FORM 6-K
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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REPORT OF FOREIGN ISSUER
Pursuant to Rule 13a-16 or 15d-16 of
the Securities Exchange Act of 1934
For the month of August, 2006
Silver Wheaton Corp.
(Translation of registrant's name into English)
Suite 1550, 200 Burrard Street, Vancouver, British Columbia V6C 3L6 CANADA
(Address of principal executive offices)
Indicate by check mark whether the registrant files or will file annual reports under cover Form 20-F or Form 40-F.
Form 20 F _____ Form 40 F X
Indicate by check mark whether the registrant by furnishing the information contained in this Form is also thereby furnishing the information to the Commission pursuant to Rule 12g3-2(b) under the Securities Exchange Act of 1934.
Yes _____ No X
If "Yes" is marked, indicate below the file number assigned to the registrant in connection with Rule 12g3-2(b): 82-________________
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf of the undersigned, thereunto duly authorized.
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| Silver Wheaton Corp. |
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| (Registrant) |
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Date: August 3, 2006 |
| By: /s/ Peter Barnes |
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| Its: President and Chief Executive Officer |
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| (Title) |
FOR IMMEDIATE RELEASE | TSX:SLW |
August 3, 2006 | NYSE:SLW |
Silver Wheaton Second Quarter Earnings Jump 274% to US$25 Million
Vancouver, British Columbia – Silver Wheaton Corp. (TSX,NYSE:SLW) is pleased to report record quarterly net earnings and operating cash flows of US$25 million (US$0.12 per share) and US$33 million (US$0.15 per share) respectively.
HIGHLIGHTS
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Record net earnings of US$25 million (US$0.12 per share) from the sale of 3.8 million ounces of silver, compared to US$7 million (US$0.04 per share) from the sale of 2.7 million ounces of silver in 2005.
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Record operating cash flows of US$33 million (US$0.15 per share), compared to US$9 million (US$0.06 per share) in 2005.
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Cash and cash equivalents at June 30, 2006 of US$52 million.
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In April, 2006, the Company completed a US$175 million (Cdn$200 million) public offering of 16.6 million common shares at a price of Cdn$12.00 per share, on a bought deal basis. The proceeds were used to repay debt.
“The Company’s strong results demonstrate the power of our unique business model,” said Peter Barnes, President and Chief Executive Officer. “As the Company continues to generate significant free cash flows at these current silver prices, we look forward to growing Silver Wheaton through further accretive acquisitions.”
A conference call will be held Friday, August 4, 2006 at 11:00 am (EDT) to discuss these results. You may join the call by dialling toll free 1-877-888-4605 or (416) 695-7848 for calls from outside of Canada and the US.
The conference call will be recorded and you can listen to a playback of the call after the event by dialling 1-888-509-0081 or (416)695-5275 and using the passcode: 626871. A live and archived audio webcast will be available on the website atwww.silverwheaton.com.
Silver Wheaton is the only public mining company with 100% of its revenue from silver production. The Company expects to have annual silver sales of approximately 15 million ounces in 2006, increasing to 20 million ounces by 2009 and thereafter. Silver Wheaton is unhedged and well positioned for further growth.
CAUTIONARY NOTE REGARDING FORWARD LOOKING-STATEMENTS
This news release contains “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Forward-looking statements include, but are not limited to, statements with respect to the future price of silver, the estimation of mineral reserves and resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, reserve determination and reserve conversion rates. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, or & #147;believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved”. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Silver Wheaton to be materially different from those expressed or implied by such forward-looking statements, including but not limited to: risks related to the integration of acquisitions, the absence of control over mining operations from which Silver Wheaton purchases silver and risks related to these mining operations, including risks related to international operations, actual results of current exploration activities, actual results of current reclamation activities, conclusions of economic evaluations, changes in project parameters as plans continue to be refin ed, as well as those factors discussed in the section entitled “Description of the Business – Risk Factors” in Silver Wheaton’s annual information form for the year ended December 31, 2005 incorporated by reference into Silver Wheaton’s Form 40-F on file with the U.S. Securities and Exchange Commission in Washington, D.C. Although Silver Wheaton has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Silver Wheaton does not undertake to update any forward-looking statements that are incorporated by reference herein, exc ept in accordance with applicable securities laws.
For further information, please contact:
David Awram
Investor Relations Manager
Silver Wheaton Corp.
Tel: 1-800-380-8687
Email:info@silverwheaton.com
Website:www.silverwheaton.com
Management’s Discussion and Analysis of
Results of Operations and Financial Condition
For the Three and Six Months Ended June 30, 2006
This Management’s Discussion and Analysis should be read in conjunction with the Company’s unaudited interim consolidated financial statements for the three and six months ended June 30, 2006 and related notes thereto which have been prepared in accordance with Canadian generally accepted accounting principles. The Company’s accounting policies are consistent with United States generally accepted accounting principles in all material respects except as outlined in note 10 to the unaudited interim consolidated financial statements. In addition, the following should be read in conjunction with the 2005 audited consolidated financial statements, the related annual Management’s Discussion and Analysis, and the Annual Information Form/40F on file with the Canadian provincial securities regulatory authorities and the US Securities and Exchange Commis sion. This Management’s Discussion and Analysis contains “forward looking” statements that are subject to risk factors set out in the cautionary note contained herein. All figures are in United States dollars unless otherwise noted. This Management’s Discussion and Analysis has been prepared as of August 3, 2006.
SECOND QUARTER HIGHLIGHTS(3 months)
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Record net earnings of $25.2 million ($0.12 per share) from the sale of 3.8 million ounces of silver, compared to $6.7 million ($0.04 per share) from the sale of 2.7 million ounces of silver in 2005.
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Record operating cash flows of $32.7 million (2005 - $9.3 million).
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Cash and cash equivalents at June 30, 2006 of $51.6 million (December 31, 2005 - $117.7 million).
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In April, 2006, the Company completed a $175 million (Cdn$200 million) public offering of 16.6 million common shares at a price of Cdn$12.00 per share, on a bought deal basis. The proceeds were used to repay debt of $160 million.
OVERVIEW
Silver Wheaton Corp. (“Silver Wheaton” or the “Company”) is a growth-oriented silver company, and is the largest mining company with 100% of its revenue from silver production. The Company’s goal is to be recognized as the most profitable and best managed silver company in the world.
The Company has entered into three long-term silver purchase contracts with Goldcorp (Luismin mines in Mexico), Lundin Mining (Zinkgruvan mine in Sweden) and Glencore (Yauliyacu mine in Peru), whereby Silver Wheaton acquires silver production from the counterparties at a fixed price of $3.90 per ounce, subject to an inflationary adjustment. As a result, the primary drivers behind the Company’s financial results are the price of silver and the volume of silver production at the various mines.
The Company expects, based upon its current contracts, to have annual silver sales of approximately 15 million ounces in 2006, increasing to 20 million ounces by 2009 and thereafter.
SUMMARIZED FINANCIAL RESULTS
The year end of the Company was changed from August 31 to December 31, during 2004. As a result, comparative figures include the four months ended December 31, 2004.
