VANCOUVER, BRITISH COLUMBIA--(Marketwire - Feb. 25, 2008) - Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) is pleased to announce record annual 2007 net earnings of US$92 million (US$0.41 per share) and record operating cash flows of US$119 million (US$0.54 per share). Fourth quarter net earnings and operating cash flows were US$25 million (US$0.11 per share) and US$34 million (US$0.15 per share), respectively.
2007 HIGHLIGHTS (12 Months)
- Record net earnings of US$91.9 million (US$0.41 per share) from the sale of 13.1 million ounces of silver, compared to US$85.2 million (US$0.40 per share) from the sale of 13.5 million ounces of silver in 2006.
- Record operating cash flows of US$119.3 million (US$0.54 per share), compared to US$104.7 million (US$0.50 per share) in 2006.
- With 2007 investments in silver purchase contracts (Penasquito and Stratoni) totalling US$558 million, annual silver sales are expected to almost double to 25 million ounces by 2010 without any further capital expenditures. This growth was financed by way of operating cash flows and a US$500 million debt facility.
- Subsequent to year end, Goldcorp sold its entire 48% interest in Silver Wheaton, on a bought deal basis, for aggregate gross cash proceeds of Cdn$1.6 billion.
FOURTH QUARTER HIGHLIGHTS (3 Months)
- Net earnings of US$24.9 million (US$0.11 per share) from the sale of 3.5 million ounces of silver, compared to US$23.8 million (US$0.11 per share) from the sale of 3.5 million ounces of silver in 2006.
- Record operating cash flows of US$34.4 million (US$0.15 per share), compared to US$29.8 million (US$0.14 per share) in 2006.
- On December 20, 2007, the Company signed a binding letter agreement to purchase between 45% and 90% of silver produced by Augusta Resource Corporation's Rosemont Copper Project in Arizona for the life of mine. Subject to the finalization of the transaction structure, including tax considerations, and upon receipt of all necessary mining permits by Augusta, Silver Wheaton will pay an upfront cash payment ranging in value from US$135 million to US$165 million to acquire 45% of the payable silver, and US$240 million to US$320 million to acquire 90% of the payable silver, produced for the life of mine.
"2007 was our best year ever, with record earnings, record cash flows, and two very accretive acquisitions," said Peter Barnes, President and Chief Executive Officer of Silver Wheaton. "These acquisitions set us on a path to almost double our silver ounces sold by 2010, to 25 million ounces a year, and boosting our long term cash flow per share by 40% per annum. 2008 promises to be even better than 2007, with a strong silver price, the Goldcorp share overhang recently removed, and a robust potential deal flow."
A conference call will be held Monday, February 25, 2008 at 11:00 am (Eastern Time) to discuss these results. To participate in the live call use one of the following methods:
Dial toll free from Canada or the US: 1-800-446-4472
Dial from outside Canada or the US: 1-416-695-5259
Live audio webcast: www.silverwheaton.com
Participants should dial in five to ten minutes before the call.
The conference call will be recorded and you can listen to an archive of the call by one of the following methods:
Dial toll free from Canada or the US: 1-800-408-3053
Dial from outside Canada or the US: 1-416-695-5800
Pass code: 3250736#
Archived audio webcast: www.silverwheaton.com
Silver Wheaton is the largest public mining company with 100% of its operating revenue from silver production. Silver Wheaton's 2008 silver sales are expected to approximate 15 million ounces, increasing to 25 million ounces in 2010. 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 "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 completion and integration of acquisitions, including the Rosemont acquisition, 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 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, 2006 incorporated by reference into Silver Wheaton's Form 40-F on file with the U.S. Securities and Exchange Commission in Washington, D.C. or AIF filed on SEDAR. 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, except in accordance with applicable securities laws.
Annual Report 2007
Silver Wheaton
MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION FOR THE YEAR ENDED DECEMBER 31, 2007
This Management's Discussion and Analysis should be read in conjunction with the Company's audited consolidated financial statements for the year ended December 31, 2007 and related notes thereto which have been prepared in accordance with Canadian generally accepted accounting principles. 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 February 21, 2008.
2007 HIGHLIGHTS
- Net earnings of $91.9 million ($0.41 per share) from the sale of 13.1 million ounces of silver, compared to $85.2 million ($0.40 per share) from the sale of 13.5 million ounces of silver in 2006.
- Operating cash flows of $119.3 million (2006 - $104.7 million).
- On April 23, 2007, the Company entered into an agreement with Hellas Gold S.A., a subsidiary of European Goldfields Ltd., to acquire all of the silver produced from Hellas Gold's Stratoni mining operations in Greece for the life of mine. Silver Wheaton made an upfront cash payment of $57.5 million. 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 2010), for silver delivered under the contract.
- On July 24, 2007, the Company entered into an agreement with Goldcorp to acquire 25% of the silver produced from Goldcorp's Penasquito project in Mexico for the life of mine. Silver Wheaton made an upfront cash payment of $485 million. 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 2011), for silver delivered under the contract.
- On July 24, 2007, the Company entered into a credit agreement with the Bank of Nova Scotia and BMO Capital Markets, as co-lead arrangers and administrative agents, to borrow $200 million under a non revolving term loan (the "Term Loan") and up to $300 million under a revolving term loan (the "Revolving Loan"). The Revolving Loan is for a period of 7 years and the Term Loan is to be repaid in equal installments over a period of 7 years, however, prepayments are allowed at any time. In order to fund the Penasquito transaction the Term Loan was drawn in full and the Revolving Loan was drawn in the amount of $246 million.
- On December 20, 2007, the Company entered into a binding letter agreement to acquire between 45% and 90% of the silver produced by Augusta Resource Corporation's Rosemont Copper Project in Arizona for the life of mine. Augusta must elect the percentage of life of mine silver subject to the transaction, which will be between a minimum of 45% and a maximum of 90%, on or before March 31, 2008. Subject to the finalization of the transaction structure, including tax considerations and upon receipt of all necessary mining permits by Augusta, Silver Wheaton will pay an upfront cash payment ranging in value from $135 million to $165 million to acquire 45% of the payable silver, and $240 million to $320 million to acquire 90% of the payable silver, produced for the life of mine.
- Subsequent to year end, Goldcorp sold its entire 48% interest in Silver Wheaton of 108 million common shares, on a bought deal basis, at a price of Cdn$14.50 per common share for aggregate gross cash proceeds to Goldcorp of Cdn$1.6 billion.
OVERVIEW
Silver Wheaton Corp. ("Silver Wheaton" or the "Company") is the largest public 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 five long-term silver contracts with Goldcorp (Luismin mines in Mexico and Penasquito project in Mexico), Lundin Mining (Zinkgruvan mine in Sweden), Glencore (Yauliyacu mine in Peru) and Hellas Gold (Stratoni mine in Greece), whereby Silver Wheaton acquires silver production from the counterparties at a price of $3.90 per ounce, subject to an inflationary adjustment. In addition, on December 20, 2007, the Company signed a binding letter agreement to acquire between 45% and 90% of the life of mine silver to be produced by Augusta Resource Corporation's ("Augusta") Rosemont Copper Project ("Rosemont") in Arizona. As a result, the primary drivers behind the Company's financial results are the volume of silver production at the various mines and the price of silver.
The Company expects, based upon its current contracts, to have annual silver sales of approximately 15 million ounces in 2008, increasing to 19 million ounces in 2009 and 25 million ounces in 2010. Silver Wheaton is actively pursuing further growth opportunities.
