Wheaton Precious Metals Corp

TSX:WPM

Earnings Call Transcript 2022-Q1

[Operator]

Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Wheaton Precious Metals 2022 First Quarter Conference Call. [Operator Instructions] I would like to remind everyone that this conference is being recorded on Friday, May 6, 2022, 11:00 AM, Eastern Standard Time.

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

[Patrick Drouin, executive]

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 President-- Wheaton Precious Metals President and Chief Executive Officer; Gary Brown, Senior Vice President and Chief Financial Officer; Haytham Hodaly, Senior Vice President, Corporate Development; and Wes Carson, Vice President of Mining Operations.

Please note that for those not currently on the webcast, this slide presentation accompanying this conference call is available in PDF format on the Presentations page. I'd like to bring to your attention that some of the commentary in today's call may contain forward-looking statements, and I would direct everyone to review Slide 2 of the presentation, which contains important cautionary notes regarding forward-looking statements.

It should be noted that all figures referred to on today's call are in US dollars unless otherwise noted. In addition, reference to Wheaton or Wheaton Precious Metals on this call includes 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, executive]

Thank you, Patrick, and good morning, ladies and gentlemen. Thank you for joining us today to discuss Wheaton's first-quarter results of 2022. I am pleased to announce that Wheaton is off to a good start in 2022. Our portfolio continues to deliver strong results, including solid revenue, earnings, and cash flow for the first 3 months of 2022, as Gary will discuss later.

These results were driven by solid first-quarter production that positioned us well for achieving our previously announced annual guidance for 2022 of 700,000 to 760,000 gold equivalent ounces. This solid performance reflects the underlying strength of our diversified high-quality portfolio. And our portfolio continues to grow, as the first quarter was once again very busy on the corporate development front.

In the quarter, we added 2 new streams, Adventus' Curipamba project and the other on Sabina's Goose project. In addition, we increased our interest on a third stream, one that was already in the portfolio from Aris Gold's Marmato Mine. Lastly, we once again demonstrated our leadership in pushing to create value for all stakeholders, by announcing the adoption of a new climate change and environmental policy.

Well, Wheaton has been carbon-neutral relative to our Scopes 1 and 2 emissions since 2014. This new policy includes a commitment to net-zero carbon emissions for Scope 1, 2, and 3 by 2050. I would now like to turn the call over to Gary Brown, our Senior Vice President and Chief Financial Officer, who will provide more details on our results. Gary.

[Gary Brown, executive]

Thank you, Randy. And good morning, ladies and gentlemen. The company's precious metal interest produced 171,400 gold equivalent ounces in the first quarter of 2022, comprised of 79,100 ounces of gold, 6.2 million ounces of silver, 4,500 ounces of palladium, and 234,000 pounds of cobalt. Relative to the first quarter of the prior year, this represented a decrease of 13% in gold equivalent production, partially due to lower production at Voisey's Bay, where the comparable period in the prior year included 676,000 pounds or 12,400 gold equivalent ounces of production from prior periods.

Neutralizing for the prior period production at Voisey's Bay, production was down 7%, primarily due to the mining of lower-grade material at Voisey's Bay and Antamina. On a gold equivalent basis, sales volumes were 4% lower relative to Q1 2021, with the lower production levels being partially offset by relative changes to ounces produced but not delivered. As at March 31st, 2022, approximately 151,000 gold equivalent payable ounces were in PBND, in addition to inventory amounting to 410,000 pounds of cobalt or 7,500 gold equivalent ounces, with a combined figure of 158,000 gold equivalent ounces, representing approximately 2.7 months of payable production.

This level of PBND and inventory is approximately 4,000 gold equivalent ounces higher than the average balance of approximately 154,000 gold equivalent ounces over the preceding 4 quarters. Revenue for the first quarter of 2022 amounted to $307 million, representing a 5% decrease relative to Q1 2021, primarily due to a 2% decrease in the average realized gold equivalent price and the lower sales volumes.

Of this revenue, 47% was attributable to gold, 44% silver, 3% palladium, and 6% cobalt.