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| June 30 2006 (3 Months) | March 31 2006 (3 Months) | December 31 2005 (3 Months) | September 30 2005 (3 Months) | June 30 2005 (3 Months) | March 31 2005 (3 Months) | December 31 2004 (4 Months) | August 31 2004 (3 Months) |
Silver sales($000's) | $ 47,413 | $ 25,711 | $ 17,474 | $ 18,081 | $ 19,263 | $ 16,077 | $ 10,986 | $ - | ||
Ounces (000’s) | 3,805 | 2,672 | 2,176 | 2,535 | 2668 | 2,323 | 1,505 | - | ||
Average realized silver price ($'s per ounce) | $ 12.46 | $ 9.62 | $ 8.03 | $ 7.13 | $ 7.22 | $ 6.92 | $ 7.30 | $ - | ||
Total cash cost ($'s per ounce)1 | $ 3.90 | $ 3.90 | $ 3.90 | $ 3.90 | $ 3.90 | $ 3.90 | $ 3.90 | $ - | ||
Net earnings (loss)($000's) | $ 25,159 | $ 13,781 | $ 7,009 | $ 6,378 | $ 6,722 | $ 5,182 | $ 1,765 | $ (16) | ||
Earnings (loss) per share | ||||||||||
Basic | $ 0.12 | $ 0.07 | $ 0.04 | $ 0.04 | $ 0.04 | $ 0.03 | $ 0.02 | $ (0.01) | ||
Diluted | $ 0.11 | $ 0.07 | $ 0.04 | $ 0.04 | $ 0.04 | $ 0.03 | $ 0.02 | $ (0.01) | ||
Cash flow from (used in) operations($000's) | $ 32,699 | $ 13,862 | $ 7,654 | $ 7,947 | $ 9,271 | $ 5,150 | $ 8,356 | $ (29) | ||
Cash and cash equivalents($000's) | $ 51,637 | $ 8,368 | $ 117,741 | $ 26,608 | $ 33,279 | $ 24,014 | $ 19,989 | $ 320 | ||
Total assets ($000's) | $ 614,349 | $ 578,150 | $ 266,151 | $ 173,871 | $ 167,056 | $ 160,355 | $ 156,988 | $ 53,491 | ||
Total liabilities($000’s) | $ 20,885 | $ 181,317 | $ 1,961 | $ 426 | $ 586 | $ 702 | $ 2,557 | $ 3,320 | ||
Shareholders' equity($000's) | $ 593,464 | $ 396,833 | $ 264,190 | $ 173,445 | $ 166,470 | $ 159,653 | $ 154,431 | $ 50,171 | ||
1) Refer to discussion on Non-GAAP measures |
Changes in sales, net earnings and cash flow from operations from quarter to quarter are affected primarily by changes in the price of silver, fluctuations in production at the mines and timing of shipments that are in the normal course of operations.
RESULTS OF OPERATIONS AND OPERATIONAL REVIEW
The Company has four business segments, the Luismin, Zinkgruvan and Yauliyacu contracts, and corporate operations. The acquisition of silver under the Yauliyacu contract began in May, 2006.
Three Months Ended June 30, 2006 | |||||||||
Luismin | Zinkgruvan | Yauliyacu | Corporate | Total | |||||
Silver sales ($000's) | $ 30,142 | $ 5,929 | $ 11,342 | $ - | $ 47,413 | ||||
Ounces (000’s) | 2,447 | 483 | 875 | - | 3,805 | ||||
Average realized silver price ($'s per ounce) | $ 12.32 | $ 12.28 | $ 12.96 | $ - | $ 12.46 | ||||
Total cash cost ($'s per ounce)1 | $ 3.90 | $ 3.90 | $ 3.90 | $ - | $ 3.90 | ||||
Net earnings($000's) | $ 19,721 | $ 3,238 | $ 4,696 | $ (2,496) | $ 25,159 | ||||
Three Months Ended June 30, 2005 | ||||||||
Luismin | Zinkgruvan | Corporate | Total | |||||
Silver sales ($000's) | $ 14,970 | $ 4,293 | $ - | $ 19,263 | ||||
Ounces (000’s) | 2,088 | 580 | - | 2,668 | ||||
Average realized silver price ($'s per ounce) | $ 7.17 | $ 7.40 | $ - | $ 7.22 | ||||
Total cash cost ($'s per ounce)1 | $ 3.90 | $ 3.90 | $ - | $ 3.90 | ||||
Net earnings($000's) | $ 6,034 | $ 1,088 | $ (400) | $ 6,722 | ||||
Six Months Ended June 30, 2005 | ||||||||
Luismin | Zinkgruvan | Corporate | Total | |||||
Silver sales ($000's) | $ 28,654 | $ 6,686 | $ - | $ 35,340 | ||||
Ounces (000’s) | 4,062 | 929 | - | 4,991 | ||||
Average realized silver price ($'s per ounce) | $ 7.05 | $ 7.19 | $ - | $ 7.08 | ||||
Total cash cost ($'s per ounce)1 | $ 3.90 | $ 3.90 | $ - | $ 3.90 | ||||
Net earnings($000's) | $ 11,304 | $ 1,490 | $ (890) | $ 11,904 | ||||
1) Refer to discussion on Non-GAAP measures | ||||||||
Six Months Ended June 30, 2006 | |||||||||
Luismin | Zinkgruvan | Yauliyacu | Corporate | Total | |||||
Silver sales ($000's) | $ 51,246 | $ 10,536 | $ 11,342 | $ - | $ 73,124 | ||||
Ounces (000’s) | 4,618 | 984 | 875 | - | 6,477 | ||||
Average realized silver price ($'s per ounce) | $ 11.10 | $ 10.71 | $ 12.96 | $ - | $ 11.29 | ||||
Total cash cost ($'s per ounce)1 | $ 3.90 | $ 3.90 | $ 3.90 | $ - | $ 3.90 | ||||
Net earnings($000's) | $ 31,636 | $ 5,052 | $ 4,696 | $ (2,444) | $ 38,940 | ||||
1) Refer to discussion on Non-GAAP measures |
Luismin
On October 15, 2004, a 100% subsidiary of the Company, Silver Wheaton (Caymans) Ltd. (“SW Caymans”), entered into an agreement (amended on March 30, 2006) to purchase all of the silver produced by Goldcorp’s Luismin mining operations in Mexico for a period of 25 years, for an upfront payment of $36.7 million (Cdn$46.0 million) in cash and 108 million common shares of the Company. In addition, a per ounce cash payment of the lesser of $3.90 and the prevailing market price is due (subject to an inflationary adjustment commencing in 2007). Under this agreement, Luismin was required to deliver a minimum of 120 million ounces over the 25 year period following the contract date, and Silver Wheaton was obligated to pay 50% of any capital expenditures made by Luismin at its mining operations in excess of 110% of the projected capital expenditures outlined in th e contract.
On March 30, 2006, Goldcorp and Silver Wheaton amended the silver purchase contract, increasing the minimum number of ounces of silver to be delivered over the 25 year period by 100 million ounces, to 220 million ounces, and waiving any capital expenditure contributions previously required to be paid by Silver Wheaton. In consideration for these amendments, Silver Wheaton issued to Goldcorp 18 million common shares and a $20 million non-interest bearing promissory note due on March 30, 2007. As a result, at June 30, 2006, Goldcorp owned 57% of the Company’s common shares.
The amendment to the silver purchase contract was made in connection with Goldcorp’s plans to substantially increaseits investment in exploration and development at its San Dimas mine in Mexico. As a result of the planned exploration and development at San Dimas, Silver Wheaton and Goldcorp anticipate that additional silver sales will aggregate more than 100 million ounces over the remaining 24 year term of the silver purchase agreement. It is projected that Luismin’s annual silver production will approximate 9.5 million ounces in 2006, increasing to 13 million ounces by 2009 and thereafter.
During the quarter, SW Caymans purchased 2.4 million ounces (2005 – 2.1 million ounces) of silver at a total cash cost of $3.90 per ounce, and sold it for an average price of $12.32 per ounce (2005 - $7.17 per ounce). During the six months ended June 30, 2006, SW Caymans purchased 4.6 million ounces (2005 – 4.1 million ounces) of silver at a total cash cost of $3.90 per ounce, and sold it for an average price of $11.10 per ounce (2005 - $7.05 per ounce). The Company’s cash flows and net earnings under the Luismin silver purchase contract for the three months ended June 30, 2006 were $20.6 million (2005 - $6.8 million) and $19.7 million (2005 - $6.0 million) respectively, and for the six months ended June 30, 2006 were $33.2 million (2005 - $12.6 million) and $31.6 million (2005 - $11.3 million) respectively.
At December 31, 2005, the Luismin mines had proven and probable reserves of 45.4 million ounces of silver and inferred resources of 188.4 million ounces of silver (as described in the Reserves and Resources section of this Management’s Discussion and Analysis), an increase of 12.7% and 29.4% respectively, compared to the reserves and resources at December 31, 2004, despite production during 2005 of 7.7 million ounces of silver. Luismin has historically converted resources into reserves at a rate of approximately 90%.
