WPM

Business Context and Reporting Period

Company: Silver Wheaton Corp. (SLW)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Year ended December 31, 2006 (with Q4 2006 highlights)
Business Model: Silver Wheaton is a growth-oriented silver company that acquires silver production from third-party mining operations (Goldcorp, Lundin Mining, Glencore) at a fixed low cost ($3.90/oz) and sells it at prevailing market prices. The company holds no operational control over the mines.

Key Financial Metrics

Material Changes vs. Prior Period

• Revenue & Earnings Surge: Net earnings more than tripled to $85.2 million, driven by a 40% increase in silver ounces sold (13.5M vs 9.7M) and a significant rise in the average realized silver price ($11.72 vs $7.31).
• Strategic Acquisitions: The company entered a major contract with Glencore for the Yauliyacu mine in Peru (up to 4.75M oz/year for 20 years) with a $285 million upfront payment. This contract began contributing to revenue in May 2006.
• Contract Amendment: The Luismin contract with Goldcorp was amended to eliminate Silver Wheaton's obligation to contribute to capital expenditures. In exchange, Silver Wheaton issued 18 million shares and a $20 million promissory note to Goldcorp.
• Liquidity Position: Cash and cash equivalents decreased from $117.7 million to $60.0 million due to significant capital outflows for the Yauliyacu acquisition ($285M) and investments in other silver companies ($50.8M), partially offset by a $175 million public equity offering.
• Debt: The company utilized a $125 million bank credit facility in March 2006 to finance the Yauliyacu deal but repaid it in full by April 2006 using proceeds from the public offering. A $20 million promissory note to Goldcorp remains outstanding.

Guidance, Outlook, and Risks

• Production Outlook: Management expects annual silver sales of approximately 15 million ounces in 2007, increasing to 20 million ounces by 2009 and thereafter, without further capital expenditures or acquisitions.
• Investment Strategy: The company invested $50.8 million in 2006 to acquire significant ownership positions in Bear Creek Mining (19.1%), Revett Minerals (17.2%), and Sabina Silver (14.1%) to secure future growth options.
• Market Listing: The company began trading on the New York Stock Exchange (NYSE) under the symbol SLW.
• Key Risks:
  • Operational Control: Silver Wheaton has no control over the mining operations of its partners (Goldcorp, Lundin, Glencore). Production shortfalls or mine closures directly impact revenue.
  • Silver Price Volatility: Profitability is highly sensitive to silver prices; a $1.00/oz change impacts 2007 net earnings by approximately $15 million.
  • Geopolitical Risk: Operations are located in Mexico, Sweden, and Peru, exposing the company to political, economic, and regulatory risks in those jurisdictions.
  • Accounting Changes: New Canadian accounting standards (Sections 1530, 3855, 3865) effective Jan 1, 2007, will require changes in financial reporting, including the introduction of Comprehensive Income.

Investor Verification Checklist

• Contractual Obligations: Verify the specific terms of the Yauliyacu contract regarding the "make-up" clause for production shortfalls and the inflationary adjustment starting in 2009.
• Goldcorp Relationship: Confirm the status of the $20 million promissory note due March 30, 2007, and the progress of negotiations for the Penasquito Project right of first refusal.
• Investment Valuation: Review the market value vs. book value of the long-term investments in Bear Creek, Revett, and Sabina, which showed significant unrealized gains ($39.5 million total) as of year-end.
• Reserve Estimates: Note that reserve and resource estimates are provided by the partner mining companies (Goldcorp, Lundin, Glencore), not Silver Wheaton directly.
• Accounting Transition: Monitor the impact of the new financial instrument accounting standards on the 2007 financial statements, particularly regarding the classification of long-term investments.