Wheaton Precious Metals (WPM) Q2 2021 Earnings Call Transcript

Wheaton Precious Metals (WPM 0.02%)
Q2 2021 Earnings Call
Aug 13, 2021, 11:00 a.m. ET

Contents:

• Prepared Remarks
• Questions and Answers
• Call Participants

Prepared Remarks:

Operator

Good morning, ladies and gentlemen and thank you for standing by. Welcome to the Wheaton Precious Metals 2021 second-quarter results conference call. [Operator instructions] I would like to remind everyone that this conference call is being recorded on Friday, August 13, 2021, at 11:00 a.m. Eastern Time.

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

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 second-quarter results of 2021. I do hope everyone has been keeping healthy and safe since our last quarterly conference call. I am pleased to announce that our record sales volumes in the first half of 2021 have resulted in both record revenue and cash flow.

This solid performance reflects the underlying strength of our diversified high-quality portfolio and has resulted in a 50% increase to the quarterly dividend relative to the second quarter of 2020, marking the fourth quarterly dividend increase in a row. We continue to execute on our growth strategy closing the previously announced stream on the Aris Gold are owned by Marmato mine -- sorry, owned Marmato mine located in Colombia and the Capstone owned Santo Domingo project located in Chile. In addition, subsequent to the quarter, we signed a nonbinding term sheet with Rio2 to enter into a new stream on the Fenix Gold Project located in Chile. Haytham will provide details on this most recent transaction later in this call.

Our organic growth profile continues to advance with first production from the Pampacancha deposit at Hudbay Constancia mine in the second quarter and at Vale's Voisey's Bay operation, the commencement of the transition from open pit to underground mining. I am pleased to announce that in May, Wheaton published its second annual sustainability report, highlighting our strong ESG performance, which continues to be recognized with sector-leading scores from external rating agencies. The report looks back at a year where the COVID-19 pandemic significantly impacted lives and communities globally and reinforce the need for all stakeholders to work together to make a positive contribution. Recognizing this need, we launched a $5 million community support and response fund more than doubling the budget for our existing community reinvestment programs.

The fund was designed to meet the immediate needs of communities that are directly influenced by the mines on which we have precious metal streaming agreements. And Wheaton continues to work with our mining partners and nonprofit organizations to identify where funds could make the greatest impact and alleviate pressures resulting from this pandemic. Details on the specific initiatives supported by this fund are outlined in the sustainability report, which if you haven't done so already, I highly encourage you to download from our website. 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 -- Senior Vice President and Chief Financial Officer

Thank you, Randy and good morning, ladies and gentlemen. The company's precious metal interest produced 194,100 gold equivalent ounces in the second quarter of 2021 comprised of 90,300 ounces of gold, 6.7 million ounces of silver, 5,300 ounces of palladium and 380,000 pounds of cobalt. Relative to the second quarter of the prior year, this represented an increase of 32% on a gold equivalent basis with the prior-year's production being affected by the temporary suspension of operations at six mines from which the company derives precious metal as a result of the COVID-19 pandemic. On a gold equivalent basis, sales volumes were 7% higher with the changes in PBND tempering the significant increase in production in the most recent quarter.

As at June 30, 2021, approximately 138,000 gold equivalent payable ounces were in PBND, in addition to 134,500 pounds of cobalt or 1,000 gold equivalent ounces with the combined figure of 139,000 gold equivalent ounces, representing approximately 2.2 months of payable production. This is consistent with the average PBND balance of approximately 134,000 gold equivalent ounces over the preceding four quarters. Revenue for the second quarter of 2021 amounted to $330 million, representing a 33% increase relative to Q2 2020, primarily due to a 24% increase in the average realized gold equivalent price combined with the higher sales volume. Of this revenue, 50% was attributable to gold, 45% to silver, 3% to palladium and 2% to cobalt.

Driven by the increase in commodity prices, gross margin for the second quarter of 2021 increased 46% to $182 million. Cash-based G&A expenses amounted to $17 million in the second quarter of 2021, representing a decrease of $3 million from Q2 2020, primarily due to lower accrued costs associated with performance share units or PSUs. The company estimates that nonstock-based G&A expenses, which exclude expenses relating to the value of stock options and PSUs, will fall at the higher end of the previously communicated $42 million to $45 million range for 2021. Net earnings increased by 57% to $166 million in the second quarter of 2021 compared to $106 million in Q2 2020.