The results of the Luismin mine operations for the three months ended June 30, 2006 are shown below:
2006 | 2005 | |||||
Q2 | Q1 | Q4 | Q3 | Q2 | Q1 | |
· Ore milled (tonnes) | 267,400 | 255,800 | 250,600 | 244,000 | 218,700 | 199,000 |
· Grade (grams/tonne)1 |
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- Gold | 6.61 | 6.18 | 5.57 | 5.55 | 6.23 | 6.59 |
- Silver | 358 | 348 | 298 | 332 | 310 | 335 |
· Recovery (%) | ||||||
- Gold | 94% | 94% | 94% | 94% | 95% | 95% |
- Silver | 89% | 87% | 88% | 88% | 91% | 88% |
· Production (ounces) | ||||||
- Gold | 53,700 | 47,800 | 42,200 | 41,000 | 41,800 | 40,000 |
- Silver | 2,388,400 | 2,192,000 | 1,855,700 | 2,005,700 | 1,974,400 | 1,894,000 |
· Sales (ounces) | ||||||
- Gold | 54,900 | 46,500 | 42,200 | 39,100 | 44,000 | 38,300 |
- Silver | 2,447,500 | 2,171,000 | 1,819,800 | 2,003,800 | 2,088,000 | 1,974,400 |
1) Grades exclude Nukay operations, which do not contain silver |
Zinkgruvan
On December 8, 2004, SW Caymans entered into an agreement to purchase all of the silver produced by Lundin Mining’s Zinkgruvan mining operations in Sweden (“Zinkgruvan”) for the life of mine. During the three months ended June 30, 2006, SW Caymans purchased 0.5 million ounces (2005 – 0.6 million ounces) of silver at a total cash cost of $3.90 per ounce, and sold it for an average price of $12.28 per ounce (2005 - $7.40 per ounce). During the six months ended June 30, 2006, SW Caymans purchased 1.0 million ounces (2005 – 0.9 million ounces) of silver at a total cash cost of $3.90 per ounce, and sold it for an average price of $10.71 per ounce (2005 - $7.19 per ounce). The Company’s cash flows and net earnings under the Zinkgruvan silver purchase contract for the three months ended June 30, 2006 were $5.3 million (2005 - $1.6 million) and $3.2 million (2005 - $1.1 million) respectively, and for the six months ended June 30, 2006 were $6.2 million (2005 - $2.1 million) and $5.1 million (2005 - $1.5 million) respectively.
As at December 31, 2005, Zinkgruvan had proven and probable silver reserves of 25.8 million ounces, measured and indicated silver resources of 6.8 million ounces and inferred silver resources of 29.4 million ounces (as described in the Reserves and Resources section of this Management’s Discussion and Analysis). The Zinkgruvan mine is expected to produce approximately 2 million ounces of silver annually for a minimum of 20 years, and is one of the lowest cost zinc mines in the world. The mine is located in south-central Sweden and has been in production on a continuous basis since 1857.
Yauliyacu
On March 23, 2006, SW Caymans entered into an agreement with Glencore to purchase 4.75 million ounces of silver per year, for a period of 20 years, based on the production from their Yauliyacu mining operations in Peru. Total consideration paid was $285 million, comprised of $245 million in cash and a $40 million promissory note, which was paid in full on May 31, 2006. In addition, a cash payment of $3.90 per ounce of silver delivered under the contract is due, subject to an inflationary adjustment.
During May, 2006, the Company began purchasing silver under the Yauliyacu silver purchase contract and, as a result, during the three months ended June 30, 2006, SW Caymans purchased 0.9 million ounces of silver at a total cash cost of $3.90 per ounce, and sold it for an average price of $12.96 per ounce. The Company’s cash flows and net earnings under the Yauliyacu silver purchase contract for the three months ended June 30, 2006 were $7.9 million and $4.7 million respectively.
During the term of the contract, Silver Wheaton has a right of first refusal on any future sales of silver streams from the Yauliyacu mine and a right of first offer on future sales of silver streams from any other mine currently owned by Glencore. In addition, Silver Wheaton has an option to extend the 20 year term of the silver purchase contract in five year increments, on substantially the same terms as the existing contract, subject to an adjustment related to silver price expectations at the time and other factors.
As at December 31, 2005, Yauliyacu had proven and probable silver reserves of 12.9 million ounces, measured and indicated silver resources of 52.2 million ounces and inferred silver resources of 64.7 million ounces (as described in the Reserves and Resources section of this Management’s Discussion and Analysis).
Corporate
Three Months Ended | Six Months Ended | ||||||||||
June 30 | June 30 | June 30 | June 30 | ||||||||
(in thousands) | 2006 | 2005 | 2006 | 2005 | |||||||
General and administrative | $ 1,199 | $ 508 | $ 1,717 | $ 923 | |||||||
Interest expense | 510 | - | 712 | - | |||||||
Amortization of debt financing costs | 675 | - | 929 | - | |||||||
Stock based compensation | 963 | 38 | 1,074 | 78 | |||||||
Project evaluation | 75 | 54 | 108 | 62 | |||||||
Interest income | (520) | (183) | (1,660) | (259) | |||||||
Foreign exchange (gain) loss | (406) | (17) | (436) | 86 | |||||||
Corporate net loss | $ 2,496 | $ 400 | $ 2,444 | $ 890 | |||||||
General and administrative expenses totaled $1,199,000 (six months - $1,717,000) during the three months ended June 30, 2006 compared with $508,000 (six months - $923,000) during the same period in 2005. This increase resulted primarily from the payment of a one-time New York Stock Exchange listing fee of $250,000, increased insurance costs and increased salary expenses incurred as a result of hiring additional employees.
Interest expense totaled $510,000 during the quarter (six months - $712,000), as a result of utilizing debt financing to fund the Yauliyacu transaction. Upfront debt financing costs of $1,024,000 were incurred, of which $675,000 (six months - $929,000) were amortized to income during the quarter.
The non-cash stock based compensation expense has been estimated using the Black-Scholes option valuation method to determine the fair value of the share purchase options granted. During the quarter 550,000 options were granted to new employees.
Project evaluation expenses of $75,000 (2005 - $54,000) were incurred in pursuing additional silver acquisition opportunities. It is anticipated that project evaluation expenses will continue during 2006.
Interest income during the quarter of $520,000 (2005 - $183,000) was the result of interest earned on cash balances held in short-term money market instruments.
During the quarter, a foreign exchange gain of $406,000 (2005 - $17,000) was realized, as a result of the Company holding a portion of its cash balances in Canadian dollars, while the Canadian dollar increased in value against the US dollar (the Company’s functional currency).
Non-GAAP measures – total cash costs per ounce of silver calculation
Silver Wheaton has included, throughout this document, certain non-GAAP performance measures including total cash costs of silver on a sales basis. These non-GAAP measures do not have any standardized meaning prescribed by GAAP, nor are they necessarily comparable with similar measures presented by other companies. Cash costs are presented as they represent an industry standard method of comparing certain costs on a per unit basis. The Company believes that certain investors use this information to evaluate the Company’s performance. The data is intended to provide additional information and should not be considered in isolation or as a substitute for measures of performance prepared in accordance with GAAP. During the three and six months ended June 30, 2006, the Company’s total cash costs were $3.90 per ounce of silver.
LIQUIDITY AND CAPITAL RESOURCES
At June 30, 2006, the Company had cash and cash equivalents of $51.6 million (December 31, 2005 – $117.7 million) and working capital of $32.8 million (December 31, 2005 - $118.7 million), which includes the $20.0 million promissory note due to Goldcorp relating to the amendment of the Luismin silver purchase contract. During the quarter, the Company generated operating cash flows of $32.7 million (six months - $46.6 million), compared with $9.3 million (six months - $14.4 million) during the same period in 2005. In the opinion of management, these are sufficient to support the Company’s normal operating requirements on an ongoing basis.
Yauliyacu silver purchase contract
On March 23, 2006, the Company entered into an agreement with Glencore to purchase 4.75 million ounces of silver per year, for a period of 20 years, based on the production from their Yauliyacu mining operations in Peru. Total consideration paid was $285 million, comprised of $245 million in cash and a $40 million promissory note due on July 21, 2006. In addition, a cash payment of $3.90 per ounce of silver delivered under the contract is due, subject to an inflationary adjustment.
