JIM: Joining me on the program today as my special guest is Randy Smallwood. He’s President and CEO and founder of Silver Wheaton.
And Randy, I want to begin with Silver Wheaton and what makes Silver Wheaton different from, let’s say, other silver/gold producers. And I want to talk about: What is silver streaming? So let’s begin with that. [00:57]
RANDY: Sure. Okay. First off, Jim, thanks for having me on the show again and always look forward to chatting with you and your listeners.
First off, Silver Wheaton is a bit unique than your — different than your producers, your normal producers in the sense that we provide access — in the silver market, 75 percent of silver is actually produced as a byproduct. So we provide access to that byproduct silver production from the copper mines and from the lead-zinc [mines]. We look for high quality assets in that space and buy the rights to the silver byproduct off of that and provide access to that high quality production to our shareholders.
And we do that on a concept called “streaming” where we have fixed costs. And so, you know, the big advantage from an investor’s perspective is that we don’t have the cost risk. We don’t have the inflation risk. Our costs are detailed in the contract. So we have a production payment that’s typically about 3.90 an ounce plus a bit of inflation, so I can forecast our cost per ounce going out four or five, ten years out with a pretty high degree of confidence; much higher than your normal operating company where you always run the risk of inflationary pressures. [1:59]
JIM: Randy, a lot of your clients that you have relationships with are large mining companies like Goldcorp and Barrick. Explain for our listeners: Why would a major gold company use Silver Wheaton versus, let’s say, tapping the equity markets or doing debt financing? [2:16]
RANDY: Yeah. It comes down to the fact that we take on some of the project risk. I always like to say that we get the project risk but project reward also. Our agreements are life-of-mine agreements, which means that we get all the upside potential going forward.
But in terms of taking on some of that project risk, we contribute our dollars up front when it comes to constructing projects. Sometimes we do deals on operating projects where the company just needs to clean up its balance sheet, but in the typical example, say Penasquito and Pascua-Lama, the Goldcorp and Barrick assets, our contribution on the capital side is a much, much larger portion than the actual revenue stream that we impact by having a silver stream. And so you dramatically improve the project internal rate of return of these projects from a Barrick perspective and from a Goldcorp perspective, and it makes it much more appealing in terms of moving some of these high capital projects forward by having someone that’s stepping in with a good chunk of capital upfront to help offset that risk. [03:08]
JIM: Randy, I know a lot of silver, as you mention, is a byproduct of mining. Why do you think that the market does not give the same valuation for, let’s say, a base metal company that produces a large amount of silver versus a pure silver company? [3:23]
RANDY: It comes down to the attractiveness of precious metals as a store of value. The price of base metals will always be dictated by economic activity, whereas precious metals have always been sort of a safe haven, a place to sort of go to in times of crisis and concern. When you look around the world right now, of course you see all sorts of issues with fiat currencies; the challenges that governments have in terms of trying to actually maintain any type of value in their fiat currencies. So precious metals have always had that benefit whereas the base metals really do fluctuate based on industrial demand. And so investors recognize that when they are looking at that, and they value these companies accordingly. In times of distress, precious metals companies tend to do better whereas the base metal companies tend to pull back just because of lower economic activity. [04:09]
JIM: And how would you compare Silver Wheaton against, let’s say, some of your peers in the silver space? And I’m thinking, Randy, in terms of two components: Both reserves and production.
RANDY: Well, from a reserve base we have more reserves than any other silver company in the world; more reserves and resources than any other. We’re close to a billion ounces in reserves, you know, on substantive growth. I mean nearly twice the reserves of any other silver company in the world. So in seven short years we’ve been able to access a lot of good, high quality assets.
From the production side of course, our production last year — and we haven’t given final numbers yet, but our guidance is 25 to 26 and things look pretty good, so 25 to 26 million ounces — but we’re climbing to 43 million ounces by 2015, which is an incredible growth rate in the precious metals, not just the silver space, but the entire precious metals space. It’s one of the strongest growth rates. And that’s just with our current acquisitions — our current assets. That doesn’t incorporate any type of growth from further project acquisitions. So we’ve got a very strong growth profile.
Of course, our costs are fixed. I can tell you that in 2015 our cost per ounce will be about $4.14 an ounce; it might be 4.15 or 4.12, but it’s definitely not going to be anything significantly different. So that’s the big appeal between the traditional producer and Silver Wheaton. [5:26]
JIM: I know one of the big risks in mining today is concerns about what goes on politically in various jurisdictions. How diverse is your asset base in terms of geographical location?