Basic adjusted earnings per share increased 65% to $0.36 compared to $0.22 per share in the prior year. Operating cash flow for the second quarter of 2021 amounted to $216 million or $0.48 per share compared to $152 million or $0.34 per share in the prior year, representing a 42% increase on a per share basis. Based on the company's dividend policy, the company's board has declared a dividend of $0.15 a share payable to shareholders of record on August 27, 2021 and 50% higher than the dividend declared relative to Q2 2020 and representing the fourth consecutive quarterly increase, highlighting the participation that the company's unique dividend policy provides to both production growth and increase in commodity prices. 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 second quarter of 2021, the company made dividend payments relative to the prior two quarters totaling $104 million, made $64 million in upfront payments relative to the Marmato and Santo Domingo PMPAs and acquired $2 million of long-term equity investments. Overall, net cash inflows amounted to $44 million in Q2 2021, resulting in cash and cash equivalents at June 30 of $235 million. Also during the quarter, the term of the company's $2 billion revolving facility was extended by an additional year with the facility now maturing in June 2026. As at June 30, 2021, the company had over $2.2 billion of immediate liquidity, which, when combined with the unaccessed $300 million ATM program and strong forecast operating 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 accretive precious metal purchase agreements.

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

Haytham Hodaly -- Senior Vice President, Corporate Development

Thanks, Gary and thank you all for joining us today. By now, you've all had a chance to go through the economics on our newest stream on Rio2's Fenix Gold mine in Chile, just Northeast of Copiapo. And I can tell you that we're very happy to be a stream partner on this project, especially with such a proven management team run by Alex Black that has a strong track record of advancing this type of deposit. As you can see on Slide 11, we've ventured into a small Life of Mine gold stream, which starts at 6% and then stays there for the majority of the reserve life before dropping to 4% and eventually to 3.5% with an 18% production payment that increases to 22%, the upfront deposits reduced to zero.

Total stream deposit is $50 million payable in two installments of $25 million each, one payable on closing and another one once the EIA is received, which is the primary hurdle in Chile, as well as funding being in place, etc. It's a fairly simple 20,000 tonne a day heap leach project, which has the potential to expand to a much larger heap leach over time. The original study by the previous order was for a project that was 4x this size. So although there is no current plan to ramp up to this, we do see potential for some future expansion.

If everything keeps moving forward at the planned pace this asset could be contributing ounces to Wheaton as early as the end of next year. In summary, this project is a long-life asset with potential for expansions, improvement in recoveries, it results in near-term production and is accretive to Wheaton on all metrics. We're very excited to be working with this management team and look forward to helping them advance this asset and their company. I could also give a minute to update you on the streaming opportunity landscape.

We're seeing lots of new pressure on streaming opportunities. The majority is still falling into the $100 million to $300 million range, primarily development stage opportunities with precious metals as a byproduct, which is obviously where streaming works best. We're also seeing streaming being considered to fund expansions and for M&A opportunities, which is a little bit new not much these days in the way of balance sheet repair, but that's expected in a strong commodity price environments. We're very optimistic that we can continue to deploy our cash to accretively add quality streams in the current environment and we'll continue to look at streams of all sizes, but our focus will as always remain on quality.

Over to you, Randy.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Haytham. As a result of strong production in the first half of the year, we are pleased to reiterate our full-year production guidance. For 2021, Wheaton's estimated attributable production is forecast to range between 370,000 to 400,000 ounces of gold, 22.5 million to 24 million ounces of silver and 40,000 to 45,000 gold equivalent ounces of other metals, being cobalt and palladium. With half of 2021 now behind us, we now expect to finish the year toward the high end of our guided range for silver and toward the lower end of our guided range for gold.

On a gold equivalent basis, we anticipate closing the year well within the guided range of 720,000 to 780,000 gold equivalent ounces previously announced back in February. As our strong development pipeline continues to deliver organic growth, I would like to highlight a few assets to watch for in the coming months. At Salobo, Vale has reported that physical completion of the Salobo III expansion was at 77% at the end of the second quarter and is on track for a start-up in the second half of 2022. As I mentioned at the beginning of the call, in April, Hudbay achieved commercial production from the Pampacancha deposit, which has gold grades that are significantly higher than the main Constancia pit.

