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Wheaton Precious Metals Corp. (WPM) Q3 2019 Earnings Call Transcript

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Wheaton Precious Metals Corp. (NYSE: WPM)
Q3 2019 Earnings Call
Nov 15, 2019, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen, thank you for standing by. Welcome to the Wheaton Precious Metals 2019 Third Quarter Results Conference Call. [Operator Instructions]

I would now like to turn the conference over to Mr. Patrick Drouin, Senior Vice President of Investor Relations. Please go ahead.

Patrick Drouin -- Senior Vice President, Investor Relations

Thank you, operator. Good morning, ladies and gentlemen, and thank you for participating in today's call. I'm joined today by Randy Smallwood, Wheaton Precious Metals' President and Chief Executive Officer; Gary Brown, Senior Vice President and Chief Financial Officer; and Haytham Hodaly, Senior Vice President, Corporate Development.

I'd like to bring to your attention that some of the commentary in today's call may contain forward-looking statements. There can be no assurances that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements.

In addition to our financial results, cautionary note regarding forward-looking statements, please refer to the section entitled Description of the Business Risk Factors in Wheaton's annual information form and the risk identified under Risks and Uncertainties in Management's Discussion and Analysis, both available on SEDAR and in Wheaton's Form 40-F and Wheaton's Form 6-K both on file with the U.S. Securities and Exchange Commission.

These documents together with the Q3 2019 MD&A and the press release from last night set out the material assumptions and risk factors that could cause actual results to differ, including, among others, fluctuations in the price of commodities, the absence of control over mining operations from which Wheaton purchases precious metals, and risks related to such mining operations and the continued operations of Wheaton's counterparties.

It should be noted that all figures referred to on today's call are in U.S. dollars unless otherwise noted. In addition, reference to Wheaton or Wheaton Precious Metals on this call include Wheaton Precious Metals Corp. and-or its wholly owned subsidiaries as applicable.

Now I'd like to turn the call over to Randy Smallwood, our President and Chief Executive Officer.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Patrick, and good morning ladies and gentlemen. Thank you for joining us today to discuss Wheaton's third quarter results of 2019.

I am pleased to report that we delivered another solid quarter from our diversified portfolio of high-quality assets. In the third quarter of 2019, we produced over 100,000 ounces of gold, 6 million ounces of silver, and 5,000 ounces of palladium. From a cash flow perspective, Wheaton generated over $140 million of operating cash flow and declared a quarterly dividend of $0.09 per common share in line with our dividend policy set for 2019 by the Board of Directors.

This quarter highlights the strength of Wheaton's business model and our ability to generate strong cash flows, particularly in an environment of rising commodity prices. Throughout the quarter, we saw gold and silver prices increased by an average of 17% over the previous year, while our cash flow and net earnings increased by over 30% and 100% respectively.

Looking forward, we are still currently on track for record annual gold production. However, we have updated our guidance for the year to reflect outperformance at Salobo, and the production interruptions at Penasquito.

With that, I'd like to turn the call over to Gary Brown, Senior Vice President and Chief Financial Officer, who will provide more details on our results. Gary?

Gary Brown -- Senior Vice President and Chief Financial Officer

Thank you, Randy, and good morning ladies and gentlemen. The Company's precious metal interests produced a 185,000 gold equivalent ounces in the third quarter of 2019, comprised of 104,200 ounces of gold, 6.1 million ounces of silver, and 5,500 ounces of palladium.

On a gold equivalent basis, this was consistent with the third quarter of the prior year with increased silver production being offset by a decrease in gold and palladium production. The decrease in gold and palladium production was due primarily to lower reported production at the Stillwater mines were reported production in the third quarter of 2018, included some material processed in prior periods.

Gold production was also impacted by lower production at the other gold interests, including Minto, which was placed in the care and maintenance in October of 2018, with these decreases being partially offset by higher production at Salobo and San Dimas. The increase in silver production was primarily due to higher grades at Penasquito. Gold equivalent sales volumes for Q3 2019 amounted to 155,000 ounces, consistent with the third quarter of the prior year with the increases in sales of gold and palladium being partially offset by lower silver sales volumes.

