Business Context and Reporting Period
Company: Silver Wheaton Corp. (formerly Chap Mercantile Inc.)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Third Quarter ended September 30, 2005 (Nine months ended September 30, 2005)
Business Model: Pure-play silver company deriving 100% of revenue from silver production via long-term purchase contracts. The Company does not own or operate mines but purchases silver from third-party producers (Goldcorp's Luismin mine in Mexico and Lundin Mining's Zinkgruvan mine in Sweden) at a fixed cash cost.
Key Financial Metrics
| Metric | Q3 2005 (3 Months) | YTD 2005 (9 Months) |
|---|---|---|
| Silver Sales | $18.1 million | $53.4 million |
| Ounces Sold | 2.54 million oz | 7.53 million oz |
| Average Realized Price | $7.13/oz | $7.10/oz |
| Total Cash Cost | $3.90/oz | $3.90/oz |
| Net Earnings | $6.4 million ($0.04/share) | $18.3 million ($0.11/share) |
| Operating Cash Flow | $8.0 million | $22.4 million |
| Cash & Equivalents | $26.6 million (as of Sept 30, 2005) | |
| Debt | None (Debt-free) | |
| Total Assets | $173.9 million |
Material Changes vs. Prior Period
- Revenue Growth: The Company generated significant revenue in Q3 2005 ($18.1M) compared to zero revenue in the comparable three-month period ended August 31, 2004, due to the commencement of the Luismin and Zinkgruvan contracts in late 2004.
- Profitability: Net earnings turned positive ($6.4M) from a net loss of $16,000 in the prior year's comparable period.
- Acquisition Activity: In August 2005, the Company acquired a 15% interest in Bear Creek Mining Corporation for approximately $13.7 million (Cdn$16.4M) to gain exposure to the Corani silver project in Peru.
- Capital Structure: Goldcorp Inc. owns 64.6% of the Company's outstanding shares following the Luismin transaction.
Outlook, Risks, and Management Commentary
- Production Guidance: Management expects to sell approximately 10.0 million ounces in 2005 and 11.5 million ounces in 2006. The cash cost is expected to remain at $3.90 per ounce.
- Strategic Focus: The Company is actively pursuing further growth through long-term silver purchase contracts or acquisitions of exploration/development assets. It remains unhedged regarding silver prices.
- Contractual Obligations:
- Luismin: Silver Wheaton is obligated to pay 50% of capital expenditures exceeding 110% of projected amounts. In 2005, accelerated development resulted in a $1.7M share of costs, with reimbursement deferred to a combined 2004-2006 calculation.
- Inflation Adjustment: The $3.90/oz cost is subject to annual inflation adjustments starting in 2007 (range 0.4% to 1.65%).
- Risks: Key risks include lack of control over mining operations, international operational risks, silver price volatility, and the realization of mineral reserve estimates. Forward-looking statements regarding production and reserves are subject to uncertainty.
Investor Verification Checklist
- Contractual Cost Stability: Verify the terms of the $3.90/oz fixed cost and the specific mechanics of the inflation adjustment starting in 2007.
- Reserve Life: Confirm the remaining mine life estimates (over 20 years) for Luismin and Zinkgruvan and the conversion rates of resources to reserves.
- Related Party Transactions: Review the extent of reliance on Goldcorp (majority shareholder and supplier) and the terms of the management services agreement.
- Bear Creek Investment: Assess the progress of the Corani project and the valuation of the 15% stake acquired in Bear Creek Mining.
- Cash Flow Sustainability: Monitor operating cash flow generation against capital expenditure obligations, particularly regarding the Luismin development costs.