Luismin silver purchase contract amendment
On March 30, 2006, Goldcorp and Silver Wheaton amended their existing silver purchase contract, increasing the minimum number of ounces of silver to be delivered by Goldcorp over the 25 year contract period by 100 million ounces, to 220 million ounces, and waiving any capital expenditure contributions previously required to be paid by Silver Wheaton. In consideration for these amendments, Silver Wheaton issued to Goldcorp 18 million common shares and a $20 million non-interest bearing promissory note due on March 30, 2007.
Public Offering
On April 20, 2006, the Company raised gross proceeds of $175 million (Cdn$200 million) from a public offering of 16,644,000 shares at a price of Cdn$12.00 per share. The offering proceeds were used during the quarter to repay $120 million of bank debt and a $40 million promissory note due to Glencore.
Bank debt
In March 2006, the Company entered into a credit agreement with the Bank of Nova Scotia, as lead arranger and administrative agent, to borrow $100 million under a non revolving term loan (the “Term Loan”) and $25 million under a revolving term loan (the “Revolving Loan”) in order to partially finance the acquisition of the Yauliyacu silver purchase contract. During April, 2006, both the Term Loan and the Revolving Loan were repaid in full. The Term Loan was cancelled upon repayment, while the Revolving Loan facility remains available.
Contractual obligations
In connection with the Luismin and Zinkgruvan silver purchase contracts, the Company has committed to purchase 100% of the silver produced by each mine for a per-ounce cash payment of the lesser of $3.90 and the then prevailing market price, subject to adjustment. This inflationary adjustment, which will begin in 2007, is intended to reflect the effects of inflation on operating costs, and is subject to a minimum of 0.4% and a maximum of 1.65% per annum. In connection with the Yauliyacu silver purchase contract, the Company has committed to purchase 4.75 million ounces of silver per year, based on production at the Yauliyacu mine, for a per-ounce cash payment of $3.90, subject to adjustment. This inflationary adjustment, which will begin in 2009, is intended to reflect the effects of inflation on operating costs, and is subject to a minimum of 1.0% and a maximum of 1.65% per annum. &nb sp;
Share capital
During the quarter, the Company received cash proceeds of $2.6 million (2005 - $nil) from the exercise of 917,300 (2005 – nil) share purchase options at a weighted average exercise price of Cdn$3.27 per option. As of August 3, 2006, there were 220,229,611 outstanding common shares, 4,822,666 share purchase options and 165,346,100 share purchase warrants, which are convertible into 39,319,220 shares.
RELATED PARTY TRANSACTIONS
At June 30, 2006, Goldcorp owned 57% of the Company’s outstanding common shares. During the quarter, the Company purchased 2.4 million ounces (2005 – 2.1 million ounces) of silver from a subsidiary of Goldcorp at a price of $3.90 per ounce, for total consideration of approximately $9.5 million (2005 - $8.1 million). During the six months ended June 30, 2006, the Company purchased 4.6 million ounces (2005 – 4.1 million ounces) of silver from the subsidiary at a price of $3.90 per ounce, for total consideration of approximately $18.0 million (2005 - $15.8 million).
On March 30, 2006, Silver Wheaton and Goldcorp amended the Luismin silver purchase agreement, as described elsewhere in this Management’s Discussion and Analysis. As a result of this transaction the Company issued 18 million shares and a non-interest bearing $20 million promissory note to Goldcorp, due on March 30, 2007.
The Company has an agreement with Goldcorp whereby Goldcorp provides certain management and administrative services at cost. During the quarter, total management fees paid to Goldcorp were $73,000 (six months - $142,000) compared to $107,700 (six months - $266,800) during the same period in 2005. This agreement allows for cancellation with 30 days notice at any time.
In addition, during the quarter the Company sold leasehold improvements and furniture and fixtures to Goldcorp at their net book value of $145,000, which approximates fair value. At June 30, 2006, Goldcorp owed the Company $170,800 (December 31, 2005 – $nil).
OVERSIGHT ROLE OF THE AUDIT COMMITTEE
The Audit Committee reviews, with management and the external auditors, the Company’s quarterly Management’s Discussion and Analysis and related consolidated financial statements and approves the release of such information to shareholders. For each audit or quarterly review, the external auditors prepare a report for members of the Audit Committee summarizing key areas, significant issues and material control weaknesses encountered, if any.
FINANCIAL INSTRUMENTS
During the three months ended June 30, 2006, the Company has used a mixture of cash and long-term debt to maintain an appropriate capital structure, ensuring the liquidity required to meet the needs of the business and the flexibility to continue growing through acquisition. The Company does not use interest rate contracts or other derivative financial instruments and therefore, in the normal course of business, is inherently exposed to currency, interest rate and commodity price fluctuations.
OUTLOOK
The Company expects, based upon its current contracts, to have annual silver sales of approximately 15 million ounces in 2006, increasing to 20 million ounces by 2009 and thereafter.
The Company is unhedged and actively pursuing further growth opportunities, either by way of entering into long-term silver purchase contracts, or by acquiring silver exploration, development or production assets.
RESERVES AND RESOURCES
Proven and Probable Reserves (1,4,5,6) | |||||||||
As of Dec. 31, 2005 | PROVEN | PROBABLE | PROVEN & PROBABLE | ||||||
Tonnes | Grade | Contained | Tonnes | Grade | Contained | Tonnes | Grade | Contained | |
Silver | Mt | g Ag/t | M oz | Mt | g Ag/t | M oz | Mt | g Ag/t | M oz |
San Dimas | 1.42 | 447 | 20.4 | 1.83 | 401 | 23.6 | 3.25 | 421 | 44.0 |
San Martin | 0.31 | 47 | 0.5 | 0.58 | 46 | 0.9 | 0.90 | 47 | 1.3 |
Zinkgruvan | 6.27 | 111 | 22.4 | 1.89 | 57 | 3.5 | 8.16 | 98 | 25.8 |
Yauliyacu | 1.21 | 124 | 4.8 | 1.27 | 198 | 8.1 | 2.48 | 162 | 12.9 |
Total | 48.1 | 36.0 | 84.0 |
Measured & Indicated Resources (1,2,3,4,5,6) | |||||||||
As of Dec. 31, 2005 | MEASURED | INDICATED | MEASURED & INDICATED | ||||||
Tonnes | Grade | Contained | Tonnes | Grade | Contained | Tonnes | Grade | Contained | |
Silver | Mt | g Ag/t | M oz | Mt | g Ag/t | M oz | Mt | g Ag/t | M oz |
San Dimas | - | - | - | - | - | - | - | - | - |
San Martin | 0.02 | 204 | 0.2 | 0.2 | 234 | 1.5 | 0.22 | 231 | 1.7 |
Zinkgruvan (Zn) | 0.61 | 25 | 0.5 | 1.24 | 86 | 3.4 | 1.85 | 66 | 3.9 |
Zinkgruvan (Cu) | - | - | - | 2.80 | 32 | 2.9 | 2.80 | 32 | 2.9 |
Yauliyacu | 2.11 | 265 | 18.0 | 3.01 | 353 | 34.2 | 5.12 | 317 | 52.2 |
Total | 18.7 | 42.0 | 60.7 |
Inferred Resources (1,2,3,4,5,6) | |||
As of Dec. 31, 2005 | MEASURED & INDICATED | ||
Tonnes | Grade | Contained | |
Silver | Mt | g Ag/t | M oz |
San Dimas | 17.27 | 321 | 178.1 |
San Martin | 2.87 | 111 | 10.3 |
Zinkgruvan (Zn) | 8.46 | 105 | 28.6 |
Zinkgruvan (Cu) | 0.89 | 28 | 0.8 |
Yauliyacu | 6.87 | 293 | 64.7 |
Total | 282.5 |
Notes:
1.
All Mineral Reserves and Mineral Resources have been calculated as of December 31, 2005 in accordance with the standards of the Canadian Institute of Mining, Metallurgy and Petroleum and National Instrument 43-101.