SUMMARIZED FINANCIAL RESULTS
Years Ended December 31
2007 2006 2005
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Silver sales ($000's) $ 175,434 $ 158,541 $ 70,895
Ounces (000's) 13,068 13,531 9,702
Average realized silver price ($'s per
ounce) $ 13.42 $ 11.72 $ 7.31
Total cash cost ($'s per ounce)(1) $ 3.91 $ 3.90 $ 3.90
Net earnings ($000's) $ 91,862 $ 85,220 $ 25,291
Earnings per share
Basic $ 0.41 $ 0.40 $ 0.15
Diluted $ 0.37 $ 0.37 $ 0.15
Cash flow from operations ($000's) $ 119,261 $ 104,722 $ 29,971
Total assets ($000's) $ 1,208,474 $ 662,893 $ 266,151
Total liabilities ($000's) $ 426,243 $ 21,354 $ 1,961
Shareholders' equity ($000's) $ 782,231 $ 641,539 $ 264,190
1) Refer to discussion on non-GAAP measures
QUARTERLY FINANCIAL RESULTS
2007
Q4 Q3 Q2 Q1
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Silver sales ($000's) $ 50,240 $ 39,598 $ 41,464 $ 44,132
Ounces (000's) 3,543 3,129 3,053 3,343
Average realized silver
price ($'s per ounce) $ 14.18 $ 12.66 $ 13.58 $ 13.20
Total cash cost
($'s per ounce)(1) $ 3.93 $ 3.90 $ 3.90 $ 3.90
Net earnings ($000's) $ 24,886 $ 19,184 $ 22,855 $ 24,937
Earnings per share
Basic $ 0.11 $ 0.09 $ 0.10 $ 0.11
Diluted $ 0.10 $ 0.08 $ 0.09 $ 0.10
Cash flow from
operations ($000's) $ 34,414 $ 27,102 $ 27,846 $ 29,899
Total assets ($000's) $ 1,208,474 $ 1,200,304 $ 748,696 $ 700,893
Total liabilities ($000's) $ 426,243 $ 440,514 $ 4,048 $ 2,787
Shareholders' equity
($000's) $ 782,231 $ 759,790 $ 744,648 $ 698,106
2006
Q4 Q3 Q2 Q1
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Silver sales ($000's) $ 43,651 $ 41,766 $ 47,413 $ 25,711
Ounces (000's) 3,534 3,520 3,805 2,672
Average realized silver
price ($'s per ounce) $ 12.35 $ 11.86 $ 12.46 $ 9.62
Total cash cost
($'s per ounce)(1) $ 3.90 $ 3.90 $ 3.90 $ 3.90
Net earnings ($000's) $ 23,762 $ 22,518 $ 25,159 $ 13,781
Earnings per share
Basic $ 0.11 $ 0.10 $ 0.12 $ 0.07
Diluted $ 0.10 $ 0.09 $ 0.11 $ 0.07
Cash flow from
operations ($000's) $ 29,829 $ 28,262 $ 32,699 $ 13,932
Total assets ($000's) $ 662,893 $ 638,123 $ 614,349 $ 578,150
Total liabilities ($000's) $ 21,354 $ 21,202 $ 20,885 $ 181,317
Shareholders' equity
($000's) $ 641,539 $ 616,921 $ 593,464 $ 396,833
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 fluctuations in production at the mines and timing of shipments that are in the normal course of operations, as well as changes in the price of silver. During the fourth quarter of 2007, the number of ounces sold was 13% higher than during the third quarter, due to increased production at Yauliyacu and Zinkgruvan, as well as delayed shipments at Zinkgruvan and Stratoni at the end of the third quarter for which the sales were recognized in the fourth quarter.
RESULTS OF OPERATIONS AND OPERATIONAL REVIEW
The Company has five business segments, the silver produced by the Luismin, Zinkgruvan, Yauliyacu and Stratoni mines, and corporate operations. The acquisition of silver from the Yauliyacu and Stratoni mines began in May 2006 and June 2007, respectively.
Year Ended December 31, 2007
Zink- Yauli- Stra- Corp-
Luismin gruvan yacu toni orate Total
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Silver sales
($000's) $ 92,284 $ 25,315 $ 46,055 $ 11,780 $ - $ 175,434
Ounces (000's) 6,913 1,845 3,442 868 - 13,068
Average realized
silver price
($'s per ounce) $ 13.35 $ 13.72 $ 13.38 $ 13.57 $ - $ 13.42
Total cash cost
($'s per
ounce)(1) $ 3.91 $ 3.90 $ 3.90 $ 3.90 $ - $ 3.91
Net earnings
(loss) ($000's) $ 62,532 $ 15,109 $ 20,088 $ 4,941 $ (10,808) $ 91,862
Cash flow from
(used in)
operations
($000's) $ 65,782 $ 17,991 $ 32,632 $ 8,337 $ (5,481) $ 119,261
1) Refer to discussion on Non-GAAP measures
Year Ended December 31, 2006
Zink- Yauli- Corp-
Luismin gruvan yacu orate Total
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Silver sales ($000's) $ 103,850 $ 18,903 $ 35,788 $ - $ 158,541
Ounces (000's) 8,978 1,686 2,867 $ - 13,531
Average realized
silver price
($'s per ounce) $ 11.57 $ 11.21 $ 12.48 $ - $ 11.72
Total cash cost
($'s per ounce)(1) $ 3.90 $ 3.90 $ 3.90 $ - $ 3.90
Net earnings
(loss) ($000's) $ 65,691 $ 9,506 $ 14,034 $ (4,011) $ 85,220
Cash flow from (used in)
operations ($000's) $ 68,293 $ 13,152 $ 24,607 $ (1,330) $ 104,722
1) Refer to discussion on Non-GAAP measures
Year Ended December 31, 2005
Luismin Zinkgruvan Corporate Total
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Silver sales ($000's) $ 57,406 $ 13,489 $ - $ 70,895
Ounces (000's) 7,886 1,816 - 9,702
Average realized silver price
($'s per ounce) $ 7.28 $ 7.43 $ - $ 7.31
Total cash cost
($'s per ounce)(1) $ 3.90 $ 3.90 $ - $ 3.90
Net earnings (loss) ($000's) $ 23,721 $ 3,335 $ (1,765) $ 25,291
Cash flow from operations ($000's) $ 26,485 $ 4,340 $ (854) $ 29,971
1) Refer to discussion on Non-GAAP measures
LUISMIN
On October 15, 2004, a 100% owned subsidiary of the Company, Silver Wheaton (Caymans) Ltd. ("SW Caymans"), entered into an agreement (amended on March 30, 2006) with Goldcorp to acquire all of the silver produced by Goldcorp's Luismin mining operations in Mexico (owned at the date of the transaction) for a period of 25 years. During 2007, SW Caymans purchased 6.9 million ounces (2006 - 9.0 million ounces) of silver at a total cash cost of $3.91 per ounce (2006 - $3.90 per ounce), and sold it for an average price of $13.35 per ounce (2006 - $11.57 per ounce). The number of ounces sold during the year decreased from 2006 due to a reduction in the average grade of ore milled at Luismin's San Dimas mine, from 436 grams per tonne in 2006 to 338 grams per tonne in 2007. The Company's cash flows and net earnings under the Luismin silver purchase contract for the year ended December 31, 2007 were $65.8 million (2006 - $68.3 million) and $62.5 million (2006 - $65.7 million) respectively.
As at December 31, 2007, the Luismin mines had proven and probable reserves, of 66.1 million ounces of silver, measured and indicated resources of 1.9 million ounces of silver and inferred resources of 183.2 million ounces of silver (as described in the Reserves and Resources section of this Management's Discussion and Analysis).