Gross margin for the first quarter of 2022 increased by 3% to $180 million relative to comparable quarter of the prior year, resulting from sales mix differences. G&A expenses amounted to $9 million in the first quarter of 2022 and donations, and community investment expenses amounted to an additional $1 million, with a combined figure of $10 million being virtually unchanged from Q1 2021.

For 2022, the company continues to estimate that G&A expenses will amount to $41 to $42 million while donations and community investment expenses are estimated to amount to an additional $6 to $7 million. Stock-based compensation amounted to $10 million in the first quarter of 2022, representing an increase of $8 million relative to the comparable quarter of the prior year, primarily due to higher accrued costs associated with the performance share units or PFUs, which in turn was due to a 24% increase in the company's share price over the quarter.

Net earnings amounted to $157 million in the first quarter of 2022, compared to $162 million in Q1 2021. Basic adjusted earnings per share decreased 3% to 35 cents per share, compared to 36 cents per share in the prior year. Operating cash flow for the first quarter of 2022 amounted to $211 million or 47 cents per share, compared to $232 million or 52 cents per share in the prior year, representing a 9% decrease on a per-share basis.

Based on the company's dividends policy, the company's Board has declared a dividend of 15 cents a share, payable to shareholders of record on May 20th, 2022. 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 1% discount to market.

During the first quarter of 2022, the company invested $16 million relative to the Marathon PMPA, $25 million relative to the Phoenix PMPA, and $4 million relative to the Marmato PMPA. Additionally, the company acquired $20 million of long-term equity investments. Overall, net cash inflows amounted to $150 million in Q1 2022, resulting in cash and cash equivalents, as at March 31st, of $376 million.

The capacity provided by the undrawn $2 billion revolving credit facility, combined with the strong forecast offering cash flows, positions the company very well to satisfy its funding commitments and sustain its dividend policy, while at the same time having the flexibility to consummate additional creative precious metal purchase agreements. That concludes the financial summary, and with that, I turn the call over to Haytham.

[Haytham Hodaly, executive]

Thanks, Gary, and thank you all for joining us today. I'm happy to say that the momentum we ended 2021 with continued nicely into 2022. 3 more streaming transactions were completed in the first quarter of 2022 for a total of 8 transactions over the last year, committing to deploy more than $1 billion over the next 3 to 5 years on streams that will further grow our medium-term outlook.

I did have the chance to review the first 2 transactions completed in the early part of this year on our year-end call, so we'll only provide a bit of an overview on the latest transaction with Aris Gold. In March, we announced an expansion of our Marmato gold stream in Colombia with Aris Gold, whereby we had the opportunity to increase our stream, to help with the remainder of the funding required.

As shown on the slide, we've increased our gold stream to start at 10.5% from 6.5% previously. The silver stream remains unchanged at 100%. For this change, we'll pay $65 million, providing $15 million on closing and the remaining $50 million during construction. The production payments have stayed the same starting at 18%. When we first entered into this transaction in November 2020, we were very excited about the resource expansion potential, and late last year, we weren't disappointed when the company released its updated resource estimate showing an 81% increase in M&I resources in the Lower Mine.

We believe significant upside still remains from the Lower Mine going forward. I'll note that the Upper Mine is already producing with the planned expansion underway, while first production from the Lower Mine, which is what we are really excited about, is expected to begin in about 2 years' time, with construction having begun late last year. I'll now pass the presentation over to Wes Carson for the operations review.

[Wesley Carson, executive]

Thanks, Haytham. Good morning. Overall production in the first quarter came in slightly lower than anticipated with a lower-than-expected performance from Salobo and Constancia gold, but remains on track for us to meet our forecasts for the year. In the first quarter, Salobo produced 42,500 ounces of attributable gold, a decrease of approximately 20% relative to the first quarter of 2021 due to lower throughput.

