Silver Wheaton’s Smallwood sees a ‘gold flavour to the portfolio’

VANCOUVER — Royalty and streaming leader Silver Wheaton (TSX: SLW; NYSE: SLW) has been increasing its presence in the gold space recently, and according to president and CEO Randy Smallwood that trend could continue, with many of the company’s current opportunities reflecting a “gold bias.” Silver Wheaton’s annual earnings were hit by falling precious metal prices last year, but that didn’t stop it from starting off 2015 with another big purchase.

In early march Silver Wheaton announced it was picking up an additional 25% of the gold production from Vale’s (NYSE: VALE) Salobo mine in Brazil, entitling the company to a total of 50% of the life-of-mine gold production from the operation. The price tag was an impressive US$900 million, and forced Silver Wheaton to wade into tepid equity markets in an attempt to raise US$800 million.

Though there have been rumours that the bought-deal financing didn’t exactly go smoothly, the company ended up closing it on March 17 and sold roughly 39 million shares priced at US$20.55 per share. Silver Wheaton is scheduled to make ongoing payments to Vale of US$400 per oz. gold, and the deal should position the company to hit around 50 million oz. of silver equivalent production by 2016. Salobo is expected to chip in around 70,000 oz. of gold annually over the life of the agreement.

“I’d say we’re still silver focused,” Smallwood commented during a conference call. “We think the streaming model works slightly better in the silver space because most silver is produced as a by-product and therefore there tends to be greater capacity. I’ll be honest, the gold sector is hurting a bit more than the base metal space and that’s one the reasons why we’ve been more active there. So there’s definitely a gold flavor to the portfolio we’re looking at right now.”

Silver Wheaton reported attributable silver equivalent production of 35.3 million oz. last year, which was composed of 25.7 million oz. silver and 142,800 oz. gold. That compares to production of around 36 million oz. silver equivalent in 2013. Adjusted net earnings were down 29% year-on-year to US$268 million or 75¢ per share.

The company’s margins were hit by falling silver prices, with the effects culminating in the fourth quarter when it saw its net earnings drop 45% year-on-year to US$52 million. Average realized sale price per silver equivalent oz. for the year was US$18.86, representing a decrease of 20% compared to 2013.

Silver Wheaton’s focus on low-cost assets continues to pay dividends, however, as the company reported average cash costs of US$4.14 per oz. silver and US$386 per oz. gold. On a silver equivalent basis cash costs were actually down US6¢ year-on-year to US$4.59 per oz.

“Despite the challenging markets I think last year was still another solid one for us,” Smallwood continued. “Even with the substantial drop in precious metal prices we continue to generate strong cash operating margins. The best defense is to make sure that you invest into assets that are in the lowest half of the respective cost curves. We know that our partners, and the industry as a whole, will be very motivated to keep these mines going. These are the types of assets that will always survive through challenging times.”

It’s been a decade since Silver Wheaton’s inception, and it now manages a portfolio of 27 assets around the globe. The company expects silver equivalent production of 43.5 million oz., including 230,000 oz. gold, this year. By 2019, estimated annual attributable production is anticipated to jump by over 40% compared with 2014 levels, growing to approximately 51 million silver equivalent oz., including 325,000 oz. gold.

“Salobo is expected to be a lead contributor to our growth and has significant expansion and exploration potential even beyond a forty-year year mine life. We reached another milestone in December when HudBay Minerals (TSX: HBM; NYSE: HBM) hit first production at its Constancia mine in Peru.” Smallwood commented.

“Looking forward we are very positive on the organic growth embedded within our current portfolio. And this is all fully-funded growth, which allows us to use our significant free cash flows towards continued investments into the precious metals space. Many of the current opportunities under consideration involve helping existing producers strengthen their balance sheets to assist in asset acquisitions, and to provide support to single-asset companies,” he added.

Silver Wheaton finished the year with US$308 million in cash and US$1 billion outstanding under a non-revolving term loan, while debt totaled US$690 million. The company has traded within a 52-week window of $18.92 and $29.98, and jumped $1 following its annual results en route to a US$24.69 per share close at press time. Silver Wheaton maintains 404 million shares outstanding for a $10-billion market capitalization.

BMO Capital Markets analyst Andrew Kaip maintains a stock “outperform” target on Silver Wheaton along with a $28 per share price target. BMO Research estimates that the company will be net cash positive — or free of debt — by 2017 at spot metal prices.

“The Salobo transaction is estimated to be marginally dilutive to near-term earnings, but accretive to cash flows after 2015,” Kaip noted on March 19.