2.
All Mineral Resources are exclusive of Mineral Reserves.
3.
Mineral Resources which are not Mineral Reserves do not have demonstrated economic viability.
4.
The Qualified Person for the Mineral Reserve and Mineral Resource estimates as defined by National Instrument 43-101 are as follows:
a.
San Dimas, San Martin – Reynaldo Rivera, MAusIMM, an employee of Luismin, S.A. de C.V., the Mexican operating subsidiary of Goldcorp Inc.
b.
Zinkgruvan – John Jullivan, P.Geo., Senior Geologist and Steve Cheeseman, P.Geo., Senior Associate Geologist, both with Watts, Griffis and McOuat Limited of Toronto, Canada.
c.
Yauliyacu – Velasquez Spring, P.Eng., Senior Geologist, and G. Ross MacFarlane, P.Eng., Senior Associate Metallurgical Engineer, both with Watts, Griffis and McOuat Limited of Toronto, Canada.
5.
Mineral Reserves and Mineral Resources are estimated using appropriate recovery rates and commodity prices as follows:
a.
San Dimas and San Martin Reserves – US$6.00 per silver ounce
b.
San Dimas and San Martin Resources – US$7.00 per silver ounce
c.
Zinkgruvan Reserves and Resources – US$5.50 per silver ounce
d.
Yauliyacu Reserves and Resources – US$6.00 per silver ounce
6.
Silver Wheaton’s purchase agreement with Glencore provides for the delivery of 4.75 million ounces of silver per year for 20 years. Silver production at Yauliyacu in excess of 4.75 million ounces per year is to the credit of Glencore, and therefore a portion of the reserves and resources from Yauliyacu may relate to production which may be for the credit of Glencore.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
The information contained herein contains “forward-looking statements” within the meaning of the United States Private Securities Litigation Reform Act of 1995 and applicable Canadian securities legislation. Forward-looking statements include, but are not limited to, statements with respect to the future price of silver, the estimation of mineral reserves and resources, the realization of mineral reserve estimates, the timing and amount of estimated future production, costs of production, reserve determination and reserve conversion rates. Generally, these forward-looking statements can be identified by the use of forward-looking terminology such as “plans”, “expects” or “does not expect”, “is expected”, “budget”, “scheduled”, “estimates”, “forecasts”, “intends”, “anticipates” or 47;does not anticipate”, or “believes”, or variations of such words and phrases or state that certain actions, events or results “may”, “could”, “would”, “might” or “will be taken”, “occur” or “be achieved”. Forward-looking statements are subject to known and unknown risks, uncertainties and other factors that may cause the actual results, level of activity, performance or achievements of Silver Wheaton to be materially different from those expressed or implied by such forward-looking statements, including but not limited to: risks related to the integration of acquisitions, the absence of control over mining operations from which Silver Wheaton purchases silver and risks related to these mining operations, including risks related to international operations, actual results of current exploration activities, actual results of current reclamation activities, conclusions of economic evaluations, changes in project parame ters as plans continue to be refined, as well as those factors discussed in the section entitled “Description of the Business – Risk Factors” in Silver Wheaton’s annual information form for the year ended December 31, 2005 incorporated by reference into Silver Wheaton’s Form 40-F on file with the U.S. Securities and Exchange Commission in Washington, D.C. Although Silver Wheaton has attempted to identify important factors that could cause actual results to differ materially from those contained in forward-looking statements, there may be other factors that cause results not to be as anticipated, estimated or intended. There can be no assurance that such statements will prove to be accurate, as actual results and future events could differ materially from those anticipated in such statements. Accordingly, readers should not place undue reliance on forward-looking statements. Silver Wheaton does not undertake to update any forward-looking statements that are inc orporated by reference herein, except in accordance with applicable securities laws.
CAUTIONARY LANGUAGE REGARDING RESERVES AND RESOURCES
Readers should refer to the annual information form of Silver Wheaton for the year ended December 31, 2005 and other continuous disclosure documents filed by Silver Wheaton since January 1, 2006 available atwww.sedar.com, for further information on mined Reserves and Resources, which is subject to the qualifications and notes set forth therein. Mineral Resources which are not Mineral Reserves, do not have demonstrated economic viability.
Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: The information contained herein uses the terms “Measured”, “Indicated” and “Inferred” Resources. United States investors are advised that while such terms are recognized and required by Canadian regulations, the United States Securities and Exchange Commission does not recognize them. “Inferred Mineral Resources” have a great amount of uncertainty as to their existence, and as to their economic and legal feasibility. It cannot be assumed that all or any part of an Inferred Mineral Resource will ever be upgraded to a higher category. Under Canadian rules, estimates of Inferred Mineral Resources may not form the basis of feasibility or other economic studies. United States investors are cautioned not to assume that all or any part of Measured or Indicated Mineral Resources will ever be converted into Mineral Reserves. United States investors are also cautioned not to assume that all or any part of an Inferred Mineral Resource exists, or is economically or legally mineable.
Consolidated Statements of Operations
(US dollars and shares in thousands, except per share amounts - Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||
June 30 | June 30 | June 30 | June 30 | |||||||||||
Note | 2006 | 2005 | 2006 | 2005 | ||||||||||
Silver sales | $ 47,413 | $ 19,263 | $ 73,124 | $ 35,340 | ||||||||||
| ||||||||||||||
Cost of sales | 14,841 | 10,405 | 25,263 | 19,466 | ||||||||||
Depreciation and amortization | 4,917 | 1,736 | 6,477 | 3,080 | ||||||||||
19,758 | 12,141 | 31,740 | 22,546 | |||||||||||
Earnings from operations | 27,655 | 7,122 | 41,384 | 12,794 | ||||||||||
Expenses and other income | ||||||||||||||
General and administrative | 1,199 | 508 | 1,717 | 923 | ||||||||||
Interest expense | 510 | - | 712 | - | ||||||||||
Amortization of debt financing costs | 5 | 675 | - | 929 | - | |||||||||
Stock based compensation | 963 | 38 | 1,074 | 78 | ||||||||||
Project evaluation | 75 | 54 | 108 | 62 | ||||||||||
Interest income | (520) | (183) | (1,660) | (259) | ||||||||||
Foreign exchange (gain) loss | (406) | (17) | (436) | 86 | ||||||||||
| ||||||||||||||
2,496 | 400 | 2,444 | 890 | |||||||||||
| ||||||||||||||
Net earnings | $ 25,159 | $ 6,722 | $ 38,940 | $ 11,904 | ||||||||||
Basic earnings per share | $ 0.12 | $ 0.04 | $ 0.19 | $ 0.07 | ||||||||||
Diluted earnings per share | $ 0.11 | $ 0.04 | $ 0.18 | $ 0.07 | ||||||||||
Weighted average number of shares outstanding | ||||||||||||||
- basic | 216,815 | 167,026 | 200,525 | 167,018 | ||||||||||
- diluted | 238,569 | 167,899 | 221,226 | 167,862 |
The accompanying notes form an integral part of these interim unaudited consolidated financial statements
Consolidated Balance Sheets
(US dollars and shares in thousands - Unaudited)
June 30 | December 31 | ||||||||
Note | 2006 | 2005 | |||||||
Assets | |||||||||
Current | |||||||||
Cash and cash equivalents | $ 51,637 | $ 117,741 | |||||||
Accounts receivable | 1,755 | 2,491 | |||||||
Silver inventory | - | 383 | |||||||
Other | 279 | 44 | |||||||
53,671 | 120,659 | ||||||||
