Business Context and Reporting Period
Company: Silver Wheaton Corp. (Wheaton Precious Metals Corp.)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter ended September 30, 2006 (and nine months ended September 30, 2006)
Filing Date: November 2, 2006
Silver Wheaton is a growth-oriented silver company and the largest mining company with 100% of its revenue derived from silver production. The company operates through long-term silver purchase contracts with major mining operators (Goldcorp, Lundin Mining, and Glencore), acquiring silver at a fixed price of $3.90 per ounce (subject to inflationary adjustments) and selling it at prevailing market prices.
Key Financial Metrics
| Metric (US$) | Q3 2006 | Q3 2005 | 9 Months 2006 | 9 Months 2005 |
|---|---|---|---|---|
| Silver Sales | $41.8 million | $18.1 million | $114.9 million | $53.4 million |
| Ounces Sold (000s) | 3,520 | 2,535 | 9,998 | 7,526 |
| Average Realized Price ($/oz) | $11.86 | $7.13 | $11.49 | $7.10 |
| Total Cash Cost ($/oz) | $3.90 | $3.90 | $3.90 | $3.90 |
| Net Earnings | $22.5 million | $6.4 million | $61.5 million | $18.3 million |
| Earnings Per Share (Basic) | $0.10 | $0.04 | $0.30 | $0.11 |
| Operating Cash Flow | $28.3 million | $7.9 million | $74.9 million | $22.3 million |
| Cash & Equivalents (Sep 30) | $62.0 million | $26.6 million | $62.0 million | $26.6 million |
| Total Assets | $638.1 million | $173.9 million | $638.1 million | $173.9 million |
| Total Liabilities | $21.2 million | $0.4 million | $21.2 million | $0.4 million |
Material Changes vs. Prior Period
- Earnings Growth: Net earnings more than tripled in Q3 2006 compared to Q3 2005, driven by a 39% increase in silver ounces sold and a 66% increase in the average realized silver price.
- Production Volume: Silver sales increased from 2.5 million ounces in Q3 2005 to 3.5 million ounces in Q3 2006. This was primarily due to the commencement of the Yauliyacu contract in May 2006 and increased production at the Luismin mine.
- Asset Base Expansion: Total assets grew from $173.9 million in Q3 2005 to $638.1 million in Q3 2006, largely due to the capitalization of the Yauliyacu silver purchase contract ($285 million) and the amendment to the Luismin contract.
- Liquidity: Cash and cash equivalents decreased from $117.7 million at year-end 2005 to $62.0 million at September 30, 2006, reflecting significant capital expenditures on new contracts and investments, though operating cash flow remains robust.
Guidance, Outlook, and Management Commentary
- Production Outlook: Management expects annual silver sales of approximately 16 million ounces in 2007, increasing to 20 million ounces by 2009 and thereafter.
- Hedging Strategy: The company remains unhedged, positioning itself to benefit from rising silver prices.
- Strategic Acquisitions:
- Bear Creek Mining: Increased ownership to 19%, becoming the largest shareholder.
- Goldcorp/Peñasquito: Secured a right of first refusal on future silver production from the Peñasquito project in Mexico, contingent on Goldcorp's acquisition of Glamis Gold.
- Contract Amendments: The Luismin contract was amended to increase minimum delivery obligations to 220 million ounces over 25 years, with Silver Wheaton waiving capital expenditure contributions in exchange for shares and a promissory note.
- Risks: Forward-looking statements are subject to risks including silver price volatility, lack of control over mining operations, and the realization of mineral reserves.
Investor Verification Checklist
- Goldcorp Concentration: Verify the impact of Goldcorp owning 57% of Silver Wheaton's shares and the related-party nature of the Luismin contract.
- Yauliyacu Performance: Monitor the actual production volumes from the Yauliyacu mine against the contracted 4.75 million ounces per year.
- Debt Obligations: Confirm the repayment status of the $20 million promissory note to Goldcorp due March 30, 2007.
- Reserve Estimates: Review the "Proven and Probable" reserves for Luismin, Zinkgruvan, and Yauliyacu to ensure they support the 2007-2009 production guidance.
- Peñasquito Deal: Track the status of Goldcorp's acquisition of Glamis Gold, which triggers the right of first refusal for Silver Wheaton.