RANDY: It’s pretty much spread through the Americas and Europe. With silver, we are blessed in the fact that there’s very little silver in Africa, and that of course takes away a lot of political risk issues. For some reason, you know, very few assets in Africa have any type of silver at all, even as a byproduct. So, most silver actually comes out of the Americas.
Mexico and Peru are by far the largest silver producing countries in the world and we’ve got a lot of focus in both of those. Mexico, particularly, but even Peru and into the rest of South America, Argentina and Chile also provide their piece. So political risk is important to us; these are life-of-mine contracts and we expect — you know, we like to go into jurisdictions where we’re confident that we’re going to see the full benefit of that life of mine. [6:20]
JIM: Let’s talk about two particular projects that are going to have a significant influence in terms of your production going forward and that is the Penasquito project with Goldcorp and Pascua-Lama with Barrick. What can you tell us about those two projects?
RANDY: Well, fantastic ore body. I’ve known the asset for quite a while. I’ve watched it sort of advance its way all of the way forward, so it’s pretty exciting to see it finally generating some return back to all those very patient shareholders on both the Goldcorp side and Silver Wheaton [side]. They are very close to reaching full production capacity of 130,000 tonnes per day; they expect to have that by the end of this quarter. Goldcorp’s year-end results look very positive and so we’ll get about 7 million; we have about 25 percent of the silver from Penasquito and that equates to about 7 million ounces a year over the life of the mine. So it’s a very, very important asset for us. It’ll become our near term catalyst in terms of achieving that full scale production, you know, during this quarter, and I’m starting to see those silver production levels to our credit.
Pascua-Lama, of course, Barrick’s gold mine down in South America. It’s on the border between Chile and Argentina. Again, an incredible gold asset. For the first five years, that will be one of the best if not the best gold mine in the world. It’s very high grade and over that five year period, again, we get 25 percent of the silver which will equate to about 9 million ounces per year to our credit as it moves forward. We’ve been down on site, we’re very happy with what Barrick’s doing and the progress they’re making down there. Their target is to have it up and running in mid-2013 and things look very positive in terms of achieving those targets. It’s a great asset, you know, that has been tied up in permitting and tax negotiations for quite a while and you know, we think there is some great potential on that asset even beyond what’s been currently described just because it’s been so long in the making. And once it gets up and running we’re pretty excited about the future at Pascua-Lama. [08:07]
JIM: Now, you’ve been saying in a lot of your corporate presentations to analysts, by 2015 you guys are targeting about 43 million ounces. From where you are today, Randy, that’s a 72 percent increase in production. I don’t know of any company out there that has that kind of profile. How confident are you in those numbers?
RANDY: Well, very confident in the Pascua-Lama portion of it, which is the biggest step in that moving forward. Of course, Penasquito reaching full production here, we’re very close to that; Pascua-Lama, well on its way and so we’re very confident that we’ll see that in the middle of 2013 and get to that full level.
And there are two other projects that we’ve got: Navidad with Pan American Silver and the Augusta Resources, the Rosemont project down in Arizona — Augusta Resources. Both of them are still waiting their final permits, but very optimistic that they expect them here in the next while.
Argentina is looking very positive in terms of the recent elections down there. Pan American is about as good a partner as you could ask for in Argentina. They’ve got previous project building experience down there and have had great success.
Augusta has done a fantastic job with Rosemont in Arizona in terms of moving that one forward. They’ve set some new ground in terms of water management issues and environmental impact, and so we’re very optimistic they’re going to move their way forward too. Both of those will also contribute to that 43 million ounces.
You know, the key thing to keep in mind is, you know, we’re constantly always looking for new ways to help continue growing our company. We've got the cash flows to do it, so that 43 million ounces is assuming that we don’t do any further acquisitions before then. And you know, I’m pretty optimistic that we’ll continue to grow our company beyond that. [9:40]
JIM: You know what’s rather surprising, when you look at the amount of investment dollars that have gone into the silver industry, roughly about 67 percent of it has gone to the silver ETF, about 11 percent has gone into other silver producers, but 22 percent has gone into Silver Wheaton — nearly twice all the silver producers combined. That’s quite a statement there. [10:05]
RANDY: Yeah. Well, it shows the strength of our model, but it also shows that we’ve got some effort to do in terms of the holders of ETFs because I think when you look at an ETF and you compare it with what we provide at Silver Wheaton, you know, there’s four different aspects that, you know, sell that.