As these higher grades enter the mine plan, Pampacancha is expected to contribute to a significant increase in gold production at Constancia through 2025. And lastly, in June, Vale achieved a significant milestone when first ore was produced from the Reedbrook underground mine at Voisey's Bay, which we consider to be one of the most sustainable sources of cobalt in the world. Physical completion of the underground mine extension was at 66% at the end of the second quarter and the Eastern Deeps underground mine is expected to start up in 2022. So in summary, Wheaton recorded a strong second quarter distinguished by several key highlights.

We achieved record revenue and declared a record quarterly dividend which was the fourth consecutive dividend increase in a row. Our commitment to accretive growth was emphasized by the closing of new streams on the Aris Gold owned Marmato mine located in Columbia and the Santo Domingo project located in Chile, where we are pleased to once again be working with our partner, Capstone. In addition, subsequent to the quarter, we signed a nonbinding term sheet with Rio2 to enter into a new stream on the Fenix Gold Project located in Chile, a strong development project, which we look forward to welcoming into our portfolio of high-quality assets. Our organic growth pipeline remains robust with Wheaton receiving inaugural ounces from the Pampacancha deposit at Constancia and cobalt production from the underground extension at Voisey's Bay.

In the quarter, Wheaton published its annual sustainability report, highlighting our strong ESG performance and we are honored to be recognized by external rating agencies for our performance in this area with sector-leading scores. Lastly, we believe our portfolio continues to deliver ample opportunity for organic growth, the benefit of which we expect to see from assets such as Salobo, Voisey's Bay and Constancia in the coming months. So with that, I would like to open up the call for questions, please. Operator?

Questions & Answers:

Operator

[Operator instructions] Your first question comes from Tyler Langton with JPMorgan. Please go ahead.

Tyler Langton -- J.P. Morgan -- Analyst

Good morning, Randy and team. Thanks for taking my question. Just to start on a slope, I think Q2 production was improved over Q1 level sort of still impacted by some of the mine maintenance changes. I guess should this largely be behind the company in Q3 or just how do you kind of see kind of production for the second half of the year?

Randy Smallwood -- President and Chief Executive Officer

Yeah. As mentioned, it's related to some of the changes in the maintenance, again, trying to improve overall maintenance practices down there, mainly from a safety perspective. So fully supportive of everything that Vale is doing. We do expect that transition through the third quarter, we're hopeful that by the end of the third quarter, we should be back up to the normal running rates, but we do expect a bit of an impact still here in the third quarter.

Tyler Langton -- J.P. Morgan -- Analyst

OK. Great. And then just in terms of the dividend and the 30% payout ratio, any sense in terms of -- or sort of thoughts around potentially sort of increasing that sort of in a ratio sort of in the near to medium term?

Randy Smallwood -- President and Chief Executive Officer

Yeah. Tyler, it all comes down to how effective we are putting money back into the ground. We're obviously generating very strong cash flows. Haytham and his team have continued to keep a good strong list of opportunities in front of us.

And so closing those transactions if we wind up with what I would call an effective balance sheet, which means not having a lot of cash on hand, then the chances are not raising the dividend. But if we start building up a bit of a cash balance, if we start getting too much to the positive on that side, then we'll definitely be considering that dividend going from 30% up to 40% or 50%. That will come at some time. It's just a matter of timing and what other opportunities we have to put our capital to work back into the ground.

Our objective is always to sort of add good quality ounces in the ground for the future.

Tyler Langton -- J.P. Morgan -- Analyst

Great. Thanks so much.

Randy Smallwood -- President and Chief Executive Officer

Thanks, Tyler.

Operator

[Operator instructions] Your next question comes from Puneet Singh with iA Capital. Please go ahead.

Puneet Singh -- iA Capital Markets -- Analyst

Hi. Good morning. Good to see your deal on Fenix. Can you take us through some of the upside on that asset, maybe the exploration potential that drew you to it? And how you think it will grow? Because the initial mine plan looks as you mentioned at the top line it can get bigger if you take a look at that big oxide resource.

Thanks.