The results of the Luismin mine operations for the years ended December 31, 2007 and 2006 are shown below:
2007
Q4 Q3 Q2 Q1
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Ore milled (tonnes) 213,100 202,997 197,100 232,400
Grade (grams/tonne)(1)
- Gold 5.81 7.37 6.09 6.46
- Silver 354 381 286 326
Recovery (%)
- Gold 94% 92% 92% 95%
- Silver 91% 91% 90% 92%
Production (ounces)
- Gold 37,400 44,385 35,600 45,900
- Silver 1,829,400 1,865,533 1,341,300 1,898,300
Sales (ounces)
- Gold 34,500 44,039 34,543 46,500
- Silver 1,681,300 1,900,000 1,393,600 1,937,270
2006
Q4 Q3 Q2 Q1
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Ore milled (tonnes) 285,800 276,700 267,400 255,800
Grade (grams/tonne)(1)
- Gold 6.07 6.50 6.61 6.18
- Silver 296 316 358 348
Recovery (%)
- Gold 94% 94% 94% 94%
- Silver 90% 89% 89% 87%
Production (ounces)
- Gold 52,600 54,400 53,700 47,800
- Silver 2,118,200 2,233,200 2,388,400 2,192,000
Sales (ounces)
- Gold 52,200 53,400 54,900 46,500
- Silver 2,146,220 2,213,500 2,447,500 2,171,000
1) Grades exclude Nukay, a Luismin mine, which does not produce silver
During January 2007, Luismin sold the San Martin mine. Therefore, the results of the Luismin mine operations including the ore milled, grade, recovery and production figures, do not include the results of the San Martin mine after January 2007. In accordance with the Luismin silver contract, Luismin purchases all of the silver produced by the San Martin mine and continues to sell it to Silver Wheaton at $3.95 per ounce, subject to an inflationary adjustment on October 15 of each year. During the fourth quarter, silver sales at Luismin were approximately 148,000 ounces less than the silver production, due primarily to timing of product shipments.
ZINKGRUVAN
On December 8, 2004, SW Caymans entered into an agreement to acquire all of the silver produced by Lundin Mining's Zinkgruvan mining operations in Sweden ("Zinkgruvan") for the life of mine. During 2007, SW Caymans purchased 1.8 million ounces (2006 - 1.6 million ounces) of silver under the contract at a total cash cost of $3.90 per ounce, and sold 1.8 million ounces (2006 - 1.7 million ounces) for an average price of $13.72 per ounce (2006 - $11.21 per ounce). The Company's cash flows and net earnings under the Zinkgruvan silver purchase contract for 2007 were $18.0 million (2006 - $13.2 million) and $15.1 million (2006 - $9.5 million) respectively.
As at December 31, 2006, Zinkgruvan had proven and probable silver reserves of 27.9 million ounces, measured and indicated silver resources of 6.7 million ounces and inferred silver resources of 26.1 million ounces (as described in the Reserves and Resources section of this Management's Discussion and Analysis).
YAULIYACU
On March 23, 2006, SW Caymans entered into an agreement with Glencore International AG ("Glencore") to acquire up to 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. During 2007, SW Caymans purchased 3.4 million ounces (2006 - 2.9 million ounces) of silver at a total cash cost of $3.90 per ounce, and sold it for an average price of $13.38 per ounce (2006 - $12.48 per ounce). The Company's cash flows and net earnings under the Yauliyacu silver purchase contract for 2007 were $32.6 million (2006 - $24.6 million) and $20.1 million (2006 - $14.0 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 owned by Glencore at the time of the initial transaction. In addition, Silver Wheaton has an option to extend the 20 year term of the 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, 2006, Yauliyacu had proven and probable silver reserves of 13.1 million ounces, measured and indicated silver resources of 36.5 million ounces and inferred silver resources of 69.2 million ounces (as described in the Reserves and Resources section of this Management's Discussion and Analysis).
STRATONI
On April 23, 2007, SW Caymans entered into an agreement with Hellas Gold S.A. ("Hellas Gold"), a subsidiary of European Goldfields Ltd., to acquire all of the silver produced from Hellas Gold's Stratoni mining operations in Greece for the life of mine. Silver Wheaton made an upfront cash payment of $57.5 million. 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 2010), for silver delivered under the contract.
During June 2007, the Company began purchasing silver under the contract and during the year, 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 $13.57 per ounce. The Company's cash flows and net earnings under the Stratoni silver purchase contract for 2007 were $8.3 million and $4.9 million respectively.
During the term of the contract, Silver Wheaton has a right of first refusal on any future sales of silver streams from any other mine owned by European Goldfields or Hellas Gold.
As at December 31, 2006, Stratoni had proven and probable silver reserves of 12.1 million ounces, and inferred silver resources of 3.2 million ounces (as described in the Reserves and Resources section of this Management's Discussion and Analysis).
PENASQUITO
On July 24, 2007, SW Caymans entered into an agreement to acquire 25% of the silver produced from Goldcorp's Penasquito project in Mexico for the life of mine, for an upfront cash payment of $485 million. 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 2011), for silver delivered under the contract.
Silver Wheaton is not required to fund any capital expenditures at Penasquito, including any expansion scenarios. Goldcorp has provided a completion guarantee to Silver Wheaton that the Penasquito Mine will be constructed with certain minimum production criteria by certain dates.
As at June 25, 2007, Penasquito had proven and probable silver reserves of 864 million ounces, measured and indicated silver resources of 413 million ounces and inferred silver resources of 508 million ounces (as described in the Reserves and Resources section of this Management's Discussion and Analysis).
ROSEMONT
On December 20, 2007, the Company entered into a binding letter agreement to acquire between 45% and 90% of the silver produced by Augusta's Rosemont Copper Project in Arizona for the life of mine. Augusta must elect the percentage of life of mine silver subject to the transaction, which will be between a minimum of 45% and a maximum of 90%, on or before March 31, 2008.
Subject to the finalization of the transaction structure, including tax considerations, Silver Wheaton will pay an upfront cash payment ranging in value from $135 million to $165 million to acquire 45% of the payable silver, and $240 million to $320 million to acquire 90% of the payable silver, produced for the life of mine.
The upfront payment will be made on a drawdown basis to fund construction of the mine as construction milestones are achieved. Silver Wheaton will not be required to pay any further ongoing per ounce payments for silver delivered from Rosemont and is not required to fund or contribute to ongoing capital expenditures, including expansion scenarios. Augusta will provide a completion guarantee that the Rosemont mine will be constructed with certain minimum production criteria by certain dates.
The transaction is subject to (a) Augusta receiving all necessary permits to construct and operate a mine in accordance with their August 2007 Rosemont Feasibility Study (the "Feasibility Study"), (b) Augusta having entered into committed arrangements for sufficient financing to construct and operate the mine, and (c) execution by the parties of definitive agreements on or before June 30, 2008 as well as receipt of any required regulatory approvals and third-party consents. Augusta expects production at the Rosemont project to start in late 2010 with an average of 2.7 million ounces of silver produced each year over the life of mine, currently expected to be a minimum of 18 years.
CORPORATE
Years Ended December 31
(in thousands) 2007 2006 2005
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General and administrative(1) $ 9,700 $ 5,700 $ 2,443
Project evaluation 360 211 91
Interest expense - 717 -
Interest income (1,508) (3,221) (705)
Loss on mark-to-market of warrants held 1,669 - -
Other 565 604 (64)
Future income tax expense 22 - -
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Corporate net loss $ 10,808 $ 4,011 $ 1,765
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1) Stock based compensation (a non cash item)
included in General and administrative $ 2,735 $ 1,768 $ 463
General and administrative expenses totaled $9.7 million during 2007 compared with $5.7 million during 2006. This increase resulted primarily from increased insurance costs, exchange listing and investor relations costs, and salary and stock based compensation expenses incurred as a result of hiring additional employees. Stock based compensation expense during 2007, a non cash item, included $2.6 million (2006 - $1.7 million) of amortization of the fair value of share purchase options issued, which was determined using the Black-Scholes option valuation method. During the year, 21,333 (2006 - 15,000) restricted share rights and 945,000 (2006 - 550,000) share purchase options were issued.
The Company incurred interest costs of $13.3 million and upfront debt financing costs of $2.5 million during the year in order to finance the acquisition of the Penasquito silver contract and as a result these amounts were capitalized to the cost of the contract. In 2006, the Company incurred interest expense of $0.7 million and upfront debt financing costs of $1.1 million.
Project evaluation expenses of $0.4 million (2006 - $0.2 million) were incurred in pursuing additional silver acquisition opportunities.
Interest income during the year of $1.5 million (2006 - $3.2 million) was the result of interest earned on cash balances held in short-term money market instruments.