As of September 30, 2019, approximately 85,500 payable gold ounces, 4.2 million payable silver ounces, and 4,200 payable palladium ounces had been produced, but not yet delivered to the Company, representing an increase during the quarter of 4,300 payable gold ounces, and 700,000 payable silver ounces, while payable palladium ounces decreased by 300 ounces. The volume of ounces produced but not delivered were consistent with what we would expect to be normal levels.

Revenue for the third quarter of 2019 amounted to $224 million, representing a 20% increase relative to Q3 2018, primarily due to a 22% increase in the average realized gold price and a 15% increase in the average realized the silver price. Of this revenue, 62% was attributable to gold, 35% silver, and 3% palladium.

Gross margin for the third quarter of 2019 increased by 65% to $96 million, primarily due to the increase in commodity prices. Cash-based G&A expenses amounted to $13 million in the third quarter of 2019, representing an increase of $5 million from Q3 2018, with the increase being primarily related to increased accruals relative to the outstanding performance share units or PSUs during Q3 2019.

For the 2019 fiscal year, the Company has reduced its estimate of the total non-stock based G&A expenses, which excludes expenses relating to the value of stock options, restricted share units, and PSUs to be in the range of $33 million to $36 million.

Interest costs for the third quarter of 2019 amounted to $11 million, resulting in an effective interest rate on outstanding debt of 4.02% as compared to $12 million of interest costs at an effective interest rate of 3.61% in incurred in Q3, 2018.

During the third quarter of 2019, Chesapeake Gold Corp. exercised its option to reacquire two-thirds of the Metates Royalty for $9 million, resulting in a gain on disposal of $3 million. Net earnings amounted to $76 million in the third quarter of 2019, compared to $34 million in Q3 2018. After negating the effect of the gain on disposal of the Metates Royalty, and other items that are non-recurring in nature, adjusted net earnings in the third quarter of 2019 amounted to $73 million, more than doubled that of Q3 2018, with the increase being primarily the result of higher commodity prices.

Basic adjusted earnings per share doubled to $0.16 compared to $0.08 per share in the prior year. Operating cash flow for the third quarter of 2019 amounted to $142 million or $0.32 per share compared to $108 million or $0.24 per share in the prior year, representing a 33% increase on a per-share basis.

Based on the Company's dividend policy, the Company's Board has declared a dividend of $0.09 a share payable to shareholders of record on December 4, 2019. Under the dividend reinvestment plan, the Board has elected to offer shareholders the option of having their dividends reinvested in newly issued common shares of the Company at a 3% discount to market.

The operational highlights for the third quarter of 2019 included the following. Salobo generated 73,600 ounces of attributable gold production in Q3 2019, an increase compared to Q3 2018 of 2%, while gold sales volumes in Q3 2019 relative to Salobo decreased 3% to 63,100 ounces, resulting from negative changes in gold ounces produced, but not yet delivered to Wheaton.

Attributable gold production relative to Sudbury in Q3 2019, amounted to 6,600 ounces, while sales amounted to 7,600 ounces, an increase compared to Q3 2018 of 2% and 197%, respectively, with the increase in the sales being the result of positive changes in gold ounces produced, but not yet delivered to Wheaton. It is worth highlighting that throughput at the Sudbury mines is typically lower in the third quarter as a result of planned maintenance shutdowns occurring in the summer months.

Attributable gold production relative to Constancia in Q3 2019 amounted to 5,200 ounces, while sales amounted to 4,700 ounces, an increase compared to Q3 2018 of 42% and 59%, respectively, reflecting the receipt of 2,000 ounces of gold as compensation for the delay in accessing the Pampacancha deposit.

Attributable gold and palladium production relative to the Stillwater mines decreased by 49% and 38% to 3,200 ounces and 5,500 ounces, respectively as production in the third quarter of 2018 included some material processed in prior periods. The other gold interests generated 4,300 ounces of attributable gold production in Q3 2019, a decrease compared to Q3 2018 of 36%, primarily due to the Minto mine being placed in the care and maintenance during October of 2018.

According to Pembridge's news release dated October 16, 2019, milling operations at Minto recommenced on October 10, 2019. Pembridge states that the mill will operate on two weeks on, two weeks off schedule until sufficient development has been achieved underground to enable a higher monthly processing capacity.

Attributable silver production relative to the Penasquito mine increased 93% to 2 million ounces resulting from the mining of higher-grade material. Though production in the third quarter of 2019 was significantly better than in Q3 2018, it was adversely impacted by an illegal blockade which began on September 15 with mining operations not resuming until October 22.

