Q115 results and Q2-Q415 preview
In broad terms, Silver Wheaton's (NYSE:SLW) Q115 results were characterised by strong performances at San Dimas, Barrick and Sudbury, while production at Salobo more than doubled (consistent with its ramp-up and increased SLW interest). These more than made up for declines in output at Penasquito and Yauliyacu, such that silver-equivalent production exceeded 10Moz for the first time ever. Silver and gold prices remained at lower levels. However, a decline in sales of US$9.9m cf Q414 was more than offset by a US$11.0m decline in costs.
Fully-funded growth weighted to H215 and then FY16
Notwithstanding a creditable set of results in Q1, performance in FY15 will be weighted towards H215 as Salobo and Constancia in particular achieve steady-state design capacity and Penasquito returns to higher grade zones. In addition to Salobo and Constancia, production over the following two years will then be driven by 1) an increase in throughput from 2,500tpd to 3,000tpd at San Dimas in mid-2016; and 2) the Metallurgical Enhancement Project feasibility study at Penasquito, which will integrate and build on the pre-feasibility studies of the Concentrate Enrichment Process (CEP) and the Pyrite Leach projects, either of which could add c 5c per share to basic EPS. Beyond such organic growth, Silver Wheaton has access to US$1.3bn in readily available capacity (plus future cash flows) to make additional, future, accretive acquisitions of by-product precious metal streams from world-class assets in the lower half of the cost curve.
Valuation: 110% potential capital upside in C$ terms
Our production and financial forecasts remain little changed in the aftermath of Q115 results. Inasmuch as they exceed consensus forecasts (US$0.87c vs US$0.66 basic EPS), this is almost exclusively a function of precious metal price forecasts for FY15. Beyond FY15, management expects compound production growth of 17.2% pa over five years, such that silver-equivalent production reaches 51Moz in 2019, including 325koz of gold, which will drive a 125% increase in basic EPS (Edison forecast). On this basis, we predict a value of US$42.38 (C$51.61) per share in FY19, representing a total internal rate of return to investors at the current share price of 26.8% in US dollars over five years. In the meantime, SLW trades on multiples that are cheaper than its royalty/streaming ‘peers’ on 89% of ratios considered using Edison forecasts. (Note: 78% if ratios based on consensus basic EPS are considered.) It also trades on multiples that are cheaper than the gold miners themselves in c 54% of instances considered (note: 40% if consensus basic EPS are considered), despite being associated with materially less risk.
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