Effective January 1, 2007, the Company has adopted the provisions of Section 3855, Financial Instruments - Recognition and Measurement, which classifies the warrants held by the Company for long term investment purposes as derivatives that are marked-to-market each reporting period with any gain or loss reflected in net earnings. The loss recorded in 2007 from the mark-to-market of the warrants held was $1.7 million.
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 year ended December 31, 2007, the Company's total cash costs, which were equivalent to the Company's Cost of Sales in accordance with GAAP, were $3.91 per ounce of silver (2006 - $3.90 per ounce).
LIQUIDITY AND CAPITAL RESOURCES
At December 31, 2007, the Company had cash and cash equivalents of $10.0 million (December 31, 2006 - $60.0 million) and a working capital deficiency of $23.2 million (December 31, 2006 - working capital of $40.0 million). Included in the working capital deficiency at December 31, 2007 is the current portion of long term bank debt of $28.6 million (December 31, 2006 - $nil). During the year, the Company generated operating cash flows of $119.3 million compared with $104.7 million during 2006. The Company applies surplus cash flows to pay down the revolving bank debt facility, which is recorded as a long term liability.
In the opinion of management, cash flows are sufficient to support the Company's normal operating requirements on an ongoing basis.
LONG TERM INVESTMENTS
During the year, Silver Wheaton invested $17.0 million to acquire significant ownership positions in publicly traded companies owning substantial undeveloped silver resources. At December 31, 2007, the Company held investments in such companies with a market value of $119.4 million.
Bear Creek
At December 31, 2007, Silver Wheaton owned 8,146,505 common shares and warrants exercisable to acquire an additional 100,000 common shares, representing approximately 18% of the outstanding shares of Bear Creek on an undiluted basis. At December 31, 2007, the fair value of the Company's investment in Bear Creek was $59.4 million.
Revett
At December 31, 2007, Silver Wheaton owned 12,382,900 common shares and warrants exercisable to acquire an additional 2,400,000 common shares, representing approximately 17% of the outstanding shares of Revett Minerals Inc. ("Revett") on an undiluted basis. At December 31, 2007, the fair value of the Company's investment in Revett was $10.8 million.
Sabina
At December 31, 2007, Silver Wheaton owned 7,800,000 common shares and warrants exercisable to acquire an additional 3,900,000 common shares, representing approximately 12% of the outstanding shares of Sabina Silver Corporation ("Sabina") on an undiluted basis. At December 31, 2007, the fair value of the Company's investment in Sabina was $17.0 million.
Mines Management
During 2007, Silver Wheaton acquired by way of private placement 2,500,000 common shares of Mines Management, Inc. ("Mines Management") at a price of $4.00 per share, for total consideration of $10.0 million. As a result, at December 31, 2007, Silver Wheaton owned 2,500,000 common shares, representing approximately 11% of the outstanding shares of Mines Management on an undiluted basis. At December 31, 2007, the fair value of the Company's investment in Mines Management was $8.6 million.
ACQUISITION OF SILVER INTERESTS
On April 23, 2007, the Company entered into an agreement with Hellas Gold, a subsidiary of European Goldfields Ltd., to acquire all of the silver produced from Hellas Gold's Stratoni mining operations in Greece for the life of mine. Silver Wheaton made an upfront cash payment of $57.5 million. 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 2010), for silver delivered under the contract.
On July 24, 2007, the Company entered into an agreement with Goldcorp to acquire 25% of the silver produced from the Penasquito project in Mexico for the life of mine. Silver Wheaton made an upfront cash payment of $485 million. 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 2011), for silver delivered under the contract.
On December 20, 2007 the Company signed a binding letter agreement to acquire between 45% and 90% of the life of mine silver to be produced by Augusta's Rosemont Copper Project in Arizona. Augusta must elect the percentage of life of mine silver subject to the transaction, which will be between a minimum of 45% and a maximum of 90%, on or before March 31, 2008. Subject to the finalization of the transaction structure, including tax considerations and upon receipt of all necessary mining permits by Augusta, Silver Wheaton will pay an upfront cash payment ranging in value from $135 million to $165 million to acquire 45% of the payable silver, and $240 million to $320 million to acquire 90% of the payable silver, produced for the life of mine.
BANK DEBT
On July 24, 2007, the Company cancelled its undrawn $25 million revolving loan facility and entered into a credit agreement with the Bank of Nova Scotia and BMO Capital Markets, as co-lead arrangers and administrative agents, to borrow $200 million under a non revolving term loan (the "Term Loan") and up to $300 million under a revolving term loan (the "Revolving Loan"). The Revolving Loan is for a period of 7 years and the Term Loan is to be repaid in equal installments over a period of 7 years, however, prepayments are allowed at any time. Silver Wheaton has committed to pay down the Revolving Loan, within 61 days after the end of each fiscal quarter, by an amount equal to 90% of the cash flows reported for the quarter. The Revolving Loan can be drawn down at any time to finance acquisitions or investments. In order to fund the Penasquito transaction, the Term Loan was drawn in full and the Revolving Loan was drawn in the amount of $246 million.
Amounts drawn incur interest at LIBOR plus 0.875% to 1.75% per annum dependent upon the Company's leverage ratio. Undrawn amounts are subject to a 0.2% to 0.45% per annum commitment fee dependent on 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, a Leverage Ratio less than or equal to 5 : 1 (decreasing to 4 : 1 on September 30, 2008 and to 3.5 : 1 on September 30, 2009), and a Tangible Net Worth greater than 80% of the Tangible Net Worth at June 30, 2007 plus 50% of Net Income for each fiscal quarter thereafter. Both the Term Loan and the Revolving Loan are secured against the Company's assets, including the Company's silver interests. The Company has paid $2.5 million in debt financing costs relating to the credit agreement which were capitalized to the cost of the Penasquito contract. During 2007, the Company repaid $7.1 million and $19.0 million of the balances outstanding on the Term Loan and Revolving Loan, respectively.
PROMISSORY NOTE
On March 30, 2006, as partial consideration for amendments made to the Luismin silver purchase contract, the Company issued a non-interest bearing $20 million promissory note to Goldcorp, due on March 30, 2007. The promissory note was repaid in full during March 2007.
CONTRACTUAL OBLIGATIONS
Silver Interests
In connection with the Luismin, Zinkgruvan and Stratoni silver 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 $3.95, $3.96 and $3.90 respectively, and the then prevailing market price, subject to an annual inflationary adjustment. This inflationary adjustment is subject to a minimum of 0.4% and a maximum of 1.65% per annum for Luismin and Zinkgruvan, and is fixed at 1% per annum for Stratoni. In connection with the Yauliyacu silver purchase contract, the Company has committed to purchase up to 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 an inflationary adjustment. This inflationary adjustment, which will begin in 2009, is subject to a minimum of 1.0% and a maximum of 1.65% per annum. In connection with the Penasquito silver purchase contract, the Company has committed to purchase 25% of the silver produced by the Penasquito mine for a per-ounce cash payment of the lesser of $3.90 and the then prevailing market price, subject to an inflationary adjustment. This inflationary adjustment, which will begin in 2011, is subject to a minimum of 0.4% and a maximum of 1.65% per annum.
In addition, on December 20, 2007 the Company signed a binding letter agreement to acquire between 45% and 90% of the life of mine silver to be produced by Augusta's Rosemont Copper Project. Augusta must elect the percentage of life of mine silver subject to the transaction, which will be between a minimum of 45% and a maximum of 90%, on or before March 31, 2008. Subject to the finalization of the transaction structure, including tax considerations, Silver Wheaton will pay an upfront cash payment ranging in value from $135 million to $165 million to acquire 45% of the payable silver, and $240 million to $320 million to acquire 90% of the payable silver, produced for the life of mine.