Long-term investments | 2 | 15,069 | 15,069 | ||||||
Silver contracts | 3 | 544,744 | 130,254 | ||||||
Deferred debt financing costs | 5 | 195 | - | ||||||
Other | 670 | 169 | |||||||
$ 614,349 | $ 266,151 | ||||||||
Liabilities | |||||||||
Current | |||||||||
Accounts payable | $ 374 | $ 1,761 | |||||||
Accrued liabilities | 511 | 200 | |||||||
Promissory notes | 4 | 20,000 | - | ||||||
20,885 | 1,961 | ||||||||
Shareholders' Equity | |||||||||
Share purchase options | 6(c) | 4,381 | 4,953 | ||||||
Restricted share units | 39 | 26 | |||||||
Warrants | 6(b) | 38,824 | 38,867 | ||||||
Share capital | |||||||||
Common shares | |||||||||
Authorized: unlimited shares, no par value; | |||||||||
Issued and outstanding: 220,176 (December 31, 2005 – 183,375) | 6(a) | 484,647 | 193,711 | ||||||
Retained earnings | 65,573 | 26,633 | |||||||
593,464 | 264,190 | ||||||||
$ 614,349 | $ 266,151 | ||||||||
The accompanying notes form an integral part of these interim unaudited consolidated financial statements
Consolidated Statements of Cash Flows
(US dollars in thousands - Unaudited)
Three Months Ended | Six Months Ended | |||||||||||||||
June 30 | June 30 | June 30 | June 30 | |||||||||||||
Note | 2006 | 2005 | 2006 | 2005 | ||||||||||||
Operating Activities | ||||||||||||||||
Net earnings | $ 25,159 | $ 6,722 | $ 38,940 | $ 11,904 | ||||||||||||
Items not affecting cash | ||||||||||||||||
Depreciation and amortization | 4,917 | 1,736 | 6,477 | 3,080 | ||||||||||||
Amortization of debt financing costs | 675 | - | 929 | - | ||||||||||||
Stock based compensation | 963 | 38 | 1,074 | 78 | ||||||||||||
Other | (329) | 72 | (241) | 87 | ||||||||||||
Change in non-cash working capital | 7 | 1,314 | 703 | (547) | (713) | |||||||||||
Cash generated by operating activities | 32,699 | 9,271 |
| 46,632 | 14,436 | |||||||||||
Financing Activities | ||||||||||||||||
Bank debt drawn down | 5 | - | - | 125,000 | - | |||||||||||
Bank debt repaid | 5 | (120,000) | - | (125,000) | - | |||||||||||
Debt financing costs | 5 | (161) | - | (1,124) | - | |||||||||||
Shares issued | 6(a) | 175,150 | 175,150 | |||||||||||||
Share issue costs | (7,468) | - | (7,788) | (642) | ||||||||||||
Warrants exercised | 199 | 57 | 280 | 57 | ||||||||||||
Share purchase options exercised | 2,583 | - | 5,912 | - | ||||||||||||
Cash generated by (applied to) financing activities | 50,303 | 57 | 172,430 | (585) | ||||||||||||
Investing Activities | ||||||||||||||||
Silver contracts | 3 | (40,045) | - | (285,408) | (483) | |||||||||||
Other | - | (45) | - | (45) | ||||||||||||
Cash applied to investing activities | (40,045) | (45) | (285,408) | (528) | ||||||||||||
Effect of exchange rate changes on cash and cash equivalents | 312 | (18) | 242 | (33) | ||||||||||||
Increase (decrease) in cash and cash equivalents | 43,269 | 9,265 | (66,104) | 13,290 | ||||||||||||
Cash and cash equivalents, beginning of period | 8,368 | 24,014 | 117,741 | 19,989 | ||||||||||||
Cash and cash equivalents, end of period | $ 51,637 | $ 33,279 | $ 51,637 | $ 33,279 |
At June 30, 2006, the Company’s cash and cash equivalents consisted of $16.4 million in cash (December 31, 2005 - $8.8 million) and $35.2 million in cash equivalents (December 31, 2005 - $108.9 million). Cash equivalents include term deposits and treasury bills with original maturities of less then 90 days. The Company paid $510,000 in interest (six months - $712,000) compared to $nil (six months - $nil) in 2005. In addition, the Company paid no income taxes for the three and six months ended June 30, 2006 and 2005.
The accompanying notes form an integral part of these interim unaudited consolidated financial statements
Consolidated Statements of Shareholders’ Equity
(US dollars and shares in thousands - Unaudited)
Share | Restricted | |||||||
Common Shares | Purchase | Share | Retained | |||||
Shares | Amount | Warrants | Options | Units | Earnings | Total | ||
|
|
|
|
| ||||
At December 31, 2004 | 167,010 | $ 119,464 | $ 28,579 | $ 5,046 | $ - | $ 1,342 | $ 154,431 | |
Fair value of stock based compensation | - | - | - | 463 | 26 | - | 489 | |
Share purchase options exercised | 710 | 2,535 | - | (556) | - | - | 1,979 | |
Warrants exercised | 30 | 129 | (29) | - | - | - | 100 | |
Shares issued | 15,625 | 75,902 | 10,317 | - | - | - | 86,219 | |
Share issue costs | - | (4,319) | - | - | - | - | (4,319) | |
Net earnings | - | - | - | - | - | 25,291 | 25,291 | |
At December 31, 2005 | 183,375 | 193,711 | 38,867 | 4,953 | 26 | 26,633 | 264,190 | |
Fair value of stock based compensation | - | - | - | 1,061 | 13 | - | 1,074 | |
Share purchase options exercised | 2,094 | 7,545 | - | (1,633) | - | - | 5,912 | |
Warrants exercised | 63 | 323 | (43) | - | - | - | 280 | |
Shares issued | 34,644 | 290,712 | - | - | - | - | 290,712 | |
Share issue costs | - | (7,644) | - | - | - | - | (7,644) | |
Net earnings | - | - | - | - | - | 38,940 | 38,940 | |
At June 30, 2006 | 220,176 | $ 484,647 | $ 38,824 | $ 4,381 | $ 39 | $ 65,573 | $ 593,464 | |
The accompanying notes form an integral part of these interim unaudited consolidated financial statements
Notes to the Consolidated Financial Statements
Three and Six months ended June 30, 2006
(US dollars - Unaudited)
1.
BASIS OF PRESENTATION
These unaudited interim consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles (“Canadian GAAP”) for interim financial information and they follow the same accounting policies and methods of application as the audited consolidated financial statements of the Company for the year ended December 31, 2005 except as noted below. These unaudited interim consolidated financial statements do not include all the information and note disclosure required by generally accepted accounting principles for annual financial statements and therefore should be read in conjunction with the most recent annual audited consolidated financial statements.
In the opinion of management, all adjustments (including normal recurring adjustments) necessary to present fairly the financial position at June 30, 2006 and the results of operations and cash flows for all periods presented have been made. The interim results are not necessarily indicative of results for a full year.
Debt financing costs
Debt financing costs are deferred and amortized over the expected life of the debt facility.
2.
LONG-TERM INVESTMENTS
June 30, 2006 | December 31, 2005 | |||||||
(in thousands) | Book Value | Market Value | Unrealized Gains | Book Value | Market Value | Unrealized Gains | ||
|
|
| ||||||
Bear Creek (14%) | $ 13,696 | $ 29,534 | $ 15,838 | $ 13,696 | $ 20,105 | $ 6,409 | ||
Other | 1,373 | 2,670 | 1,297 | 1,373 | 1,544 | 171 | ||
$ 15,069 | $ 32,204 | $ 17,135 | $ 15,069 | $ 21,649 | $ 6,580 |
3.
SILVER CONTRACTS
June 30, 2006 | December 31, 2005 | |||||||
(in thousands) | Cost | Accumulated Depreciation | Net | Cost | Accumulated Depreciation | Net | ||
|
|
| ||||||
Luismin | $ 194,807 | $ (5,115) | $189,692 | $ 59,132 | $ (3,517) | $ 55,615 | ||
Zinkgruvan | 77,919 | (4,927) | 72,992 | 77,919 | (3,280) | 74,639 | ||
Yauliyacu | 285,292 | (3,232) | 282,060 | - | - | - | ||
$ 558,018 | $ (13,274) | $544,744 | $ 137,051 | $ (6,797) | $ 130,254 |
Luismin silver purchase contract
On October 15, 2004, the Company entered into a twenty five year agreement to purchase all of the silver produced by Goldcorp’s Luismin mining operations in Mexico, for an upfront payment of $36.7 million (Cdn$46.0 million) in cash and 108 million common shares of the Company. In addition, a per ounce cash payment of the lesser of $3.90 and the prevailing market price is due (subject to an inflationary adjustment commencing in 2007). Under this agreement, Luismin was required to deliver a minimum of 120 million ounces over the 25 year period following the contract date, and Silver Wheaton was obligated to pay 50% of any capital expenditures made by Luismin at its mining operations in excess of 110% of the projected capital expenditures outlined in the contract.
