WPM

Business Context and Reporting Period

Company: Silver Wheaton Corp. (Silver Wheaton)

Filing Type: Form 6-K (Report of Foreign Issuer)

Reporting Period: Third Quarter ended September 30, 2007

Business Overview: Silver Wheaton is a growth-oriented silver company and the largest public mining company with 100% of its operating revenue derived from silver production. The company operates through long-term contracts to purchase silver from mines at a fixed price (typically $3.90/oz) and sell it at prevailing market prices. Key assets include interests in Luismin, Zinkgruvan, Yauliyacu, Stratoni, and the newly acquired Peñasquito project.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue and Earnings Decline: Q3 2007 net earnings decreased to $19.2 million from $22.5 million in Q3 2006. This was primarily driven by a 11% decrease in silver sales volume (3.13M oz vs 3.52M oz), partially offset by a higher average realized price ($12.66 vs $11.86).
• Liquidity Shift: Cash and cash equivalents dropped significantly from $60.0 million at year-end 2006 to $7.0 million at September 30, 2007. This reduction was due to a $485 million upfront cash payment for the Peñasquito acquisition.
• Debt Assumption: The company moved from a debt-free position in 2006 to carrying $435 million in bank debt as of September 30, 2007. This includes a $200 million term loan and $235 million drawn on a revolving credit facility to fund the Peñasquito transaction.
• Asset Base Expansion: Total assets increased from $662.9 million (Dec 31, 2006) to $1.2 billion (Sep 30, 2007), largely due to the capitalization of the Peñasquito silver interest ($496.9 million).
• Production Timing: While mine production increased 10% in Q3 compared to Q2, shipment timing delays mean most of this volume improvement will be reflected in Q4 results.

Guidance, Outlook, and Risks

• Production Outlook: The company expects silver sales of approximately 13 million ounces for the full year 2007, increasing to 28 million ounces by 2012.
• Acquisition Impact: The Peñasquito acquisition (25% of life-of-mine production) is expected to commence production in Q4 2008. The company also acquired the Stratoni mine in Greece, with production starting in Q2 2007.
• Hedging Policy: Silver Wheaton remains unhedged, positioning itself to benefit from rising silver prices.
• Key Risks:
  • Operational Control: The company has no control over the mining operations from which it purchases silver; results depend on the performance of third-party operators (Goldcorp, Lundin, Glencore, Hellas Gold).
  • Commodity Price: Financial results are highly sensitive to fluctuations in the market price of silver.
  • Debt Covenants: The new credit agreement requires maintaining a debt service coverage ratio of at least 1.25:1 and a leverage ratio of 5:1 (decreasing to 3.5:1 by 2009).
  • Accounting Changes: Adoption of new financial instrument standards (Section 3855) resulted in mark-to-market adjustments for warrants held, impacting net earnings.

Investor Verification Checklist

• Debt Servicing Capacity: Verify the company's ability to meet the 90% cash flow paydown commitment on the revolving loan and maintain the required leverage ratios given the new $435M debt load.
• Peñasquito Timeline: Monitor the construction progress and the Q4 2008 start date for the Peñasquito mine, as this is critical for future volume growth.
• Production Volumes: Confirm Q4 2007 shipment volumes to ensure the 10% production increase noted by management translates into revenue.
• Related Party Transactions: Note that Goldcorp owns 49% of the company and is a major counterparty (Luismin and Peñasquito); review the terms of the management services agreement and lease.
• Warrant Valuation: Review the impact of mark-to-market adjustments on warrants held, which caused a non-cash loss of $0.84 million in Q3 2007.