Obviously, we’re both focused on silver, but we provide some leverageables in terms of having a bit of a cash cost at the bottom end; it seems pretty small relative to the spot price, but it nevertheless is some leverage.
But we also provide organic growth. The organic growth that we’ve had in our current asset — nearly 25 percent of our silver has actually come from organic growth within the mines that we already have contracts have with, after we’ve signed the contracts. That’s an incredible growth potential. The ETF ounces, the last time I checked, they don’t grow. But the ability to go out and do new acquisitions and continue making accretive acquisitions and going forward — again, an ETF, all it does is add more ounces when someone else comes in. You know, when you buy an ounce in an ETF, it stays an ounce all the way through.
And then the last thing of course is the yield. We’ve got a very unique dividend policy that ensures our shareholders share in the benefits of silver. When silver does well, our shareholders receive a higher yield. In terms of linking to the market, I don’t think there’s a better structure out there for providing that. So when you add that all up, we’ve obviously got some more work to do in terms of working on the ETF, the holders of ETFs, and we’re focused on that. [11:30]
JIM: Let’s talk about the difference between, let's say, Silver Wheaton and other silver producers.
RANDY: Really, the big difference is costs. Our costs are fixed. And you know, for any producing entity, the advantage of a streaming side is we do get all the benefits of the exploration success, the expansion potential, both in terms of life and expanded capacity, but our costs are fixed. There are no surprises there. And the mining industry has a long history of not delivering on the expected margin; you know, when commodity prices go up, generally the cost to produce that material also climbs. We’re protected from that. We’ve got a fixed inflation rate of generally one percent on most of our contracts that gets applied to that cost base and keeps on climbing up. And that’s the biggest difference.
The other side of it is that most of the silver producers out there are focused on silver assets. We tend to focus on very profitable gold assets, very profitable copper assets, very profitable lead-zinc assets. And so really high quality portfolio. Most of our production comes from the lowest half, and the majority is actually from the lowest quartile of the respective cost curves for each one of those commodities, so it’s high quality assets. [12:32]
JIM: What really stands out to me, I know there’s a lot of money that has gone into silver ETFs, I think, and investors just find that easier to understand, but if you take a look at the comparison of, let’s say, Silver Wheaton to an ETF, you’re exposed to silver just like the silver ETF.
But I think a couple of other things are rather significant. One is the leverage to the price of silver, that’s number one. Number two is you’re expanding production and you’re expanding your reserves, and the only way the ETF is going to expand is if somebody puts more money into the ETF. And more importantly is the dividend yield.
Let’s talk about that dividend yield because you’re tying it, I noticed in the Q4 the dividend is going to go from 3 cents to 9 cents. So let’s talk about that dividend for a moment because at a time when interest rates are at zero, this looks rather attractive. [13:24]
RANDY: Yes. The unique thing about our business model is that once we make the upfront payment, the only payment we make after that is the production payment on a per ounce basis that are operations. The upfront payment, all of our capital is already committed, it’s already set aside. So our cash flows, our free cash flows, our operating cash flows are essentially the spot price of silver minus the production payments that we make — which is around $4 — and then we’ve got a little bit of G&A, but we’re a very efficient, very small, efficient company. There’s 24 people in the company as a whole, so G&A is not significant on a relative basis. So operating cash flow is really the spot price of silver minus four dollars and change on a per ounce basis times the number of ounces we produce. And it’s going to stay that way.
