Silver Wheaton posts strong Q2 results

Canadian streaming company Silver Wheaton (TSX: SLW; NYSE: SLW) posted record quarterly production of nearly 11 million equivalent oz. silver in the three months ended June 30, and for the first time ever, notched quarterly sales volume of 10 million equivalent oz. silver.

The record production and sales figures were driven by strong results from all of the company’s flagship assets and from the first substantive contribution from Hudbay Minerals’ (TSX: HBM; NYSE: HBM) Constancia copper-silver-molybdenum mine in Peru, which achieved commercial production on April 30.

Silver-equivalent production reached 10.9 million oz. (7.2 million oz. silver and 50,500 oz. gold), in a 29% year-on-year increase, while US$10 million in sales volume marked a 34% increase over the same quarter of 2014.

Weak commodity price markets affected the company’s average realized sales price per equivalent silver ounce, which were 17% lower than a year ago, and the lower prices affected profits. Net earnings of US$53.7 million, or US13¢ per share, represented a 15% decline from the US$63.5 million (US18¢ per share) that the company reported in the second quarter of 2014.

Operating cash flows, however, increased 7% year-on-year to US$109.3 million, or US27¢ per share, up from US$102.5 million (US29¢ per share) in the year-earlier quarter. The company finished the quarter with US$72 million in cash and US$715 million outstanding under a US$2-billion revolving term loan.

“Overall, the first half of 2015 represents a strong start to what we believe will be a prolonged period of fully funded, organic growth for Silver Wheaton,” president and CEO Randy Smallwood, declared on a morning conference call with analysts and investors.

Smallwood reiterated the company’s production guidance for 2015 of 43.5 million equivalent oz. silver, a growth rate of over 23% and forecast that growth would “continue next year and beyond, as we climb to 51 million equivalent oz. silver by 2019 — most of which occurs in the next few years — and all of which, again, is fully funded.”

In addition to Silver Wheaton’s organic growth, which means the company does not need to make acquisitions “simply for the sake of growth,” Smallwood sees a robust array of potential deals.

“On the corporate development front, we continue to see many high-quality opportunities and believe that we’re in a strong position to add to our portfolio, given our sector-leading cash flows and financial flexibility,” he noted. “We continue to focus on finding high-quality, well-managed assets that will deliver, at the very least, reasonable rates of return for our shareholders.

“What we’ve seen is a lot of top-tier companies with tier-one assets that need that capital support, and we’re seeing the streaming business model getting more and more broadly accepted as a means of raising capital,” he continued, addressing the higher number of cornerstone assets in the marketplace. “There’s a robust opportunity out there right now.”

Meanwhile, a proposal letter the company received on July 6 from the Canada Revenue Agency stating that it plans to reassess income earned by the company’s foreign subsidiaries outside of Canada between 2005 and 2010 isn’t curbing his enthusiasm for making accretive acquisitions, Smallwood told analysts on the conference call. 

If Silver Wheaton is reassessed, the company estimates that on a preliminary basis, this would result in federal and provincial tax of $190 million, and possible transfer pricing penalties of $72 million. 

But the company intends to vigorously defend its tax filings, and believes it has filed its tax returns and paid applicable taxes in compliance with Canadian tax law.

“We have some work to do here, but we’re confident that we’re not talking about Canadian resources or Canadian assets — we’re talking about international assets, owned and managed by foreign subsidiaries of Silver Wheaton,” Smallwood elaborated in a telephone interview after the conference call. “In Canada we’re fully taxable and we’re proud of our contribution to Canadian taxable income, but the concept of reaching outside of Canada to resources outside of Canada is something we find surprising.”

Smallwood says opportunities for making accretive acquisitions in the current market have improved, even since early this year. “I’ve been with this company since we started over 10 years ago, and this is the best I’ve ever seen it, in terms of the quality of assets and the number of opportunities available,” he noted, adding that management likes silver a bit more than gold, even though it’s confident about investing in the gold space.

“We just think silver has a little bit more upside to it,” he says, explaining that of the 800 million oz. silver produced worldwide last year, over 400 million oz. was consumed in industrial applications. “That bodes well,” he says. “It’s the first time it has ever been over 50%.”

Smallwood declined to guess where silver prices might move in the coming years, saying that “it’s tough to predict, and every time I do, I’m wrong.”

But the veteran mining executive says the biggest challenge in the precious metal space is a strong U.S. dollar, and he doesn’t believe the U.S. Federal Reserve will raise interest rates this year. 

“It would surprise me … I think it goes in the wrong direction,” he explains. “In this ever-shrinking world where world trade is having more of an impact, I don’t think you want the strongest currency in the world. Germany doesn’t want it, Japan doesn’t want it, China doesn’t want it. One of the ways countries manage their economies is to devalue their currencies.”