Other Contractual Obligations
2009 - 2012 - After
(in thousands) 2008 2011 2013 2013 Total
--------------------------------------------------------------------------
Bank debt $ 28,560 $ 85,680 $ 57,120 $248,500 $419,860
Operating leases 467 1,459 1,012 1,658 4,596
Other 228 683 - - 911
--------------------------------------------------------------------------
Total contractual obligations $ 29,255 $ 87,822 $ 58,132 $250,158 $ 25,367
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SHARE CAPITAL
During the year, the Company received cash proceeds of $7.3 million (2006 - $7.0 million) from the exercise of 2,331,965 (2006 - 2,477,334) share purchase options at a weighted average exercise price of Cdn$3.39 (2006 - Cdn$3.27) per option. As of February 21, 2008, there were 223,348,617 outstanding common shares, 3,105,701 share purchase options and 163,212,289 share purchase warrants, which are convertible into 38,867,178 common shares.
RISKS AND UNCERTAINTIES
The primary risk factors affecting the Company and its profitability include fluctuations in silver production, currency fluctuations, government regulations, foreign operations, income taxes and changes in silver prices.
SILVER PRODUCTION
The Company has agreed to purchase all of the silver produced by the Luismin, Zinkgruvan and Stratoni mines, up to 4.75 million ounces per year based on the production from the Yauliyacu mine and 25% of the production from the Penasquito mine. Other than the security interests which have been granted to Silver Wheaton, the Company has no contractual rights relating to the mine operations, nor does it have any legal ownership in or operational control of the mines. Other than the penalties that may be payable by Luismin, Zinkgruvan, and Yauliyacu to Silver Wheaton, the Company will not be entitled to any compensation if the mines do not meet their forecasted silver production targets in any specified period or if they shut down or discontinue their mining operations on a temporary or permanent basis.
CURRENCY FLUCTUATIONS
Exchange rate fluctuations may affect the costs that the Company incurs in its operations. Silver is sold in US dollars and a portion of the Company's costs are incurred in Canadian dollars. From time to time, the Company may transact currency hedging to reduce the risk associated with currency fluctuations. There is no assurance that its hedging strategies will be successful. Currency hedging may require margin activities. Sudden fluctuations in currencies could result in margin calls that could have an adverse effect on the Company's financial position.
GOVERNMENT REGULATIONS
The mining, processing, development and mineral exploration activities of the companies that Silver Wheaton purchases silver from are subject to various laws governing prospecting, development, production, taxes, labour standards and occupational health, mine safety, toxic substances, land use, water use, land claims of local people and other matters. No assurance can be given that new rules and regulations will not be enacted or that existing rules and regulations will not be applied in a manner which could result in production disturbances.
FOREIGN OPERATIONS
SW Caymans purchases silver from companies that operate in Mexico, Sweden, Peru and Greece, and as such the Company's operations are exposed to various levels of political, economic and other risks and uncertainties. These risks and uncertainties vary between the four countries and include, but are not limited to, terrorism; hostage taking; military repression; extreme fluctuations in currency exchange rates; high rates of inflation; labour unrest; the risk of war or civil unrest; expropriation and nationalization; renegotiation or nullification of existing concessions, licenses, permits and contracts; illegal mining; changes in taxation policies; restrictions on foreign exchange and repatriation; and changing political conditions, currency controls and governmental regulations that favour or require the awarding of contracts to local contractors or require foreign contractors to employ citizens of, or purchase supplies from, a particular jurisdiction.
Failure of these companies to comply strictly with applicable laws, regulations and local practices relating to mineral right applications and tenure, could result in loss, reduction or expropriation of entitlements.
The occurrence of these various factors and uncertainties cannot be accurately predicted and could have an adverse effect on the Company's operations or profitability.
INCOME TAXES
As the Company's profit is derived from its subsidiary, SW Caymans, which is incorporated and operated in the Cayman Islands, the Company's profits bear no income tax. Management views the subsidiary's profits as part of its permanent investment in the subsidiary, and it has determined that those profits will be reinvested in foreign jurisdictions for the foreseeable future, therefore, no current income taxes have been recorded.
Changes to taxation laws in either Canada or the Cayman Islands, could result in some or all of the Company's profits being subject to income tax. No assurance can be given that new taxation rules will not be enacted or that existing rules will not be applied in a manner which could result in the Company's profits being subject to income tax.
SILVER PRICES
Profitability of the Company depends on silver prices. A $1.00 per ounce change in the price of silver would impact 2008 net earnings by approximately $15 million.
Silver prices are affected by numerous factors such as the sale or purchase of silver by various central banks and financial institutions, interest rates, exchange rates, inflation or deflation, fluctuations in the value of the US dollar and foreign currencies, global and regional supply and demand, and the political and economic conditions of major silver producing countries throughout the world.
CRITICAL ACCOUNTING ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amount of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements, and the reported amounts of revenues and expenditures during the reporting period. Note 2 of the Company's audited consolidated financial statements describes all of the significant accounting policies.
SILVER INTERESTS
Silver interests are a significant asset of the Company, with a carrying value of $1.1 billion at December 31, 2007. This amount represents the capitalized expenditures related to the acquisition of the Luismin, Zinkgruvan, Yauliyacu, Stratoni and Penasquito silver purchase contracts. Each of these mines estimates the reserves and resources relating to each contract. Silver Wheaton uses these estimates to determine the estimated number of ounces that will be acquired from each operation and the cost of these assets is separately allocated to reserves, resources and exploration potential. The value allocated to reserves is classified as depletable and is depreciated on a unit-of-sale basis over the estimated recoverable proven and probable reserves at the mine corresponding to the specific contract. The value associated with resources and exploration potential is the value beyond proven and probable reserves at acquisition and is classified as non-depletable until such time as it is transferred to the depletable category as a result of the conversion of resources or exploration potential into reserves. Evaluations of the carrying values of each contract are undertaken annually to determine if estimated undiscounted future net cash flows are less than the carrying value. Estimated undiscounted future net cash flows are calculated using estimated production, sales prices and purchase costs. If it is determined that the future net cash flows from an operation are less than the carrying value then a write-down is recorded with a charge to operations. At December 31, 2007, no write-down was required.
REVENUE RECOGNITION
Revenue from the sale of silver is recognized in the accounts when persuasive evidence of an arrangement exists, title and risk passes to the buyer, collection is reasonably assured and the price is reasonably determinable. Revenue from the sale of silver may be subject to adjustment upon final settlement of estimated metal prices, weights, and assays. Adjustments to revenue for metal prices are recorded monthly and other adjustments are recorded on final settlement.
CHANGES IN ACCOUNTING POLICIES
The Company adopted the provisions of Sections 3855, Financial Instruments - Recognition and Measurement, 3861 - Financial Instruments - Disclosure and Presentation, 1530 - Comprehensive Income, 3865 - Hedges and 3251 - Equity, on January 1, 2007 which address the classification, recognition and measurement of financial instruments in the financial statements and the inclusion of other comprehensive income. As a result of adopting these new standards the Company recorded a non-cash increase of $39.5 million to opening long-term investments, a non-cash increase of $3.3 million to future income tax liability and a non-cash pre-tax adjustment of $37.7 million ($31.1 million net of tax) as a one-time cumulative effect of a change in accounting policy in opening accumulated other comprehensive income. In addition, the Company recorded a non-cash increase of $4.9 million to opening retained earnings to recognize the value of income tax losses not previously recognized, and to record the cumulative effect of the change in accounting policy as it relates to warrants held by the Company and a decrease in deferred debt financing costs.
The Company has added two new accounting policies in relation to these new standards, as described below.
LONG TERM INVESTMENTS
Long-term investments in equity securities are classified as available-for-sale because the Company intends to hold the investments for more than one year. Unrealized holding gains and losses related to available-for-sale investments are excluded from net income and are included in other comprehensive income until such gains or losses are realized or an other than temporary impairment is determined to have occurred.
Warrants held by the Company are for long-term investment purposes, however, due to their nature they meet the definition of a derivative and are marked-to-market on a quarterly basis. Mark-to-market gains and losses relating to the warrants are included in net income in the period they occur.
The Company estimates the fair value of financial instruments at the balance sheet date using quoted market prices for available-for-sale securities and a Black-Scholes option pricing model for warrants held.
INTEREST AND DEBT FINANCING COSTS
Interest and debt financing costs are expensed when they are incurred, unless they are directly attributable to the acquisition or construction of qualifying assets, which are assets that necessarily take a substantial period of preparation for their intended use or sale, in which case they are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale.