So by coming up with a dividend policy that’s a function of our operating cash flow, we ensure that our shareholders get full exposure to the price of silver. Silver goes up $5, it adds $5 per ounce to the operating cash flow and our shareholders get 20 percent of that $5 back. They get a dollar an ounce back in terms of a dividend. It’s linked cleanly and purely to that. But because it’s linked to that, because we have that cost basis, this is something that also keeps our company strong and sustainable. If silver prices — you know, not that I ever see it, but if silver prices ever drop down a natural portion, you know, we don’t put our company at risk in terms of having a heavy burden from the dividend policy. But the real here upside here is, of course, the expectations; we’re very bullish on silver long term. And by having, you know, our dividend policy definitely shares that directly with our shareholders going forward. [14:49]
JIM: Now, in terms of production growth, you’ve already stated that by 2015 you’re anticipating moving from 25 to 26 million ounces to 43 million ounces. But you also have arrangements with Pan American Silver and the Navidad project is a rather significant large silver project. What could projects like that, if they come online, do to your growth going forward? I imagine more substantial than the 65-70 percent you’re already targeting? [15:18]
RANDY: Yeah. Well, I mean I should highlight Navidad is part of that forecast. We are pretty confident that they’re going to move forward, so it is part of that 43 million ounce forecast that we have going forward. But there is no doubt, I mean that Navidad project is one of the most promising silver assets of recent times in terms of exploration success. And you know, we get our silver from as many as 12 ½ percent from the Loma de La Plata zone which has by far the best metallurgy and the best silver recovery of the entire district, so no doubt will be the — I think the current plans have it being the first production, although they’re still sort of fine tuning it, they’re working their way forward. So we’re pretty bullish. In fact, we’ve got a high degree of confidence in the team at Pan American in terms of moving that project forward. And it should add about 2 million ounces to our production profile for a good long term. [16:01]
JIM: You know, I don’t think investors have really completely grasped the concept of leverage to silver that your company offers. I mean the day, Randy, you and I are speaking, the price of silver is roughly about $34.30 an ounce; your costs are $4. That’s roughly about $30 of margin. There are not too many companies that have that kind of margin around. [16:24]
RANDY: Exactly. And that $30, you know, right now, 20 percent of that gets fed back to our shareholders in a dividend basis over the course of the year; 20 percent of it, over the year, on every ounce produced. [16:34]
JIM: I want to move on to the actual primary product Silver Wheaton is involved in and that is silver.
Randy, there are times when silver has an industrial component; when the economy is growing strong, the markets are growing strong, you get the industrial component and you get the monetary component. There are other times, like for example, when the economy began to weaken last year that silver takes on more of an industrial component, but even despite that, silver has remained rather high.
Why don’t you talk about both the monetary component and the increasing industrial demand for silver that we’re starting to see, whether it’s water purification, whether it’s use in solar panels. But it seems to me there are more and more uses of silver that we keep finding every year. [17:19]
RANDY: The advantage that silver has over any other commodity out there is its efficiency in terms of conducting electricity. It’s the most efficient material out there and on a cost basis, as long as there’s a need for efficient electronics — and we all love our quicker and more efficient hand-held phones and tablets and such like that. As long as there’s demand for lighter but more powerful mobile electronics, there’s always going to be a need for silver in terms of feeding that side. It is the most efficient commodity for that.
And the beauty of silver is that it’s very — the amount that’s used in these things on a per unit basis is very, very price inelastic: No change is expected even with substantive growth in silver prices. Of course, the solar panels — again, it’s one of the reasons that it’s used there is because it’s so efficient in terms of conducting energy through the interface.
And so then you step into the water purification side and it’s not even just water purification, but it’s in surgical instruments, stainless steel. People have — it’s being sort — I say “rediscovered” because now we understand why. If you go back and look at ancient societies, most of the drinking carafes were made out of silver. People back then realized that silver has very strong anti-bacterial qualities that actually go a long way in terms of improving the health of the environment.
So increasing demand all the way across the industrial side. The need on electronics and as our world gets more and more digital and more and more driven by high speed and such, there’s going to be more and more demand for silver.
But the key thing to me is the investor demand. The side of silver and gold as a whole, but definitely silver is treated the same way, where you just see less and less confidence in the ability of governments to properly manage currencies, fiat currencies essentially. And that’s what the definition — I mean a fiat currency is something that you rely on the government to maintain that value. And I haven’t seen — if all the brain power that’s being put into trying to manage the euro, I still don’t see a solution there long term.
You know, the talk of Greece finally settling up, I mean all they’ve done is just toss a bunch more money at the problem and hope it goes away for a couple more years. It may go away for a couple more years, but there’s just not a solution there in terms of fiat currencies. Governments, they run a challenge there. As long as there is that challenge, people will tend to find a store of value into hard, real assets. Precious metals represent that and represent that well. So I see, longer term, increasing demand into real value, real assets such as gold and silver and that’s where I see some of the biggest upside. [19:40]
JIM: I think sometimes the ETF and trading in the ETF — which a lot of times is done by the hedge funds which are leveraged — overshadowed investor demand because if we look at investor demand, it actually was down slightly last year and yet, if you look at coins, metals and investor demand, that was up 28 percent in 2010, and it looks like 2011 it’s up another 25 percent. So I think you highlight a very key area there and that is investor demand.
