WPM

Business Context and Reporting Period

Company: Silver Wheaton Corp. (Silver Wheaton)
Filing Type: Form 6-K (Report of Foreign Issuer)
Reporting Period: Three months ended March 31, 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 contracts to purchase silver from mining operations at a fixed price (typically $3.90/oz) and sell it at prevailing market prices. Major contracts include Luismin (Mexico), Zinkgruvan (Sweden), and Yauliyacu (Peru).

Key Financial Metrics

Note: Total liabilities decreased significantly in Q1 2007 due to the repayment of a $20 million promissory note to Goldcorp.

Material Changes vs. Prior Period

• Revenue Growth: Net earnings increased 80% year-over-year, driven by a 25% increase in silver ounces sold and a 37% increase in the average realized silver price.
• Production Volume: Sales volume rose from 2.67 million ounces in Q1 2006 to 3.34 million ounces in Q1 2007. This increase was partially offset by temporary grade reductions at the Luismin and Yauliyacu mines.
• Cost Structure: The total cash cost per ounce remained fixed at $3.90, consistent with the company's contract structure.
• Balance Sheet: Cash and cash equivalents increased by $8.8 million to $68.8 million. The company repaid a $20 million promissory note to Goldcorp during the quarter.
• Accounting Policy Change: Effective January 1, 2007, the company adopted new financial instrument standards (Section 3855), resulting in a one-time cumulative effect adjustment to opening retained earnings and accumulated other comprehensive income.

Guidance, Outlook, and Subsequent Events

Major Acquisitions (Subsequent Events)

• Peñasquito (Mexico): On April 16, 2007, Silver Wheaton agreed to acquire 25% of silver production from Goldcorp's Peñasquito project for the life of the mine.
  • Consideration: $485 million upfront cash payment.
  • Financing: Secured $485 million in committed bank financing (Term and Revolving loans) from Bank of Nova Scotia and BMO Capital Markets.
  • Terms: Ongoing per-ounce payment of the lesser of $3.90 or market price.
• Stratoni (Greece): On April 23, 2007, the company acquired 100% of silver production from Hellas Gold's Stratoni mine.
  • Consideration: $57.5 million upfront cash payment.
  • Terms: Ongoing per-ounce payment of the lesser of $3.90 or market price.

Outlook and Guidance

• Production Targets: Based on current contracts (including Peñasquito and Stratoni), the company expects annual silver sales of approximately 15 million ounces in 2007, increasing to 23 million ounces by 2009, and over 28 million ounces by 2012.
• Hedging: The company remains unhedged regarding silver prices.
• Management Commentary: CEO Peter Barnes stated that the new contracts boost near-term sales and the long-term growth profile, signaling the beginning of a strategy to build the company through accretive acquisitions.

Risks and Contingencies

• Operational Risk: The company has no control over the mining operations from which it purchases silver; results depend on the production volumes and operational success of third-party miners (Goldcorp, Lundin, Glencore, European Goldfields).
• Market Risk: Financial results are inherently exposed to fluctuations in the price of silver.
• Forward-Looking Statements: Estimates regarding reserves, resources, and future production are subject to uncertainty and may differ materially from actual results.

Investor Verification Checklist

• Acquisition Closing: Verify the closing of the Peñasquito ($485M) and Stratoni ($57.5M) transactions and the drawdown of the associated $485M bank debt facility.
• Production Volumes: Monitor actual silver production at Luismin, Zinkgruvan, and Yauliyacu to ensure they meet the volume assumptions used in the 15M oz 2007 guidance, particularly given noted grade reductions.
• Debt Covenants: Review the terms of the new bank debt facility to ensure compliance with leverage and debt service coverage ratios (currently required to be <= 3.50:1 and >= 1.25:1 respectively).
• Goldcorp Relationship: Note that Goldcorp owns 49% of Silver Wheaton and is a major counterparty; monitor any changes in this related-party dynamic.
• Accounting Adjustments: Confirm the impact of the new financial instrument accounting standards on future quarterly earnings, specifically regarding mark-to-market adjustments on warrants.