	793,343
Net Interest		0	(6,083)	(2,277)	(4,090)	(5,241)	(2,335)
Tax		(725)	(154)	(204)	(208)	0	0
Capex		(641,976)	(2,050,681)	(146,249)	(1,791,275)	(104,481)	(72,000)
Acquisitions/disposals		0	0	0	0	0	0
Financing		12,919	58,004	6,819	761,824	632,500	0
Dividends		(123,852)	(160,013)	(79,775)	(68,593)	(109,718)	(158,201)
Net Cash Flow		(33,425)	(1,618,330)	212,896	(666,559)	966,892	560,806
Opening net debt/(cash)		(761,581)	(728,156)	902,313	690,420	1,362,703	395,811
HP finance leases initiated		0	0	0	0	0	0
Other		0	(12,139)	(1,003)	(5,724)	0	0
Closing net debt/(cash)		(728,156)	902,313	690,420	1,362,703	395,811	(164,995)

Source: Silver Wheaton, Edison Investment Research

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