Randy, a couple of final questions. It’s very rare that you see a growth company like yourself that is under priced in the market. I mean if you take a look at — we talked about your current growth rate going from around 25-26 million ounces to 43 million ounces which is roughly almost a 70 percent increase in the next couple of years, and that’s without making any further acquisitions. And yet the PEG ratio on your stock is a little over 1.0. What do you think explains that? [20:42]
RANDY: First off, the market as a whole is running through some challenges in terms of equity being properly valued and there’s no doubt that we get bundled up into that. You know, we are — the streaming is the core of our business. It’s what we do. Streaming is relatively new, so we’re constantly out working with fund managers and investors educating them about the strength of our business model and continue to put that effort in, but we are seven years old; we are a relatively young company compared to some of the other assets, you know, other comparable investments. So we constantly work on that side. But the key thing to us is we always really just continue focusing on adding value. We look for good, strong, quality assets going forward. And as long we keep on moving our way forward, we’re going to let our track record show. And you know, I think we’ve done that to date. We’re a good, solid company that is focused on real, hard value in the ground and we’ll continue focusing in that direction. And we’ll continue working on that PEG ratio. [21:34]
JIM: Well, I can tell you, I mean looking at your stock which was — it’s hard to believe it was $1.69 in April of ’05 and today you’re selling at 37, so there’s been an upside to that.
One more question. In terms of the gold-silver ratio, there are many that feel that at some point we are going to go back to historical ratios which are anywhere from 15 to 16. Do you believe in that, given the fact of where silver is today in relation to gold? [22:09]
RANDY: I think you can’t ignore that because I mean here’s the — you know, there is a big macro controlling factor and that is the fact that there’s 15 to 16 times more silver in the world than there is gold in the Earth’s crust. And you go back and look at resource bases and reserves and, you know, and so given equal demand on both sides, it would imply that there would be a ratio of about 15 or 16 to 1 in terms of a gold-silver price ratio.
If you go back and look in time, outside of the last 40 years, which I consider sort of the fiat currency experiment, which is, I think, rapidly sort of coming to an end, and the last period in the thirties during the Depression, outside of that, the gold-silver ratio typically traded in the — you know, are typically in the 25 to 30 range or 20 to 30 range. And I do see pressure working its way down into that space.
I mean the one big advantage silver has is that there is always that industrial component. There is a consumption of silver, whereas gold — generally most of the gold that’s been mined is still available on the Earth’s crust. Silver does get consumed and so there is always going to be that core industrial demand plus investor demand on top of that. So there’s no doubt that on an overall scale there is some pressure for pushing that gold-silver ratio down, which is positive for silver producers. [23:09]
JIM: Well, it would seem like if I was to sum up, probably your biggest competitor, but one that does not offer as much advantage, is the silver ETF. Both of you have exposure to silver, but it seems to me the key advantage that you have is leverage, exploration and expansion upside, acquisition potential and a large dividend yield. Anything else that you would add to that, Randy? [23:32]
RANDY: Those four points alone, if you sit and look at what we add to the equation and I think it can be best summarized by the fact that back in 2004, a shareholder of Silver Wheaton on a per share basis had about 1 ½ ounces of silver backing that share. And most of that was inferred, it was actually low confidence. There was very little proven and probable reserves.
That same shareholder now has well over five ounces per share in seven short years. In fact, it’s sort of six because that’s the end of 2010 and we haven’t got our update, but it’s six short years up to over five ounces per share. That sort of outlines it right there in terms of the value that you get out of the upside potential you get in Silver Wheaton versus an ETF. An ETF back in 2004, they didn’t exist then in the silver space, but back in 2004, that one ounce would still be one ounce.
I don’t know how much simpler the math can get, Jim. [24:23]
JIM: All right. Well, listen, Randy, I want to thank you for joining us on the Financial Sense Newshour. If you’d like to find out more about Silver Wheaton, I suggest you go to the company’s website. There is a lot of information there, including the latest presentation. It’s www.silverwheaton.com. It’s all one word. Its ticker symbol is SLW. It’s traded on the New York Stock Exchange.
And we’ve been speaking with its President, CEO and founder Randy Smallwood.
And Randy, thanks for joining us on the program. [24:53]
RANDY: Thank you very much, Jim. I always enjoy it. [24:54]