Randy Smallwood -- President and Chief Executive Officer

Sure thing, Puneet. Haytham, I'll let you take that one and done with it.

Haytham Hodaly -- Senior Vice President, Corporate Development

Sure. Thanks, Randy. Thanks for the question. I can tell you that what we're more excited about right now is not so much the exploration upside.

This thing currently has about 14 years of proven and probable reserves at a similar amount of years in the M&I resources. So there won't be a lot of focus on exploration drilling. The potential is going to be on further expansions. It's going to be on improvements in recoveries, it's going to be on continuing to optimize the circuit.

So it's -- from that perspective, it's a project that has the potential to contribute right now about 4,000 to 5,000 ounces a year. But over time, I think this could double, triple or even quadruple depending on how much success they have.

Puneet Singh -- iA Capital Markets -- Analyst

OK. That's good to hear. And then just Vale and Salobo, there's a little bit of delay in the start-up, it looks like from the first half of next year to the second half. Vale's release didn't have much to go on.

Is there any more color you can provide on that?

Randy Smallwood -- President and Chief Executive Officer

Well, I can just say that some of the challenges that Vale has had at Salobo in terms of managing the risk from the pandemic. It's had an impact. They've had to ship out nonessential staff and sort of limit people on site as part of the risk management system down there. And we kind of expected.

But we were surprised it up until now, it hasn't resulted in much of a delay. But that is going to have a bit of an impact. And I think that's really where I would point the finger to on the timing of that completion of Salobo III is mainly related to some of the challenges they've had in terms of having staff on to limiting staff on site in terms of moving that forward. And so it's still well on track.

They're still moving forward. They did focus on critical path to try and keep it going online. But sure enough, it's had a bit of an impact. It's gone from the first half, as you mentioned, first half of next year to the second half of next year.

Puneet Singh -- iA Capital Markets -- Analyst

OK, thanks, Randy.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Puneet.

Operator

Your next question comes from Trevor Turnbull with Scotiabank. Please go ahead.

Trevor Turnbull -- Scotiabank -- Analyst

Yeah. Thanks, Randy. I just wondered if you guys could comment a little bit on what happened back in June, where some of the finance ministers had talked about really moving ahead on something like a global minimum tax. And I just wondered how you guys are thinking about that in the event that it does get implemented? And if there's any changes you would envision with respect to how you do business?

Randy Smallwood -- President and Chief Executive Officer

Well, it's an interesting topic. I would -- I mean, I think the thing that stands out to me the most is probably there's a number of hurdles that would have to be overcome. And it's good to listen to the most developed countries in the world, the G7, talk about implementing this. But the OECD is made up of another 132 countries outside of the G7 and you would have to get alignment among that number.

And I just find that probably one of the biggest hurdles in terms of going forward with that. And we've already seen a number of countries step up and say that they're not supportive of moving forward or something like that. And then others say that the -- that they would expect compensation for having to give up some of that freedom that each of these countries currently has. And so I just think there's going to be a number of hurdles in terms of moving that forward.

Obviously, anything that happens would be across industry and not only across industry, across all industries. And so it would be a uniform impact on all companies. There has been some discussions about some exclusions for resource-focused companies or resource-focused businesses and also transportation businesses. And so there's just so many variables at play that it's pretty tough to sort of quantify this what I will confirm, of course and doesn't take me to highlight this, is that we're seeing this all around the world.

It's one of the reasons that we're so bullish on precious metal prices is that countries around the world, they're all scrambling to try and find revenue to try and not balance the books and they've given up on trying to do that, they're just trying to minimize or lessen the amount of negative, there is on their balance sheets as the country goes. And this is all pressures related to, I would say, fiscal mismanagement all the way around, which makes me even feel more bullish about precious metals as an investment medium. And so it's something that we're seeing around the world. We're seeing it locally in certain jurisdictions.

And of course, we're hearing it at the G7 level. And there's a lot of -- there's a long ways to go before I think we'll see anything concrete out of this.

Trevor Turnbull -- Scotiabank -- Analyst

Yeah. No, I appreciate that and we're talking about significant hurdles whenever you're trying to get alignment with numerous groups. And obviously, there's a lot of hypotheticals that would come into play, which makes this a very difficult kind of discussion to quantify. We do get a lot of questions on it.