On January 6th, heavy rainfall in the region of the Salobo III mine expansion caused a landslide that damaged part of a conveyor belt and blocked access to the project site. A full assessment of impact is ongoing and is expected to be completed early in the second quarter of 2022. Vale also reported that fiscal completion of the Salobo III mine expansion was 90% at the end of the first quarter and continues to be on track for startup in the fourth quarter of 2022.

During the quarter, Constancia produced 506,000 ounces of attributable silver and 6,300 ounces of attributable gold, an increase of approximately 25% and 157%, respectively, relative to the first quarter of 2021. The increase in both silver and gold production was due to higher grades resulting from the commencement of ore production from the Pampacancha satellite deposit and the increase in fixed recoveries on attributable gold from 55% to 70%.

Gold production was lower than forecast in Q1 due to material mine balance between Constancia and Pampacancha open pits being different than expected. This balance is expected to be restored in Q2. Voisey's Bay underground mine extension, which includes development of 2 new underground mines, Reid Brook and Eastern Deeps, was 70% physically complete at the end of the first quarter.

Reid Brook produced its first ore in the second quarter of 2021, and Vale has indicated that Eastern Deeps is expected to start up in the second half of 2022. That concludes the operations overview, and with that, I'll turn the call back to Randy.

[Randy Smallwood, executive]

Thank you, Wes. In summary, Wheaton recorded a solid first quarter distinguished by several key highlights. We achieved strong 3-month revenue, earnings, and cash flow and declared a 15-cent quarterly dividend, an increase of 7% from the prior year. Our commitment to accretive growth was emphasized by the addition of 2 new streams and increasing our interest in a preexisting stream, all of which are strong development projects, which we look forward to welcoming into our portfolio of high-quality assets.

Lastly, we once again showed our leadership and sustainability by being the first large-cap streamer with a commitment to net-zero carbon emissions by 2050. With that, I would like to open up the call for questions. Operator, please.

[Operator]

[Operator Instructions] Your first question comes from Ralph Profiti from Eight Capital.

[Ralph Profiti, analyst]

Randy, I'd like to know where you stand on sources of capital as it pertains to funding some of the contingent payments coming up over the next few years as well as new streaming opportunities. Are we close to the point where-- or at what point does cost of debt capital become more disadvantageous and you sort of start to think about leaning more on internal cash generation as a primary source of funds? How far are we from that level?

[Randy Smallwood, executive]

Well, we've always leaned on internal cash flow, first and foremost. I'm going to let Gary handle that one in terms of the balance sheet, so all I can tell you is it's an incredibly strong one.

[Gary Brown, executive]

Yes, thanks, Randy. Thanks, Ralph, for the question. Look, we've got just under $2.3 billion of commitments outstanding that get paid over the next 3 to 5 years. And based upon when we anticipate those payments to be made, we don't anticipate to have to tap into our revolver at all with the strength of our operating cash flows.

But if we did, we've got a $2-billion revolver that's very competitively priced, which we would not hesitate to use.

We still think that that is an effective source of capital for us. And at the end of the day, we still have the $300 million ATM program that we've not used. And again, we don't anticipate using but we've positioned ourselves to be very efficient with respect to accessing capital should we need it. But again, we don't anticipate having to tap into any of those other sources, given the strength of our operating cash flows.

[Ralph Profiti, analyst]

Okay. Yes, good to hear about the tools in the toolbox become plentiful. On this Aris deal and the expansion of that stream, how much of this is sort of a one-off in terms of the terms of it, or is this something that looks to be where upfront payments becoming a greater proportion of the total deal value can be somewhat of a CapEx inflation mitigation measure that we could be seeing in new streaming deals? I'm just wondering if we're starting to do that as some of these emerging producers go back and polish up the numbers and come up with new CapEx estimates?

[Haytham Hodaly, executive]

Sure. With the Aris transactions specifically-- First of all, thank you, Ralph, for the question, It's Haytham. With the Aris transactions specifically the additional capital that was required, that wasn't due to inflation, it was because they were pursuing another transaction of Soto Norte, which they've recently announced, which they decided to use some of the initial capital that they had in place.