On March 30, 2006, Goldcorp and Silver Wheaton amended the silver purchase contract, increasing the minimum number of ounces of silver to be delivered over the 25 year period by 100 million ounces, to 220 million ounces, and waiving any capital expenditure contributions previously required to be paid by Silver Wheaton. In consideration for these amendments, Silver Wheaton issued to Goldcorp 18 million common shares, valued at the February 13, 2006 closing price of $6.42 per share, and a $20 million non-interest bearing promissory note due on March 30, 2007. As a result, at June 30, 2006, Goldcorp owned 57% of the Company’s common shares.
The allocation of the total purchase price is summarized in the table below:
(in thousands) | ||||
Purchase Price | ||||
October 15, 2004 - initial agreement | ||||
Cash | $ 36,744 | |||
Shares | 21,958 | |||
Acquisition costs | 430 | |||
December 31, 2004 and 2005 | 59,132 | |||
March 30, 2006 - contract amendment | ||||
Promissory note (Note 4) | 20,000 | |||
Shares | 115,560 | |||
Acquisition costs | 115 | |||
135,675 | ||||
June 30, 2006 | $ 194,807 | |||
Yauliyacu silver purchase contract
On March 23, 2006, the Company entered into an agreement to purchase 4.75 million ounces of silver per year for a period of 20 years, based on the production from Glencore’s Yauliyacu mining operations in Peru, for an upfront payment of $285 million, comprised of $245 million in cash and a $40 million promissory note (Note 4). In addition, a cash payment of $3.90 per ounce of silver delivered under the contract is due (subject to an inflationary adjustment commencing in 2009). In the event that silver produced at Yauliyacu in any year totals less than 4.75 million ounces, the amount sold to Silver Wheaton in subsequent years will be increased to make up for the shortfall, so long as production allows.
During the term of the contract, Silver Wheaton has a right of first refusal on any future sales of silver streams from the Yauliyacu mine and a right of first offer on future sales of silver streams from any other mine currently owned by Glencore. In addition, Silver Wheaton also has an option to extend the 20 year term of the silver purchase agreement in five year increments, on substantially the same terms as the existing agreement, subject to an adjustment related to silver price expectations at the time and other factors.
The allocation of the purchase price is summarized in the table below:
(in thousands) | |||
Purchase Price | |||
Cash | $ 245,000 | ||
Promissory note (Note 4) | 40,000 | ||
Acquisition costs | 292 | ||
$ 285,292 |
4.
PROMISSORY NOTES
On March 23, 2006, as partial consideration for entering into the Yauliyacu silver purchase contract (Note 3), the Company issued a $40 million promissory note to Glencore, bearing interest at 3% per annum, which was paid in full on May 31, 2006.
On March 30, 2006, as partial consideration for amendments made to the Luismin silver purchase agreement (Note 3), the Company issued a non-interest bearing $20 million promissory note to Goldcorp, due on March 30, 2007. At June 30, 2006 this promissory note was still outstanding.
5.
BANK DEBT
In March 2006, the Company entered into a credit agreement with the Bank of Nova Scotia, as lead arranger and administrative agent, to borrow $100 million under a non revolving term loan (the “Term Loan”) and $25 million under a revolving loan (the “Revolving Loan”). During April, 2006, both the Term Loan and the Revolving Loan were repaid in full. The Term Loan was cancelled upon repayment, while the Revolving Loan facility remains available. The interest rate on the Revolving Loan is based on LIBOR plus a spread determined by the Company’s leverage ratio. Under the credit agreement, the Company is required to maintain a debt service coverage ratio greater than or equal to 1.25 : 1 and a Leverage Ratio less than or equal to 3.50 : 1. The Revolving loan is secured against the Company’s assets including the Luismin, Zinkgruvan and Yauliyacu silver purchase contracts. Total debt financing costs were $1,124,000, of which $675,000 was amortized to income during the three months ended June 30, 2006 (six months ended June 30, 2006 - $929,000).
Interest expense and the effective interest rates for the Term Loan and the Revolving Loan are presented below:
Term Loan | Revolving Loan | Total | ||
Interest expense ($000’s) | $ 264 | $ 45 | $ 309 | |
Effective interest rate | 5.01% | 5.01% | 5.01% |
6.
SHAREHOLDERS’ EQUITY
(a)
Shares issued
On April 20, 2006, the Company raised gross proceeds of $175 million (Cdn$200 million) from a public offering of 16,644,000 common shares at a price of Cdn$12.00 per share. Share issue costs totalling $7.5 million were incurred as a part of this offering.
(b)
Warrants
A summary of the Company’s warrants at June 30, 2006 and December 31, 2005 and the changes for the periods ending on those dates is presented below:
Warrants Outstanding | Weighted Avg Exercise Price (Cdn$) | Exchange Ratio | ||
At December 31, 2004 | 158,000,000 | $ 0.88 | 0.2 | |
Issued in connection with public offering | 7,812,500 | 10.00 | 1.0 | |
Exercised | (150,000) | 0.80 | 0.2 | |
At December 31, 2005 | 165,662,500 | 1.31 | 0.24 | |
Exercised | (316,400) | 1.02 | 0.2 | |
At June 30, 2006 | 165,346,100 | $ 1.31 | 0.24 |
The following table summarizes information about the warrants outstanding at June 30, 2006:
Warrants Outstanding | Exercise Price (Cdn$) | Exchange Ratio | Common Shares to be Issued upon Exercise of Warrants | Effective Price Per Share (Cdn$) | Expiry Date | ||
|
| ||||||
Share purchase warrants | 117,260,500 | $ 0.80 | 0.20 | 23,452,100 | $ 4.00 | Aug 5, 2009 | |
Series A Warrants | 40,273,100 | 1.10 | 0.20 | 8,054,620 | 5.50 | Nov 30, 2009 | |
Series B Warrants | 7,812,500 | 10.00 | 1.00 | 7,812,500 | 10.00 | Dec 22, 2010 | |
| 165,346,100 | 39,319,220 | $ 5.50 |
(c)
Share purchase options
During the quarter, the Company issued 550,000 stock options with a weighted average exercise price of Cdn$12.10 per option. At June 30, 2006 there were 4,876,666 share purchase options outstanding with a weighted average exercise price of Cdn$4.54 per option.
7.
SUPPLEMENTAL CASH FLOW INFORMATION
Three Months Ended | Six Months Ended | ||||||||
June 30 | June 30 | June 30 | June 30 | ||||||
(in thousands) | Note | 2006 | 2005 | 2006 | 2005 | ||||
Change in non-cash working capital | |||||||||
Accounts receivable | $ 1,263 | $ 397 | $ 737 | $ (324) | |||||
Silver inventory | 272 | 406 | 383 | 478 | |||||
Other | 67 | 15 | (727) | (22) | |||||
Accounts payable | (422) | (57) | (1,242) | (821) | |||||
Accrued liabilities | 134 | (58) | 302 | (24) | |||||
| |||||||||
$ 1,314 | $ 703 | $ (547) | $ (713) | ||||||
Non-cash investing activities, in connection with the acquisition of silver contracts | |||||||||
Shares issued to Goldcorp | 3 | $ - | $ - | $ 115,560 | $ - | ||||
Promissory note issued to Goldcorp | 4 | $ - | $ - | $ 20,000 | $ - | ||||
8.
RELATED PARTY TRANSACTIONS
At June 30, 2006, Goldcorp owned 57% of the Company’s outstanding common shares. During the quarter, the Company purchased 2.4 million ounces (2005 – 2.1 million ounces) of silver from a subsidiary of Goldcorp at a price of $3.90 per ounce, for total consideration of approximately $9.5 million (2005 - $8.1 million). During the six months ended June 30, 2006, the Company purchased 4.6 million ounces (2005 – 4.1 million ounces) of silver from the subsidiary at a price of $3.90 per ounce, for total consideration of approximately $18.0 million (2005 - $15.8 million).
