Business Context and Reporting Period
Company: Silver Wheaton Corp. (Silver Wheaton)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Second Quarter ended June 30, 2007
Business Model: Silver Wheaton is a growth-oriented silver company deriving 100% of its operating revenue from silver production. It operates via long-term silver purchase contracts (streams) with major mining companies, acquiring silver at a fixed cost of $3.90 per ounce (subject to inflationary adjustments) and selling at prevailing market prices.
Key Financial Metrics
| Metric | Q2 2007 | Q2 2006 | YTD 2007 | YTD 2006 |
|---|---|---|---|---|
| Silver Sales (Revenue) | $41.5 million | $47.4 million | $85.6 million | $73.1 million |
| Silver Ounces Sold | 3.05 million | 3.81 million | 6.40 million | 6.48 million |
| Average Realized Price | $13.58/oz | $12.46/oz | $13.38/oz | $11.29/oz |
| Total Cash Cost | $3.90/oz | $3.90/oz | $3.90/oz | $3.90/oz |
| Net Earnings | $22.9 million | $25.2 million | $47.8 million | $38.9 million |
| Earnings Per Share (Basic) | $0.10 | $0.12 | $0.22 | $0.19 |
| Operating Cash Flow | $27.8 million | $32.7 million | $57.7 million | $46.6 million |
| Cash & Equivalents (End of Period) | $40.3 million | $51.6 million | $40.3 million | $51.6 million |
Material Changes vs. Prior Period
- Revenue Decline: Q2 2007 revenue decreased 12.5% compared to Q2 2006, primarily due to a temporary production shortfall at the Luismin mines in Mexico (San Dimas mine produced 800,000 ounces less than expected). This was partially offset by higher average silver prices ($13.58 vs $12.46).
- Net Earnings: Q2 net earnings decreased 9.1% to $22.9 million, driven by lower volume. However, YTD 2007 earnings increased 22.7% to $47.8 million compared to YTD 2006.
- Strategic Acquisitions: The quarter was defined by two major acquisitions:
- Peñasquito (Mexico): Acquired 25% of silver production from Goldcorp for a $485 million upfront payment (closed July 24, 2007). This added 362 million ounces of attributable proven and probable reserves.
- Stratoni (Greece): Acquired 100% of silver production from Hellas Gold for a $57.5 million upfront payment. Production began in Q2 2007.
- Debt Financing: To fund the Peñasquito acquisition, the company entered a new credit facility on July 24, 2007, drawing the full $200 million term loan and $246 million of the $300 million revolving loan.
Guidance, Outlook, and Risks
- Production Outlook: Management expects silver sales of approximately 13 million ounces for the full year 2007, increasing to 23 million ounces by 2009 and 28 million ounces by 2012.
- Management Commentary: CEO Peter Barnes described the quarter as "Company-transforming," noting the acquisitions boosted long-term cash flow per share by approximately 30% without equity dilution. Management expects the Luismin production shortfall to be resolved by the end of 2007.
- Hedging: The company is unhedged regarding silver prices.
- Risks:
- Operational Control: Silver Wheaton has no control over the mining operations of its counterparties (Goldcorp, Lundin, Glencore, Hellas Gold). Production shortfalls at these sites directly impact revenue.
- Commodity Price: Revenue is highly sensitive to the spot price of silver.
- Reserves: Forward-looking statements regarding reserves and resources are subject to uncertainty; "Inferred Resources" are not recognized by the SEC and may not be economically mineable.
Investor Verification Checklist
- Production Recovery: Verify the timeline for the resolution of the production shortfall at the Luismin San Dimas mine.
- Debt Servicing: Review the terms of the new $446 million debt facility (LIBOR + 0.875% to 1.75%) and its impact on future interest expenses.
- Acquisition Integration: Monitor the start of production and cash flow generation from the new Peñasquito and Stratoni contracts.
- Related Party Transactions: Note that Goldcorp owns 49% of Silver Wheaton and is a major counterparty (Luismin and Peñasquito contracts).
- Accounting Changes: Review the impact of the new accounting standards (Section 3855) adopted in 2007 regarding the mark-to-market valuation of warrants and available-for-sale securities.