Now, we've looked at the Aris transaction, and we were taking such a small percentage of the economics that there's some very, very strong margins, so we were happy to step up and actually cover the shortfall in capital that was required after they acquired the Soto Norte option.

[Randy Smallwood, executive]

And, Ralph, if I could just add onto that, I mean, yes, I think it's a good example of how we work as partners, with our operating partners, operating companies that provide us the metal. And in a case like that, where Aris was looking at growing the company on a broader basis, this was a source of capital they had. We were actually quite excited about their investment into Soto Norte.

And although we're not investing into it, we think it's a good-quality project that the possibility of them moving that project forward is exciting. And if we can be a partner helping them grow corporately on a basis like this, I think it's just another example of one of the things that we focus on, on Wheaton is strengthening our partnerships and delivering value after the initial transaction, and I think this is a great example of that.

[Operator]

Your next question comes from Trevor Turnbull from Scotiabank.

[Trevor Turnbull, analyst]

Yes, thanks, Randy. Just reading the Salobo update and talking about delivery of Phase 3 no later than, kind of, the end of this year, do you have a sense yet of whether Vale will then be in a position to ask for your capital contribution this year, or is that more likely something to look for in 2023?

[Randy Smallwood, executive]

Yes, I expect it to likely be-- It is a 90-day test, and it is based on throughput capacity, and so I expect it'll be satisfied in 2023. They expect to turn the switches on, but given that it's a 90-day test, there's no way it's going to be completed in 2022.

[Trevor Turnbull, analyst]

Right. And then just also on that, any further kind of insights from Vale with respect to their option to kind of stockpile lower-grade material and preferentially process higher-grade material? And, has the copper price kind of informed that decision at all in your opinion?

[Randy Smallwood, executive]

We still haven't had firm guidance from them in terms of the approach there. I mean, there is no doubt that they are going to be stockpiling less material than what they have traditionally there, which means that the overall processing grade is going to be lower. Vale is still trying to find a way to make that work so they can satisfy the stockpiling maintain the same, I guess, operating process that they're doing today.

But they haven't come back with a firm plan for us yet, and so there hasn't been a commitment one way or the other. They're still working on that mining plan, and obviously, with the delays, it's given them a bit more time to make that call as to which way they go.

[Trevor Turnbull, analyst]

Right. And then I just had one other question with respect to Copper World and Rosemont. I was just wondering if you had been talking to Hudbay about how your stream and the advance or upfront payments for Rosemont might work if, for example, Copper World becomes more of a priority in the development queue relative to Rosemont.

[Randy Smallwood, executive]

Well, we haven't sat down and talked in a firm framework with them yet, mainly because they're still making decisions as to which way they want to run with the Copper World development. It is pretty exciting progress on that front, especially relative to the lack of progress on the Rosemont side. They still will have a need for capital to go forward. And the Copper World area is covered by our stream.

But what's being proposed is definitely different than what was being proposed at the Rosemont transaction. But they haven't got to the point of firming up what that proposal is yet, and so we're waiting for a bit more guidance from them as to how they want to move that forward. They are definitely working on moving it forward. How they want to move that forward, that's when we'll sit down and hammer out how those changes have an impact on the stream.

I don't see any other questions, so thank you, everyone, for dialing in today. In closing, we believe Wheaton is well-positioned to continue delivering value to all of our stakeholders for a number of different reasons. Firstly, by having low and predictable costs, which when coupled with leveraged increasing commodity prices result in some of the highest margins in the entire precious metal space.

Secondly, by offering our shareholders exposure to our diversified portfolio of long-life, low-cost assets, and the strong organic growth embedded within it.

Thirdly, by returning value to shareholders through our unique cash flow-linked dividend policy. And lastly, by being a leader amongst precious metal streamers in sustainability and by supporting our partners and the communities in which we live and operate. We do look forward to speaking with you all again soon. Until then, please stay healthy and stay safe. Thank you.

[Operator]

This concludes our conference call for today. Thank you for participating. Please disconnect your lines.