And I guess the only other follow-up I might have is that in the event it does manage to go through in a way that looks like it would impact Wheaton, do you have any sort of tax shields that you could use in a situation like this or would you be somewhat nakedly exposed to this type of kind of overarching or minimum tax?

Randy Smallwood -- President and Chief Executive Officer

Well, it's without any type of framework in terms of what would actually be coming in, it's really tough to comment on something like that. There's just so many variables that can come into play. I have -- we're a responsible company when it comes to paying taxes. We pay the appropriate taxes, required taxes everywhere and do that support and that provided.

So I can just say it's really tough to comment on that without some type of a framework as to what we'd be expecting. And so all I can tell you is that we're a company that focuses on making sure that we deliver the best we can to all of our stakeholders. And so whatever comes out of this, I assure you, we will be doing the best we can to manage that.

Trevor Turnbull -- Scotiabank -- Analyst

OK. I appreciate that, Randy. Thank you.

Operator

Your next question comes from Jackie Przybylowski with BMO. Please go ahead.

Jackie Przybylowski -- BMO Capital Markets -- Analyst

Thanks very much. I just want to follow up on that question. I mean Puneet just has asked already, but just a follow-up on Fenix. You said -- in response to his question, you said that there's a potential to double or maybe triple the production volumes coming out of Fenix.

Do you guys have any sense or can you give us any kind of guidance in terms of like what the timing would look like when Rio2 is maybe planning on doing at least early level studies on that expansion? Just to give us a sense of like when we should be watching for that?

Randy Smallwood -- President and Chief Executive Officer

Haytham, I'll let you take that one on.

Haytham Hodaly -- Senior Vice President, Corporate Development

Sure. Thanks, Randy and good morning, Jackie. Just to answer the question. So Rio2 right now is only planning on building a 20,000 tonne a day operation, heap leech operation.

The previous owner had it scaled up to 80,000 tonnes a day. Obviously, that was back in about 2013, '14, much lower commodity prices. So there's definitely the potential for expansion. Rio2 is not out there saying that they're going to expand.

But I can tell you, just looking at the project assuming that they're successful in ramping this up by the fourth quarter of next year, I think it's something they have to consider over the next, I would say, five years to expand to double and continue on. But again, we're not speaking on behalf of Rio, this is what we believe at Wheaton. We think it's got very strong scale building.

Jackie Przybylowski -- BMO Capital Markets -- Analyst

That's really helpful color. Thanks very much, Haytham. I was spending time looking through their technical report and I didn't see that so thank you very much for the context. that's helpful.

That's it for me. Thank you, guys.

Haytham Hodaly -- Senior Vice President, Corporate Development

Thanks, Jackie.

Randy Smallwood -- President and Chief Executive Officer

Thank you, Jackie. And thank you, everyone, for dialing in today. In closing, we believe Wheaton is very 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 coupled -- which when coupled with leverage to increasing commodity prices result in some of the highest margins in the entire precious metals space.

Secondly, by offering our shareholders exposure to some of the highest quality mines in the world through our portfolio of long-life, low-cost assets. Thirdly, by returning value to shareholders through our unique cash flow-linked dividend policy, which most recently allowed us to declare another record quarterly dividend. And lastly, by being a leader among precious metal streamers in sustainability and by supporting our partners in the communities and the communities in which we live and operate. So to close out, I'd like to invite you to save the date for our upcoming investor day, which will be held virtually on September 22.

During this event, we will have members of our executive team providing updates on their respective areas of expertise. And in addition to that, technical presentations from a few of our partners. I look forward to providing a fulsome update at that time until then stay healthy and stay safe. Thank you.

Operator

[Operator signoff]

Duration: 30 minutes

Call participants:

Patrick Drouin -- Senior Vice President of Investor Relations

Randy Smallwood -- President and Chief Executive Officer

Gary Brown -- Senior Vice President and Chief Financial Officer

Haytham Hodaly -- Senior Vice President, Corporate Development

Tyler Langton -- J.P. Morgan -- Analyst

Puneet Singh -- iA Capital Markets -- Analyst

Trevor Turnbull -- Scotiabank -- Analyst

Jackie Przybylowski -- BMO Capital Markets -- Analyst

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