Silver Wheaton confident despite $62m impairment charge
Silver Wheaton shares closed up 1.71% at $19.01 per share on the NYSE Wednesday after the company released its financial results.
Author: Dorothy Kosich
Posted: Thursday , 13 Nov 2014
RENO (MINEWEB) -
Silver Wheaton’s decision to take a US$62 million impairment charge relating to its Mineral Park and Campo Morado silver interests (which were impacted by lower silver prices) generated some concern during a conference call with analysts Wednesday.
Mercator Minerals filed for Chapter 11 bankruptcy in August. “As a result, management has concluded the value of the Mineral Park silver interest is nominal, and as such has reported an impairment charge of $37.1 million during the current period, representing the carrying value of the Mineral Park silver interest at September 30, 2014,” said Silver Wheaton in 3Q financials published Wednesday.
However, Silver Wheaton entered into a settlement agreement earlier this month, which retains the company’s right to be paid of a portion from the sales of the Mineral Park mine and its assets.
Meanwhile, the G9 orebody at Nystar NV’s Campo Morado mine is nearing exhaustion and the company decided to reduce its estimate for future production. “The reduction in estimates of future production is an indicator of impairment related to the Campo Morado silver interest,” said Silver Wheaton. “Management estimates that the recoverable amount under the Campo Morado silver interest is $25 million, resulting in an impairment charge of $31.1 million during the current period.”
“Despite this, we remain confident in our portfolio,” said Silver Wheaton CEO Randy Smallwood during a conference call with analysts Wednesday. “As a reminder: 86% of our current production comes from mines in the first cost quartile of the respective cost curves and we challenge you to find a higher quality portfolio of our size anywhere in the precious metal space or in the mining industry in general.”
However, analyst John Tumazos of John Tumazos Very Independent Research observed, “I think it’s the words of Franco-Nevada, your peer, I recall, emphasizing that their royalties or streams are written into the deeds, that survive bankruptcy, are enforceable.”
Silver Wheaton CFO Gary Brown admitted that “Mercator’s said some challenges. … Do we want to fight the right out, (or) is it better for us to, in our eyes, we’ve done well on this investment that we are ahead of the game, in terms of our original investment back in and out. And we look at this almost … as a chance to just clean up the portfolio and continue to improve the quality of our asset base and the percentage things.”
During the conference call, Smallwood noted that Silver Wheaton “recently marked the 10-year anniversary of streaming, a model that we created in October of 2004 when we signed the first streaming agreement on the San Dimas mine.”
“Over our first 10 years, the company has grown to have over 20 assets in the portfolio, including such cornerstones as San Dimas, Penasquito and Salobo,” he added. “Our streaming model has been adopted across the industry and is now recognized as a valuable way for traditional mining companies to raise funds and crystallize the value of their non-core precious metals production.”
“As far as performance, in its first 10 years, Silver Wheaton’s share price has climbed over 500%, while silver has risen just under 140%,” Smallwood observed in the company’s financials.
During the third quarter, Silver Wheaton reported attributed silver equivalent production of 8.4 million ounces (6.1 million ounces of silver and 35,400 ounces of gold), down 7% from 9.1 million SEO ounces (6.8 million ounces of silver and 36,600 ounces of gold) in the third-quarter 2013.
For the first nine months of the year, Silver Wheaton reported 25.9 million SEO (19.3 million silver ounces and 102,000 gold ounces), down 1% from 26.1 million ounces (19.5 million ounces of silver and 110,400 ounces of gold) for the comparable period in 2013.
The company forecast 2014 attributable production of 36 million silver equivalent ounces, including 155,000 ounces of gold.
Financials
Net earnings for the third quarter and nine months ended September 30, 2014 was $4.5 million ($0.01 per share) and $147.8 million ($0.41 per share), respectively, compared with $77.1 million ($0.22 per share) and $281.6 million ($0.79 per share) for the comparable periods in 2013, representing a decrease of 94% and 48%, respectively.
Adjusted net earnings for third quarter and nine months ended September 30, 2014 of $72.6 million ($0.20 per share) and $215.9 million ($0.60 per share), respectively, compared with net earnings of $77.1 million ($0.22 per share) and $281.6 million ($0.79 per share) for the comparable periods in 2013, representing a decrease of 6% and 23%, respectively.
Average cash costs for the third quarter and nine months ended September 30, 2014 of $4.59 and $4.62 per silver equivalent ounce, respectively, compared with $4.73 and $4.63 per silver equivalent ounce, respectively, for the comparable periods in 2013.
Silver Wheaton’s EPS for the 3Q were one cent below analysts’ consensus of $0.21.
Cowen and Company analyst Adam P. Graf said, “Earnings for 3Q14 was in line with consensus, and relatively consist y/y as increased sales offset lower metals prices. Overall, operations remained consistent, and are building cash at a healthy rate. The company is on track to meet its year-end guidance. Maintain Market Perform.”
Scotiabank’s Trevor Turnbull also maintained a Sector Outperform rating for Silver Wheaton. He noted that the operating cash flow from Mineral Park ($51m) already exceeded the stream’s purchase price of $42m.
However, Turnbull observed, “We feel gold production is likely to be about 10% below the original plan of 155,000 oz despite the expected increase in output from Salobo and Sudbury.”
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