On March 30, 2006, Silver Wheaton and Goldcorp amended the Luismin silver purchase agreement, as described in note 3. As a result of this transaction the Company issued 18 million shares and a non-interest bearing $20 million promissory note to Goldcorp, due on March 30, 2007.
The Company has an agreement with Goldcorp whereby Goldcorp provides certain management and administrative services at cost. During the quarter, total management fees paid to Goldcorp were $73,000 (six months - $142,000) compared to $107,700 (six months - $266,800) during the same period in 2005. This agreement allows for cancellation with 30 days notice at any time.
In addition, during the quarter the Company sold leasehold improvements and furniture and fixtures to Goldcorp at their net book value of $145,000, which approximates fair value. At June 30, 2006, Goldcorp owed the Company $170,800 (December 31, 2005 – $nil).
9.
SEGMENTED INFORMATION
The Company’s reportable operating segments are summarized in the table below. This information has been segmented on a silver contract basis.
Three Months Ended June 30, 2006 | ||||||
(in thousands) | Luismin | Zinkgruvan | Yauliyacu | Corporate | Consolidated | |
Statements of Operations | ||||||
Silver sales | $ 30,142 | $ 5,929 | $ 11,342 | $ - | $ 47,413 | |
Cost of sales | 9,545 | 1,883 | 3,413 | - | 14,841 | |
Depreciation | 876 | 808 | 3,233 | - | 4,917 | |
Earnings from operations | 19,721 | 3,238 | 4,696 | - | 27,655 | |
Expenses and other income | - | - | - | (2,496) | (2,496) | |
Net earnings (loss) | $ 19,721 | $ 3,238 | $ 4,696 | $ (2,496) | $ 25,159 | |
Cash flow from operations | $ 20,597 | $ 5,334 | $ 7,929 | $ (1,161) | $ 32,699 | |
Total assets (June 30, 2006) | $ 189,692 | $ 74,252 | $ 282,060 | $ 68,345 | $ 614,349 | |
Six Months Ended June 30, 2006 | ||||||
(in thousands) | Luismin | Zinkgruvan | Yauliyacu | Corporate | Consolidated | |
Statements of Operations | ||||||
Silver sales | $ 51,246 | $ 10,536 | $ 11,342 | $ - | $ 73,124 | |
Cost of sales | 18,013 | 3,837 | 3,413 | - | 25,263 | |
Depreciation | 1,597 | 1,647 | 3,233 | - | 6,477 | |
Earnings from operations | 31,636 | 5,052 | 4,696 | - | 41,384 | |
Expenses and other income | - | - | - | (2,444) | (2,444) | |
Net earnings (loss) | $ 31,636 | $ 5,052 | $ 4,696 | $ (2,444) | $ 38,940 | |
Cash flow from operations | $ 33,233 | $ 6,188 | $ 7,929 | $ (718) | $ 46,632 | |
Three Months Ended June 30, 2005 | |||||
(in thousands) | Luismin | Zinkgruvan | Corporate | Consolidated | |
Statements of Operations | |||||
Silver sales | $ 14,970 | $ 4,293 | $ - | $ 19,263 | |
Cost of sales | 8,141 | 2,264 | - | 10,405 | |
Depreciation | 795 | 941 | - | 1,736 | |
Earnings from operations | 6,034 | 1,088 | - | 7,122 | |
Expenses and other income | - | - | (400) | (400) | |
Net earnings (loss) | $ 6,034 | $ 1,088 | $ (400) | $ 6,722 | |
Cash flow from operations | $ 6,829 | $ 1,624 | $ 818 | $ 9,271 | |
Six Months Ended June 30, 2005 | |||||
(in thousands) | Luismin | Zinkgruvan | Corporate | Consolidated | |
Statements of Operations | |||||
Silver sales | $ 28,654 | $ 6,686 | $ - | $ 35,340 | |
Cost of sales | 15,841 | 3,625 | - | 19,466 | |
Depreciation | 1,509 | 1,571 | - | 3,080 | |
Earnings from operations | 11,304 | 1,490 | - | 12,794 | |
Expenses and other income | - | - | (890) | (890) | |
Net earnings (loss) | $ 11,304 | $ 1,490 | $ (890) | $ 11,904 | |
Cash flow from operations | $ 12,646 | $ 2,133 | $ (343) | $ 14,436 | |
10.
RECONCILIATION TO UNITED STATES GENERALLY ACCEPTED ACCOUNTING PRINCIPLES
These financial statements are prepared in accordance with accounting principles generally accepted in Canada (“Canadian GAAP”). A reconciliation of earnings determined in accordance with Canadian GAAP to earnings and comprehensive income determined under accounting principles which are generally accepted in the United States (“US GAAP”) is as follows:
Three Months Ended | Six Months Ended | ||||||||
June 30 | June 30 | June 30 | June 30 | ||||||
(in thousands) | 2006 | 2005 | 2006 | 2005 | |||||
Earnings as reported under Canadian and US GAAP | $ 25,159 | $ 6,722 | $ 38,940 |
| $ 11,904 | ||||
Unrealized gains on securities (a) | 3,278 | - | 10,555 | - | |||||
Comprehensive income under US GAAP | $ 28,437 | $ 6,722 | $ 49,495 | $ 11,904 |
Shareholders’ equity determined in accordance with Canadian GAAP is reconciled to Shareholders’ equity in accordance with US GAAP as follows:
June 30 | December 31 | ||||
(in thousands) | 2006 | 2005 | |||
Comprehensive Income | |||||
In accordance with Canadian GAAP | $ - | $ - | |||
Cumulative unrealized holding gains | 17,135 | 6,580 | |||
In accordance with US GAAP | $ 17,135 | $ 6,580 | |||
Shareholders’ equity | |||||
In accordance with Canadian GAAP | $ 593,464 | $ 264,190 | |||
In accordance with US GAAP | $ 610,599 | $ 270,770 |
(a)
Under US GAAP (FAS 115 – Accounting For Certain Investments in Debt and Equity Securities), the Company’s Long-term investments would be classified as available-for-sale securities and carried at fair value. The unrealized holding gains at June 30, 2006 on available-for-sale securities are not recognized under Canadian generally accepted accounting principles, but are recognized under United States accounting principles as a component of comprehensive income and reported as a net amount in a separate component of shareholders’ equity until realized.
(b)
The Company has adopted SFAS 123(R) –Share Based Payment, effective January 1, 2006.
Form 52-109F2
Certification of Interim Filings
I, Peter Barnes, Chief Executive Officer of Silver Wheaton Corp., certify that:
1.
I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109Certification of Disclosure in Issuers’ Annual and Interim Filings) of Silver Wheaton Corp. (the issuer), for the interim period ending June 30, 2006;
2.
Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings;
3.
Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings; and
4.
The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared.
Date: August 3, 2006
/s/ Peter Barnes
Chief Executive Officer
Form 52-109F2
Certification of Interim Filings
I, Nolan Watson, Chief Financial Officer of Silver Wheaton Corp., certify that:
1.
I have reviewed the interim filings (as this term is defined in Multilateral Instrument 52-109Certification of Disclosure in Issuers’ Annual and Interim Filings) of Silver Wheaton Corp. (the issuer), for the interim period ending June 30, 2006;
2.
Based on my knowledge, the interim filings do not contain any untrue statement of a material fact or omit to state a material fact required to be stated or that is necessary to make a statement not misleading in light of the circumstances under which it was made, with respect to the period covered by the interim filings;
3.
Based on my knowledge, the interim financial statements together with the other financial information included in the interim filings fairly present in all material respects the financial condition, results of operations and cash flows of the issuer, as of the date and for the periods presented in the interim filings; and
4.
The issuer’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures for the issuer, and we have designed such disclosure controls and procedures, or caused them to be designed under our supervision, to provide reasonable assurance that material information relating to the issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which the interim filings are being prepared.
Date: August 3, 2006
/s/ Nolan Watson
Chief Financial Officer