FUTURE CHANGES IN ACCOUNTING POLICIES
CAPITAL DISCLOSURES
The CICA issued a new accounting standard, Section 1535, Capital Disclosures ("Section 1535"), which requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and processes for managing capital. Section 1535 specifies the disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. This new standard became effective for the Company January 1, 2008.
FINANCIAL INSTRUMENTS
The CICA issued two new accounting standards, Section 3862, Financial Instruments - Disclosures ("Section 3862"), and Section 3863, Financial Instruments - Presentation ("Section 3863"), which replace Handbook Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements and carrying forward unchanged its presentation requirements for financial instruments. Sections 3862 and 3863 place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. These new standards will become effective for the Company for periods beginning on or after October 1, 2007.
IMPACT OF ADOPTING SECTIONS 1535, 3862 AND 3863
The Company is currently analyzing the requirements of these new standards.
RELATED PARTY TRANSACTIONS
At December 31, 2007, Goldcorp owned 48% of the Company's outstanding common shares. During the year, the Company purchased 6.9 million ounces (2006 - 9.0 million ounces) of silver from a subsidiary of Goldcorp at an average price of $3.91 per ounce (2006 - $3.90 per ounce), for total consideration of approximately $27.0 million (2006 - $35.0 million).
During the year, Silver Wheaton repaid a $20 million promissory note due to Goldcorp.
On July 24, 2007, SW Caymans entered into an agreement to acquire 25% of the life of mine silver production from Goldcorp's Penasquito project in Mexico, for an upfront cash payment of $485 million, as described elsewhere in this Management's Discussion and Analysis.
The Company has an agreement with Goldcorp whereby Goldcorp provides certain management and administrative services at cost. During the year, total costs reimbursed to Goldcorp were $193,000 compared to $249,000 during 2006. This agreement allows for cancellation by Silver Wheaton with 30 days notice at any time.
During May 2007, the Company entered into a 9 year lease agreement with Goldcorp for office space. The Company began making lease payments in December 2007 which totaled $17,500.
At December 31, 2007, the Company owed Goldcorp $152,000 (2006, Goldcorp owed the Company - $18,000).
On February 14, 2008, Goldcorp sold its entire 48% interest in Silver Wheaton by way of a secondary offering, as described in the subsequent event section of this Management's Discussion and Analysis.
SUBSEQUENT EVENT
Subsequent to year end, Goldcorp sold its entire 48% interest in Silver Wheaton of 108 million common shares, on a bought deal basis, at a price of Cdn$14.50 per common share for aggregate gross cash proceeds to Goldcorp of Cdn$1.6 billion.
CONTROLS AND PROCEDURES
DISCLOSURE CONTROLS AND PROCEDURES
Silver Wheaton's management, with the participation of the Chief Executive Officer and Chief Financial Officer, has evaluated the design and effectiveness of Silver Wheaton's disclosure controls and procedures, as defined in the rules of the U.S. Securities and Exchange Commission and Canadian Securities Administrators, as of December 31, 2007. Based on that evaluation, the Company's Chief Executive Officer and Chief Financial Officer have concluded that Silver Wheaton's disclosure controls and procedures were effective as of December 31, 2007.
INTERNAL CONTROL OVER FINANCIAL REPORTING
The Company's management, with the participation of its Chief Executive Officer and Chief Financial Officer, are responsible for establishing and maintaining adequate internal controls over financial reporting. Under the supervision of the Chief Financial Officer, the Company's internal controls over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"). The Company's controls include policies and procedures that:
- pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company;
- provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with GAAP, and that receipts and expenditures of the Company are being made only in accordance with authorizations of the Company's management and directors; and
- provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the Company's assets that could have a material effect on the annual financial statements or interim financial statements.
The Company's management, including the Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal controls over financial reporting, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, they cannot provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been prevented or detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by unauthorized override of the control. The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Accordingly, because of the inherent limitations in a cost effective control system, misstatements due to error or fraud may occur and not be detected.
There have been no significant changes in the Company's internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.
FINANCIAL INSTRUMENTS
During the year ended December 31, 2007, the Company has used a mixture of cash, short-term debt and long-term debt to maintain an appropriate capital structure, ensuring sufficient 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 to manage the risks associated with its operations and therefore, in the normal course of business, it is inherently exposed to currency, interest rate and commodity price fluctuations.
The Company holds certain financial instruments as long-term investments and therefore is inherently exposed to various risk factors including currency risk, market price risk and liquidity risk.
OUTLOOK
The Company expects, based upon its current contracts, to have silver sales of approximately 15 million ounces for the year ending December 31, 2008, increasing to 19 million ounces in 2009 and 25 million ounces in 2010.
The Company is unhedged and actively pursuing further growth opportunities.
RESERVES AND RESOURCES (1)
Proven and Probable Reserves (1,4,5,6,7,8,9,10,11)
--------------------------------------------------------------------------
PROVEN PROBABLE PROVEN & PROBABLE
--------------- ------------------- ------------------ -------------------
Ton- Grade Cont- Ton- Grade Cont- Ton- Grade Cont-
nes g ained nes g ained nes g ained
Silver Mt Ag/t M oz Mt Ag/t M oz Mt Ag/t M oz
--------------------------------------------------------------------------
Luismin
San Dimas 1.60 387 19.9 3.08 378 37.5 4.68 381 57.3
Los Filos 33.71 3 3.7 55.31 3 5.2 89.02 3 8.8
San Martin 0.32 33 0.3 0.71 48 1.1 1.03 43 1.4
Zinkgruvan (Zn) 6.64 113 24.1 2.01 59 3.8 8.65 100 27.9
Yauliyacu 1.21 111 4.3 1.95 141 8.8 3.16 129 13.1
Penasquito (25%)
Mill 106.72 34 116.8 95.06 27 83.1 201.78 31 199.9
Heap Leach 10.53 21 7.1 17.08 16 9.0 27.61 18 16.1
Stratoni 1.92 172 10.6 0.26 172 1.4 2.18 172 12.1
--------------------------------------------------------------------------
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Total 186.8 149.9 336.6
Measured and Indicated Resources (1,2,3,4,5,6,7,8,9,10,11)
--------------------------------------------------------------------------
MEASURED &
MEASURED INDICATED INDICATED
--------------- ------------------ ------------------- -------------------
Ton- Grade Cont- Ton- Grade Cont- Ton- Grade Cont-
nes g ained nes g ained nes g ained
Silver Mt Ag/t M oz Mt Ag/t M oz Mt Ag/t M oz
--------------------------------------------------------------------------
Luismin
Los Filos 6.25 3 0.7 12.66 3 1.2 18.92 3 1.9
San Martin 0.02 204 0.2 0.20 234 1.5 0.22 231 1.7
Zinkgruvan (Zn) 0.54 24 0.4 1.25 85 3.4 1.79 67 3.8
Zinkgruvan (Cu) - - - 2.80 32 2.9 2.80 32 2.9
Yauliyacu 0.25 327 2.6 3.47 303 33.8 3.72 305 36.5
Penasquito (25%)
Mill 24.78 22 17.8 134.19 19 83.1 158.97 20 100.9
Heap Leach 1.97 7 0.4 8.67 7 2.0 10.64 7 2.4
--------------------------------------------------------------------------
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Total 22.1 127.9 150.1
Inferred Resources (1,2,3,4,5,6,7,8,9,10,11)
-----------------------------------------------
INFERRED
-----------------------------------------------
Tonnes Grade Contained
Silver Mt g Ag/t M oz
-----------------------------------------------
Luismin
San Dimas 17.55 324 183.0
Los Filos 2.39 3 0.2
San Martin 1.79 139 8.0
Zinkgruvan (Zn) 7.79 101 25.3
Zinkgruvan (Cu) 0.89 28 0.8
Yauliyacu 8.38 257 69.2
Penasquito (25%)
Mill 294.75 13 122.8
Heap Leach 10.25 13 4.3
Stratoni 0.56 181 3.2
-----------------------------------------------
-----------------------------------------------
Total 416.8
Notes:
1. All Mineral Reserves and Mineral Resources have been calculated in
accordance with the standards of the Canadian Institute of Mining,
Metallurgy and Petroleum and National Instrument 43-101, or the AusIMM
JORC equivalent.
