Business Context and Reporting Period
Company: Silver Wheaton Corp. (a growth-oriented silver company deriving 100% of revenue from silver production via long-term stream contracts).
Reporting Period: Three and nine months ended September 30, 2007.
Filing Date: January 31, 2008 (Form 6-K).
Accounting Basis: Canadian GAAP (with reconciliation to US GAAP provided in Note 12).
Key Financial Metrics
| Metric | Q3 2007 | Q3 2006 | 9M 2007 | 9M 2006 |
|---|---|---|---|---|
| Silver Sales ($000s) | $39,598 | $41,766 | $125,194 | $114,890 |
| Silver Sales (Ounces '000s) | 3,129 | 3,520 | 9,525 | 9,998 |
| Avg. Realized Price ($/oz) | $12.66 | $11.86 | $13.14 | $11.49 |
| Total Cash Cost ($/oz) | $3.90 | $3.90 | $3.90 | $3.90 |
| Net Earnings ($000s) | $19,184 | $22,518 | $66,975 | $61,458 |
| Earnings Per Share (Diluted) | $0.08 | $0.09 | $0.27 | $0.27 |
| Operating Cash Flow ($000s) | $27,102 | $28,262 | $84,848 | $74,893 |
| Cash & Equivalents ($000s) | $6,965 | $61,950 | $6,965 | $61,950 |
| Total Debt ($000s) | $435,000 | $0 | $435,000 | $0 |
Material Changes vs. Prior Period
- Acquisition of Peñasquito: On July 24, 2007, the Company acquired 25% of the life-of-mine silver production from Goldcorp's Peñasquito project for an upfront cash payment of $485 million. This was funded by drawing down a new $200 million Term Loan and $246 million of a $300 million Revolving Loan.
- Liquidity Shift: Cash and cash equivalents dropped from $60.0 million at year-end 2006 to $7.0 million at September 30, 2007, primarily due to the Peñasquito acquisition and the Stratoni acquisition ($57.5 million).
- Debt Structure: The Company moved from a debt-free position to carrying $435 million in total bank debt (Term and Revolving loans) to finance growth.
- Production Volume: Q3 2007 silver sales volume (3.1 million oz) decreased compared to Q3 2006 (3.5 million oz), despite a 10% increase in mine production, due to timing of shipments.
- Accounting Policy Change: Adoption of new Canadian accounting standards (Section 3855) on Jan 1, 2007, resulted in warrants being marked-to-market through net earnings, causing a non-cash loss of $840,000 in Q3 2007.
Guidance, Outlook, and Risks
- Production Outlook: Management expects silver sales of approximately 13 million ounces for the full year 2007, increasing to 15 million in 2008, 19 million in 2009, and 25 million in 2010 and thereafter.
- Subsequent Event (Rosemont): On December 20, 2007, the Company signed a binding letter agreement to purchase 45% to 90% of the life-of-mine silver from the Rosemont Copper Project (Arizona). Upfront payments range from $135 million to $320 million depending on the percentage elected. No ongoing per-ounce payments are required.
- Risks:
- Counterparty Risk: The Company has no control over mining operations; results depend on the production volumes of partners (Goldcorp, Lundin, Glencore, Hellas Gold).
- Commodity Price Risk: The Company is unhedged; profitability is driven by the spread between the market price of silver and the fixed $3.90/oz cost.
- 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).
Investor Verification Checklist
- Debt Servicing Capacity: Verify if operating cash flows ($27.1M in Q3) are sufficient to meet the 90% cash flow paydown commitment on the revolving loan and interest payments on the $435M debt load.
- Peñasquito Timeline: Confirm the construction schedule and the "completion guarantee" provided by Goldcorp, as revenue from this major asset (25% of 864M oz reserves) does not commence until Q4 2008.
- Rosemont Transaction Finalization: Monitor the election of the silver percentage (45% vs 90%) by Augusta Resource Corporation by March 31, 2008, and the receipt of necessary permits.
- US GAAP Reconciliation: Note that under US GAAP, the Company reported a net loss of $(63.5) million for Q3 2007 due to the classification of warrants as liabilities, contrasting with the Canadian GAAP net earnings of $19.2 million.
- Goldcorp Relationship: Acknowledge that Goldcorp owns 49% of the Company and is the counterparty for the Luismin and Peñasquito streams, creating significant related-party exposure.