Attributable silver production relative to Antamina in Q3 2019 amounted to 1.2 million ounces, while sales amounted to 1.1 million ounces, a decrease compared to Q3 2018 of 13% and 21%, respectively, with the decreased production levels being due to an expected decrease in grade due to mine sequencing in the open pit.

Attributable silver production relative to the other silver interests in Q3 2019, amounted to 2.2 million ounces, while sales amounted to 1.7 million ounces, a decrease compared to Q3 2018 of 12% and 11%, respectively, with the decrease being driven primarily by lower production from the Aljustrel mine.

During the second quarter of 2019, the Company repaid $82 million on the revolving facility, and made dividend payments totaling $33 million. With these cash outflows being partially offset by proceeds from the exercise of stock options, the disposal of long-term equity investments and the partial disposal of the Metates Royalty agreement, generating $38 million of cash inflows in total.

Overall, the Company's net debt position was reduced by $146 million during the third quarter of 2019, with the balance as at September 30, being $862 million. The Company's cash position, strong forecast future operating cash flows combined with available credit capacity under the revolving facility positions the Company well to satisfy its funding commitments, sustain its dividend policy, while at the same time providing flexibility to consummate additional accretive precious metal purchase agreements.

That concludes the financial summary. And with that, I turn the call back over to Randy.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Gary. For the remainder of 2019, we expect to see continued strong results from our gold operations, offsetting the impact of the deferred silver production seen in the first nine months of the year due to temporary shutdowns at Penasquito, as Gary has already discussed.

So as such, we now expect to produce approximately 390,000 ounces of gold, up from the 385,000 ounces that was forecast last quarter due to stronger than anticipated production from Salobo. Attributable silver production has been adjusted to approximately 21 million ounces of silver, down from 22.5 million ounces to reflect the production interruptions at Penasquito. The forecast production of palladium from Stillwater in 2019 remains unchanged at approximately 22,000 ounces.

We continue to expect steady growth from our portfolio such that over the next five years, inclusive of 2019, we expect to produce on average 750,000 gold equivalent ounces annually. I would like to remind everyone that Wheaton currently does not include any production in that five-year forecast from Vale's Salobo III ongoing expansion, the Hudbay's -- or Hudbay's Rosemont project or the recently restarted Minto mine.

With respect to Salobo expansion, Vale has confirmed that it continues to advance ahead of schedule with physical completion of the expansion now at 27%, including the completion of the concrete foundations for the mill and the primary crusher basis in the arrival of the site of the first loads related to the long-distance conveyor belt. Given their progress to date and assuming construction continues at the same pace, we expect the expansion at Salobo could begin contributing to our production profile as early as 2022. Our organic growth profile continues to be very strong.

On the corporate development front, we remain focused on adding additional production from high-quality accretive opportunities. Wheaton's sector-leading cash flow coupled with available credit under our revolving facility provides ample capacity for continued investments. As always, we will remain disciplined and continue to focus on acquiring streams that are accretive to our current shareholders and come from long-life assets producing in the lowest half of their respective cost curves.

In summary, there were some challenges with silver production in the first nine months of 2019, with the interruptions at Penasquito. However with the mine safely back to full operation and new month expectation of achieving higher grades, we look forward to a much stronger fourth quarter. And on the gold side, we are very pleased -- we continue to be very pleased with the outperformances of our gold assets, resulting in increased guidance. And we are on track for record gold production in 2019.

As our revenue is derived from a diversified production profile of 100% precious metals, we provide significant leverage to not only gold but silver and palladium as well, which bodes well in an environment of increasing commodity prices as we've seen in this past quarter.

We believe our production remains founded on the highest quality portfolio of precious metal streams in the industry, underpinned by very low-cost mining operations such as the Salobo, Antamina, and Stillwater.

And so with that, I'd like to open up the call for questions. Operator?

Questions and Answers:

Operator

Thank you. Ladies and gentlemen, we will now conduct the question-and-answer session. [Operator Instructions] Your first question comes from the line of Ralph Profiti with Eight Capital. Please go ahead.

Ralph Profiti -- Eight Capital -- Analyst

Good morning. Thanks for taking my questions. Two of them, if I may. Randy, I know that CSR is a big part of the Wheaton strategy. Can you talk a little bit about sort of the community relations work you've done ahead of Phase 3 expansion at Salobo? And when do you think we can hear more details from Vale on the project scope? And now they're currently working on some details that may impact stream deliveries.

