After announcing record gold sales for their second quarter, Silver Wheaton (TSX: SLW) is now realizing the upside from the mining assets it purchased during the industry's downturn.
“By acquiring streams with attractive economics during the downturn we are now beginning to reap the robust cash flows when the commodity prices turned,” said Randy Smallwood, president and CEO of the precious metal streaming company.
Attributable production for Silver Wheaton during the second quarter was 7.6 million ounces of silver and a record 70,200 ounces gold, up 5% and 40%, respectively, from last year. Silver Wheaton saw revenues increase 29% year over year, resulting from increases in both sales volume and price. Net earnings growth didn’t quite keep pace with revenue growing 12% since the second quarter of 2015.
Over half of the gold Silver Wheaton produced came from their 50% share of gold production at the Salobo mine in Brazil. On August 2, Silver Wheaton acquired an additional 25% of the Salabo life-of-mine gold production from a subsidiary of the Brazilian mining company Vale (BVMF:VALE5). The mine was purchased for $800 million in cash and $400 million in common shares. Silver Wheaton will also have to make ongoing royalty payments for each ounce of gold delivered under the agreement.
Smallwood said ideally he would like to continue Silver Wheaton’s growth by buying into development-stage projects, but the inventory is sparse. Exposure to production assets is the remaining route.
“We haven’t seen a development asset for a long time. There’s a few out there but it’s one of the reasons I’m so bullish about investing in this space because without investing back into the ground it just puts supply side pressure onto the commodity prices themselves,” said Smallwood during a conference call.
After purchasing the Salobo mine, Silver Wheaton expects 42% of its revenue to come from gold in 2016, jumping to 45% when looking at the average over the next five years. With the new source of gold, Silver Wheaton is expecting to increase its production by over 50% for the second half of 2016. The company expects to produce over 330,00 ounces of gold over the course of the year.
While increasing commodity prices leads to greater profits for Silver Wheaton, it may also slow their acquisition plans. Silver Wheaton may instead reward shareholders by boosting dividends.
“If we see real strength in silver and gold prices over the next year it’s going to make it tougher for us to close new acquisitions. But that’s the point where we start looking at our cash flows and start contemplating increasing the dividend moving forward,” said Smallwood.
Silver Wheaton is also having trouble with the Canadian Revenue Agency (CRA). The government is currently seeking $200 million in back taxes from Silver Wheaton for profits made internationally. Silver Wheaton holds that Canadian taxes are not applicable to their offshore profits. Silver Wheaton is aiming to have this issue resolved by next year and assumes they will be successful in their challenge.
