Silver Wheaton rises on record 2011 revenues

Silver Wheaton (SLW-T, SLW-N) is the reigning king of silver-stream financing, and saw notable growth in 2011.

The company released annual results in late March highlighting a third consecutive yearly increase in silver-equivalent production, as well as record revenues, earnings and operating cash flows.

The company’s silver streams generated 25.4 million equivalent oz. silver in 2011 — including 24.6 million oz. silver and 18,400 oz. gold — which marked a 7% increase from 2010 levels, and a 12% year-on-year increase in the fourth quarter to 6.9 million equivalent oz. silver.

The production jump resulted in a 92% increase in net earnings to US$625 million, translating to US$1.77 per share. Operating cash margins were US$30.56 per equivalent oz. silver with average cash costs of US$4.09 per oz.

Silver Wheaton registered a year-end cash balance of US$840 million, including a US$762-million net cash position.

The company’s US$191.9 million fourth-quarter revenue — attributable to selling 6 million equivalent oz. silver — fell short of estimates by five analysts polled by S&P Capital IQ, who projected US$202 million in revenue on average.

The main production driver through 2011 was Goldcorp’s (G-T, GG-N) gold-silver-zinc-lead Penasquito mine in Mexico, where Silver Wheaton extracted 5.3 million oz. silver in 2011 — up 39% from 2010. Goldcorp is ramping up production at the mine, with throughput increasing to 107,000 tonnes per day in December.

A number of projects are underway to push Penasquito’s throughput up to a full design capacity of 130,000 tonnes per day, including a supplemental feed system and tailings dam height increase. The mine is expected to hit target throughput levels in the second quarter.

“We expect 7-million-oz. silver production from Penasquito this year,” Silver Wheaton president and CEO Randy Smallwood says.

Silver Wheaton’s other major silver-stream contributor during 2011 was Barrick Gold (ABX-T, ABX-N), with streaming agreements that include the Veladero gold-silver mine in Argentina, and the Lagunas Norte and Pierina gold-silver mines in Peru. Barrick’s streams accounted for 3 million oz. silver — a 14% annual increase — though the quantity was below expectations owing to weak silver production at Veladero and Pierina.

Silver Wheaton also expects production at Barrick’s Pascua-Lama gold-silver project on the Chilean-Argentinean border by mid-2013. Once operational, the mine is expected to have a 25-year life, and Silver Wheaton projects an average of 9 million equivalent oz. silver annually from the stream over the first five years.

“We’re projecting 43 million equivalent oz. silver production by 2016,” Smallwood explains. “Advanced-stage projects like Pascua-Lama are a big part of our growth.”

Silver Wheaton has silver-stream agreements with 12 more active mines, which contributed 6.5 million oz. silver during 2011. The company also maintains a stock of produced but not yet delivered silver totalling 4.1 million oz., including 1.7 million oz. silver payable by Glencore International from its Yauliyacu lead-zinc mine in central Peru.

Silver Wheaton is projected to stream 27 million equivalent oz. silver in 2012, and average cash costs are expected to remain unchanged at US$4.07 per oz.

According to Smallwood the company could generate US$700 million in operating cash flow during 2012 at current gold and silver prices. US$840 million cash-in-hand and a US$400-million revolving credit facility brings the financing potential into focus.

“We are ready and able to act quickly to make strategic acquisitions,” Smallwood says. “With most mining companies facing tighter debt and equity markets, as well as depressed equity valuations and increasing capital costs, we are in a strong position to meet financing requirements.”

Markets reacted warmly to the company’s annual report on March 23. Silver Wheaton’s shares rose 5%, or $1.68, to $33.66 on a 1.3-million share trade volume.

Silver Wheaton adopted a new dividend policy in 2011 designed to increase shareholder exposure to rising silver prices by tying dividend payments to 20% of the previous quarter’s operating cash flows. The company paid US$63.6 million in dividend payments in 2011, or 18¢ per share.

Silver Wheaton has 353.5 million shares outstanding and a market capitalization of $11.9 billion.