Randy Smallwood -- President and Chief Executive Officer

Okay. So I think the first part of that, we've had a long relationship, but Salobo -- with Vale, and we orchestrate that through a partnership with the Vale Foundation. And so there has been a number of different programs in the area of Salobo improvements to health facilities. I know we supported a health clinic in one of the local villages there. We've also initiated some small business enterprise support for some of the local communities that were -- there were some changes in terms of train scheduling and stuff like this, and so we provided some support to promote small business development and help supply in that.

And -- so it's been a very active program. Obviously, Salobo is a very important asset for us and so we've done quite a bit of work on that side. And -- sorry, Ralph, what was the second part of the question, you talked about some changes?

Ralph Profiti -- Eight Capital -- Analyst

Well, are they currently working on sort of scope details, right, that -- I know, it's just that step up to the 12 million tons per year step-up. But are there changes around the mine plan, the footprint or the actual production plan when you get down to the metal level that may impact how Wheaton is approaching Phase 3 stream deliveries?

Randy Smallwood -- President and Chief Executive Officer

Yes. Okay. And one of the reasons that we don't include the Phase 3 deliveries is that they haven't selected a final mine plan at Salobo. They have the option of continuing their current practices, which is to stockpile low-grade material or to switch over to a mining practice that would take all the ore and process it through the mill at the same time and not build up a low-grade stockpile.

They don't have to make that decision until probably 2021 because the only impact is the different sized mobile fleet. If they're going to be stockpile low-grade material, it means they're overall moving more material, which means they're going to need a slightly larger mobile fleet. Last I've checked, all that takes is 1,800 Caterpillar [Phonetic] and you can have that equipment there relatively quick.

And so that's not a decision that they've finalized yet, and it's one of the reasons we haven't been able to give firm guidance in terms of what we see coming forward. Typically the range in additional production for us is going to be somewhere between -- and -- if they go with the full feed from the -- and not do any stockpiling, they'll probably see a bump of about 50,000 to 60,000 ounces of gold per year. If they go to a stockpile that they maintain current practices and go with a low-grade stockpiling procedure, we would probably see somewhere in the area of 100,000 to 110,000 ounces of additional gold production per year.

And so -- you know, it's that range, we're probably not going to get a firm decision from them until as I said, 2021, I would think. They're still going through and doing optimization studies to try and determine what works the best for them. We -- we're hopeful that they do take the stockpiling approach. It's what they currently do at the site and that -- it's proven very effective at this site in terms of moving metal production forward. It's proven effective at many sites around the world in terms of that and so. But that's a decision that just hasn't been made yet on the Vale side. And so we're monitoring that and give guidance as we get guidance on that.

Ralph Profiti -- Eight Capital -- Analyst

Got it. Yes. That's very helpful. On Constancia, we've heard from Hudbay on Pampacancha ore in 2020, that hasn't changed, and the 8,000 ounces payment that hasn't changed either. Is there comments you can make on what happens if Pampacancha ore doesn't come in until say late 2020, or not In 2020 at all? Any disclosures around helping us on what those delay payments may look like?

Gary Brown -- Senior Vice President and Chief Financial Officer

Yes, Ralph. It's Gary here. If they're not mining by the end of 2020, then there is a -- we have the option to demand an 85,000 ounce of gold payment, which would be delivered over -- I believe it's a 12-month period. But -- so -- and that's to return the capital that we've deployed, relative to the Pampacancha pit. But at this point, it still looks like they're going to be in the Pampacancha pit sometime next year.

Ralph Profiti -- Eight Capital -- Analyst

Yes.

Randy Smallwood -- President and Chief Executive Officer

Yes, I mean, it's Randy, here. Our partnership with Hudbay is an important one. We've done a lot of work with them on different projects and such and so we're supportive in terms of their efforts to move this thing forward. They are making progress slowly, but they are making progress. They are moving forward on it. And so we will work with Hudbay through this and see where we get. But we get compensated until the end of 2020, and then at that point, we have an option to either cash, get compensation back or work with Hudbay. But it's our choice.

Ralph Profiti -- Eight Capital -- Analyst

Got it. Yes. Very helpful. Thanks, everyone.

