Business Context and Reporting Period
Company: Silver Wheaton Corp. (Wheaton Precious Metals Corp.)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter ended June 30, 2006 (Three and Six Months)
Business Model: Silver Wheaton is a growth-oriented silver company deriving 100% of its revenue from silver production. It operates via long-term silver purchase contracts (streams) with major mining companies (Goldcorp, Lundin Mining, Glencore), acquiring silver at a fixed low cost ($3.90/oz) and selling at prevailing market prices.
Key Financial Metrics
| Metric (US$) | Q2 2006 | Q2 2005 | YTD 2006 | YTD 2005 |
|---|---|---|---|---|
| Silver Sales | $47.4 million | $19.3 million | $73.1 million | $35.3 million |
| Silver Volume Sold | 3.8 million oz | 2.7 million oz | 6.5 million oz | 5.0 million oz |
| Average Realized Price | $12.46 / oz | $7.22 / oz | $11.29 / oz | $7.08 / oz |
| Total Cash Cost | $3.90 / oz | $3.90 / oz | $3.90 / oz | $3.90 / oz |
| Net Earnings | $25.2 million | $6.7 million | $38.9 million | $11.9 million |
| Earnings Per Share (Basic) | $0.12 | $0.04 | $0.19 | $0.07 |
| Operating Cash Flow | $32.7 million | $9.3 million | $46.6 million | $14.4 million |
| Cash & Equivalents (End of Period) | $51.6 million | $33.3 million | $51.6 million | $33.3 million |
| Total Assets | $614.3 million | $167.1 million | $614.3 million | $167.1 million |
| Total Liabilities | $20.9 million | $0.6 million | $20.9 million | $0.6 million |
Material Changes vs. Prior Period
- Revenue and Profit Surge: Net earnings jumped 274% year-over-year in Q2 2006, driven by a 41% increase in silver sales volume and a 73% increase in the average realized silver price.
- New Asset Acquisition: The Yauliyacu silver purchase contract (Glencore, Peru) commenced production in May 2006, contributing 0.9 million ounces and $4.7 million in net earnings in Q2 2006.
- Contract Amendment: The Luismin contract (Goldcorp, Mexico) was amended in March 2006 to increase minimum delivery obligations by 100 million ounces. Consideration included 18 million shares and a $20 million promissory note.
- Capital Structure: In April 2006, the company completed a $175 million public offering. Proceeds were used to repay $160 million in debt (including bank loans and a promissory note to Glencore), significantly reducing liabilities.
- Shareholder Base: Following the Luismin amendment, Goldcorp owns 57% of the company's outstanding common shares.
Guidance, Outlook, and Risks
- Production Outlook: Management expects annual silver sales of approximately 15 million ounces in 2006, increasing to 20 million ounces by 2009 and thereafter.
- Strategy: The company is unhedged and plans to grow through further accretive acquisitions of silver streams or assets.
- Risks:
- Operational Control: Silver Wheaton has no control over the mining operations of its counterparties (Goldcorp, Lundin, Glencore).
- Commodity Price: Financial results are highly sensitive to the market price of silver.
- Reserve Estimates: Forward-looking statements regarding mineral reserves and resources are subject to uncertainty and may not be realized.
- Unusual Items: Q2 2006 expenses included a one-time NYSE listing fee of $250,000 and increased stock-based compensation due to new employee grants.
Investor Verification Checklist
- Goldcorp Ownership: Verify the implications of Goldcorp holding a 57% stake on corporate governance and future strategic decisions.
- Yauliyacu Performance: Monitor the ramp-up of the Yauliyacu stream to ensure it meets the contracted 4.75 million ounces per year.
- Silver Price Sensitivity: Assess the impact of potential silver price volatility on future margins, given the company is unhedged.
- Debt Obligations: Confirm the status of the $20 million promissory note to Goldcorp due March 30, 2007.
- Reserve Conversions: Review future updates on the conversion of inferred resources to proven reserves at the Luismin and Yauliyacu mines.