2. All Mineral Resources are exclusive of Mineral Reserves.
3. Mineral Resources which are not Mineral Reserves do not have
demonstrated economic viability.
4. Reserves and Resources are reported as of December 31, 2007, with the
following conditions or exceptions;
a. Reserves and Resources for Penasquito are reported as of August 9,
2007.
b. Reserves and Resources for San Martin are reported as of December
31, 2006 with the exception of the San Pedrito project, which is
reported as of December 31, 2005.
c. Reserves and Resources for Zinkgruvan are reported as of December
31, 2006.
d. Reserves and Resources for Yaliyacu are reported as of December 31,
2006.
e. Reserves and Resources for Stratoni are reported as of December 31,
2006.
5. Qualified Persons for the Mineral Reserve and Mineral Resource
estimates as defined by the National Instrument 43-101 are as follows:
a. San Dimas - Reynaldo Rivera, MAusIMM (Chief Geologist), Luismin
S.A. de C.V., the Mexican operating subsidiary of Goldcorp Inc.
b. Los Filos - Reynaldo Rivera, MAusIMM (Chief Geologist), Luismin
S.A. de C.V., the Mexican operating subsidiary of Goldcorp Inc.
c. Penasquito - Bob Bryson, P. Eng. (Vice President, Engineering),
Goldcorp Inc.
d. Stratoni - Patrick Forward (General Manager, Exploration), European
Goldfields.
e. San Martin - Reynaldo Rivera, MAusIMM (Chief Geologist), Luismin
S.A. de C.V., the Mexican operating subsidiary of Goldcorp Inc.
f. Yauliyacu - Randy V.J. Smallwood, P.Eng. (Executive Vice President
of Corporate Development), Silver Wheaton Corp.
g. Zinkgruvan - Per Hedstrom (Senior Geologist) and Lars Malmstrom
(Chief Geologist), both employees of Zinkgruvan
h. Corporate Overview - Randy V.J. Smallwood, P.Eng. (Executive Vice
President of Corporate Development),Silver Wheaton Corp.
6. Mineral Reserves are estimated using appropriate recovery rates and US$
commodity prices of $10 per ounce of silver unless otherwise noted
below;
a. $7.00 / oz silver - San Martin
b. $5.75 / oz silver - Zinkgruvan
7. Mineral Resources are estimated using appropriate recovery rates and
US$ commodity prices of $13 per ounce of silver, unless otherwise
noted below;
a. $8.00 / oz silver - San Martin
b. $5.50 / oz silver - The San Pedrito project at San Martin
c. $5.75 / oz silver - Zinkgruvan
8. Silver Wheaton's purchase agreement with Glencore provides for the
delivery of up to 4.75 million ounces of silver per year for 20 years
so long as production allows. Silver production at Yauliyacu in excess
of 4.75 million ounces per year is to the credit of Glencore; however,
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. A portion of the reserves and resources from
Yauliyacu may relate to production which may be for the credit of
Glencore.
9. Penasquito reserves and resources represent the 25% attributable to
Silver Wheaton.
10. Silver is produced as a byproduct metal at the various operations,
therefore the economic cut-off applied to the reporting of silver
reserves and resources will be influenced by changes in the commodity
prices of other metals at the mine.
11. The Los Filos Project is not considered to be a material property to
the Company.
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 "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 parameters 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, 2006 incorporated by reference into Silver Wheaton's Form 40-F on file with the U.S. Securities and Exchange Commission in Washington, D.C. and available on SEDAR at www.sedar.com. 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, 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, 2006 and other continuous disclosure documents filed by Silver Wheaton since January 1, 2007 available at www.sedar.com, for further information on mineral Reserves and Resources, which is subject to the qualifications and notes set forth therein as well as for additional information relating to the Company more generally. 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: These tables use 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
& shares in thousands,
except per share Years Ended December 31
amounts - unaudited) Note 2007 2006 2005
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Silver sales $ 175,434 $ 158,541 $ 70,895
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Cost of sales 51,059 52,772 37,839
Depreciation and amortization 21,705 16,538 6,000
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72,764 69,310 43,839
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Earnings from operations 102,670 89,231 27,056
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Expenses and other income
General and administrative(1) 9,700 5,700 2,443
Project evaluation 360 211 91
Interest expense - 717 -
Interest income (1,508) (3,221) (705)
Loss on mark-to-market of
warrants held 3 1,669 - -
Other 565 604 (64)
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10,786 4,011 1,765
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Earnings before tax 91,884 85,220 25,291
Future income tax expense 10 (22) - -
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Net Earnings $ 91,862 $ 85,220 $ 25,291
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(1) Stock based compensation
(a non cash item) included in
General and administrative $ 2,735 $ 1,768 $ 463
Basic earnings per share $ 0.41 $ 0.40 $ 0.15
Diluted earnings per share $ 0.37 $ 0.37 $ 0.15
Weighted average number of shares
outstanding
- basic 7(e) 221,909 210,538 167,538
- diluted 7(e) 246,728 232,566 170,987
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The accompanying notes form an integral part of these audited consolidated
financial statements.
CONSOLIDATED BALANCE SHEETS
December December
(US dollars and shares 31 31
in thousands - unaudited) Note 2007 2006
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Assets
Current
Cash and cash equivalents $ 9,965 $ 59,994
Accounts receivable 1,428 1,220
Other 303 133
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11,696 61,347
Long-term investments 3 119,409 65,992
Silver interests 4 1,075,023 534,683
Other 2,346 871
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$ 1,208,474 $ 662,893
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Liabilities
Current
Accounts payable $ 1,021 $ 396
Accrued liabilities 5,362 958
Promissory note 5 - 20,000
Current portion of bank debt 6 28,560 -
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34,943 21,354
Bank debt 6 391,300 -
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426,243 21,354
Shareholders' Equity
Share purchase options 7(c) 5,328 4,680
Restricted share units 7(d) 262 111
Warrants 7(b) 38,776 38,824
Share capital
Common shares
Authorized: unlimited shares, no par value;
Issued and outstanding: 222,934 (December
31, 2006: 220,562) 7(a) 495,695 486,071
Retained earnings 208,658 111,853
Accumulated other comprehensive income 2 33,512 -
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782,231 641,539
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$ 1,208,474 $ 662,893
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Commitments and contingencies 6,11
----------------------- -----------------------
Peter Barnes - Director Eduardo Luna - Chairman
The accompanying notes form an integral part of these audited consolidated
financial statements.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(US dollars in Years Ended December 31
thousands - unaudited) Note 2007 2006 2005
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Operating Activities
Net earnings $ 91,862 $ 85,220 $ 25,291
Items not affecting cash
Depreciation and amortization 21,705 16,538 6,000
Debt financing costs - 950 -
Future income tax expense 10 22 - -
Stock based compensation 2,735 1,768 463
Loss on mark-to-market of
warrants held 3 1,669 - -
Other 295 (221) 60
Change in non-cash working
capital 8 973 467 (1,843)
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Cash generated by operating
activities 119,261 104,722 29,971
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Financing Activities
Bank debt drawn down 6 446,000 125,000 -
Bank debt repaid (26,140) (125,000) -
Promissory note repaid 5 (20,000) - -
Debt financing costs - (1,124) -
Shares issued 7(a) - 175,150 86,219
Share issue costs - (7,793) (4,816)
Warrants exercised 293 280 100
Share purchase options exercised 7,347 7,018 1,979
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Cash generated by financing
activities 407,500 173,531 83,482
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Investing Activities
Purchase of long-term investments 3 (17,003) (50,813) (15,069)
Silver interests 4 (557,940) (285,408) (483)
Deferred project evaluation (1,253) - -
Other (828) - (182)
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Cash applied to investing
activities (577,024) (336,221) (15,734)
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Effect of exchange rate changes
on cash and cash equivalents 234 221 33
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(Decrease) increase in cash and
cash equivalents (50,029) (57,747) 97,752
Cash and cash equivalents,
beginning of year 59,994 117,741 19,989
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Cash and cash equivalents, end
of year $ 9,965 $ 59,994 $ 117,741
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At December 31, 2007, the Company's cash and cash equivalents consisted
of $6.5 million in cash (December 31, 2006 - $8.0 million) and $3.5 million
in cash equivalents (December 31, 2006 - $52.0 million). Cash equivalents
include term deposits and treasury bills with original maturities of less
than 90 days.