Gary Brown -- Senior Vice President and Chief Financial Officer

Thank you, Ralph.

Operator

[Operator Instructions] Your next question comes from the line of Alex Hunchak with CIBC. Please go ahead.

Alex Hunchak -- CIBC World Markets -- Analyst

Hey, guys, thanks for taking my question. Just a quick one. Can you provide some guidance on sort of the longer-term plan with the equity investment portfolio? Particularly, I saw that First Majestic is now down below 10% in the quarter, interesting. [Phonetic] Any guidance on your plans there would be great. Thanks.

Randy Smallwood -- President and Chief Executive Officer

Well, we're very impressed with what First Majestic has done at San Dimas, and they've taken over, they've had great exploration success. And so we are long-term supporters the First Majestic, and look forward to watching them bringing San Dimas back to its former glory in terms of performance. And so I can tell you, we have moved slightly below 10% at -- sort of a more of a strategic decision just to get to the point. But we are long-term supporters of First Majestic.

San Dimas is an incredible asset. As I'm sure you know, Alex, I've had a very long history of that asset, even before Wheaton Precious Metals, and I know how well it can perform when you've got a motivated team that is investing into the ground there. And First Majestic has done an incredible job to date. It's very refreshing to see. And I think that we, the market and investors out there still haven't seen the full benefits of that investment from First Majestic side. And so -- yes, we are long-term supporters in that front.

Alex Hunchak -- CIBC World Markets -- Analyst

Okay. That sounds good. Thanks a lot.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Alex.

Operator

Your next question comes from the line of Charles Gibson with Edison. Please go ahead.

Charles Gibson -- Edison Group -- Analyst

Good morning and thank you very much. And if I may, congratulations on your quarter.

Randy Smallwood -- President and Chief Executive Officer

Thanks, Charles.

Charles Gibson -- Edison Group -- Analyst

I wonder if I could ask now -- not at all. I wonder if I could ask just on your silver guidance of 21 million ounces for 2019, and I couldn't help noticing you look like you've already produced 16.5 million ounces. So that would imply 4.5 million in the fourth quarter, which is quite a step down from the third quarter production-wise. And I just wonder is that all attributable to Penasquito? Is there something else? Or is that your natural conservatism?

Gary Brown -- Senior Vice President and Chief Financial Officer

It's our natural conservatism. We don't like -- we don't like missing our production guidance. And so as things like this, we obviously -- the shutdowns or the deferrals that we've seen from Penasquito as they've worked our way through this, we're hopeful that Newmont has got it resolved to in finality, not going to happen again.

But having two shutdowns within the first three quarters of this year, we decided to stay a little bit on the conservative side. I agree, we've got -- by my calculations, all we have to do is produce 4.4 million ounces in this quarter, which if you consider if everything runs smoothly through that, we should not have any problems at all on that front.

And so I'm confident. But when we put out our production guidance, it is a number that we are confident on. And we just felt 21 million ounces was the right number. I'm comfortable that we will at least achieve that.

Randy Smallwood -- President and Chief Executive Officer

Charlie, at the margin as well, we do have with the Yauliyacu sharing mechanism in place. They've hit the threshold, so we wouldn't expect to see slightly less production from Yauli as well.

Charles Gibson -- Edison Group -- Analyst

Yes, understood. Thank you very much.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Charles, and thank you, everyone, for dialing in today. In closing, we believe Wheaton is well-positioned to continue delivering value to our shareholders for a number of different reasons.

Firstly, by having low and predictable costs that result in some of the highest margins in the entire precious metal space. Secondly, through our steady organic growth profile over the next several years and proven track record of accretive quality acquisitions. Thirdly by offering our shareholders exposure to some of the best mines in the world through our high-quality portfolio of long-life, low-cost assets. And lastly, by being a leader among precious metal streamers in sustainability and supporting our partners and the communities in which we live and operate.

I do look forward to speaking with you all again. Thank you.

Operator

[Operator Closing Remarks]

Duration: 28 minutes

Call participants:

Patrick Drouin -- Senior Vice President, Investor Relations

Randy Smallwood -- President and Chief Executive Officer

Gary Brown -- Senior Vice President and Chief Financial Officer

Ralph Profiti -- Eight Capital -- Analyst

Alex Hunchak -- CIBC World Markets -- Analyst

Charles Gibson -- Edison Group -- Analyst

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