The accompanying notes form an integral part of these audited consolidated
financial statements.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
Share Restricted
(US dollars in Common Purchase Share
thousands - unaudited) Shares Options Units Warrants
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At December 31, 2005 $ 193,711 $ 4,953 $ 26 $ 38,867
Fair value of stock
based compensation - 1,657 111 -
Share purchase
options exercised 8,948 (1,930) - -
Restricted share units
exercised 26 - (26) -
Warrants exercised 323 - - (43)
Shares issued 290,712 - - -
Share issue costs (7,649) - - -
Net earnings - - - -
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At December 31, 2006 486,071 4,680 111 38,824
Change in accounting
policies (Note 2) - - - -
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At January 1, 2007 as
adjusted 486,071 4,680 111 38,824
Fair value of stock
based compensation - 2,559 176 -
Share purchase
options exercised 9,258 (1,911) - -
Restricted share units
exercised 25 - (25) -
Warrants exercised 341 - - (48)
Net earnings - - - -
Other comprehensive
income - - - -
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At December 31, 2007 $ 495,695 $ 5,328 $ 262 $ 38,776
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Accumulated
Other
(US dollars in Retained Comprehensive
thousands - unaudited) Earnings Income Total
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At December 31, 2005 $ 26,633 $ - $ 264,190
Fair value of stock
based compensation - - 1,768
Share purchase
options exercised - - 7,018
Restricted share units
exercised - - -
Warrants exercised - - 280
Shares issued - - 290,712
Share issue costs - - (7,649)
Net earnings 85,220 - 85,220
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At December 31, 2006 111,853 - 641,539
Change in accounting
policies (Note 2) 4,943 31,063 36,006
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At January 1, 2007 as
adjusted 116,796 31,063 677,545
Fair value of stock
based compensation - - 2,735
Share purchase
options exercised - - 7,347
Restricted share units
exercised - - -
Warrants exercised - - 293
Net earnings 91,862 - 91,862
Other comprehensive
income - 2,449 2,449
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At December 31, 2007 $ 208,658 $ 33,512 $ 782,231
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CONSOLIDATED STATEMENT OF COMPREHENSIVE INCOME
Year Ended
(US dollars in thousands - unaudited) December 31, 2007
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Net earnings $ 91,862
Other comprehensive income
Loss on available-for-sale securities, net of future
tax benefit of $3,702 (Note 3) 2,307
Reclassification adjustment for loss included in net
earnings, net of tax of $28 142
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2,449
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Comprehensive income $ 94,311
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The accompanying notes form an integral part of these audited consolidated
financial statements.
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED DECEMBER 31, 2007 (US DOLLARS)
1. DESCRIPTION OF BUSINESS AND NATURE OF OPERATIONS
Silver Wheaton Corp. ("Silver Wheaton" or the "Company") is engaged in the silver mining business.
The Company has entered into five long-term silver contracts with Goldcorp (Luismin mines in Mexico and Penasquito project in Mexico), Lundin Mining (Zinkgruvan mine in Sweden), Glencore (Yauliyacu mine in Peru) and Hellas Gold (Stratoni mine in Greece), whereby Silver Wheaton acquires silver production from the counterparties at an average fixed price of $3.91 per ounce, subject to an inflationary adjustment (Note 4). The Company trades on the Toronto Stock Exchange (TSX) and the New York Stock Exchange (NYSE) under the symbol SLW.
2. ACCOUNTING POLICIES
BASIS OF PRESENTATION
These consolidated financial statements have been prepared in accordance with Canadian generally accepted accounting principles ("Canadian GAAP").
PRINCIPLES OF CONSOLIDATION
The consolidated financial statements include the accounts of the Company and its 100% owned subsidiary Silver Wheaton (Caymans) Ltd. ("SW Caymans").
USE OF ESTIMATES
The preparation of financial statements in conformity with Canadian generally accepted accounting principles requires management to make estimates that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Significant areas where management's judgment is applied are silver contract valuations, depreciation and income taxes. Actual results could differ from those reported.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents include cash, and those short-term money market instruments that are readily convertible to cash with an original term to maturity of less than 90 days.
SILVER INVENTORY
Silver inventory is valued at the lower of average cost and net realizable value.
LONG-TERM INVESTMENTS
Long-term investments in equity securities are classified as available-for-sale because the Company intends to hold the investments for more than one year. Unrealized holding gains and losses related to available-for-sale investments are excluded from net income and are included in other comprehensive income until such gains or losses are realized or an other than temporary impairment is determined to have occurred.
Warrants held by the Company are for long-term investment purposes, however, due to their nature they meet the definition of a derivative and are marked-to-market on a quarterly basis. Mark-to-market gains and losses relating to the warrants are included in net income in the period they occur.
The Company estimates the fair value of financial instruments at the balance sheet date using quoted market prices for available-for-sale securities and a Black-Scholes option pricing model for warrants held.
SILVER INTERESTS
Contracts for which settlement is called for in silver, the amount of which is based on production at the mines, are recorded at cost. The cost of these assets is separately allocated to reserves, resources and exploration potential. The value allocated to reserves is classified as depletable and is depreciated on a unit-of-sale basis over the estimated recoverable proven and probable reserves at the mine corresponding to the specific contract. The value associated with resources and exploration potential is the value beyond proven and probable reserves at acquisition and is classified as non-depletable until such time as it is transferred to the depletable category as a result of the conversion of resources or exploration potential into reserves.
Evaluations of the carrying values of each contract are undertaken each year to determine if estimated undiscounted future net cash flows are less than the carrying value. Estimated undiscounted future net cash flows are calculated using estimated production, sales prices and purchase costs. If it is determined that the future net cash flows from an operation are less than the carrying value then a write-down is recorded with a charge to operations.
INTEREST AND DEBT FINANCING COSTS
Interest and debt financing costs are expensed when they are incurred, unless they are directly attributable to the acquisition or construction of qualifying assets, which are assets that necessarily take a substantial period of preparation for their intended use or sale, in which case they are added to the cost of those assets until such time as the assets are substantially ready for their intended use or sale.
REVENUE RECOGNITION
Revenue from the sale of silver is recognized in the accounts when persuasive evidence of an arrangement exists, title and risk passes to the buyer, collection is reasonably assured and the price is reasonably determinable. Revenue from the sale of silver may be subject to adjustment upon final settlement of estimated metal prices, weights, and assays. Adjustments to revenue for metal prices are recorded monthly and other adjustments are recorded on final settlement.
STOCK-BASED COMPENSATION
The fair value of all stock-based awards granted is estimated using the Black-Scholes model. The compensation cost related to stock options granted to employees and directors is recorded in the consolidated statements of operations.
INCOME TAXES
The future income tax asset and liability method of accounting for income taxes is used. As the Company's operating profit is derived from its subsidiary, SW Caymans, which is incorporated and operated in the Cayman Islands, the Company's profits bear no income tax. Management views the subsidiary's profits as part of its permanent investment in the subsidiary, and it has determined that those profits will be reinvested in foreign jurisdictions for the foreseeable future, therefore, no current income taxes have been recorded.
EARNINGS PER SHARE
Earnings per share calculations are based on the weighted average number of common shares and common share equivalents issued and outstanding during the period. Diluted earnings per share are calculated using the treasury method which requires the calculation of diluted earnings per share by assuming that outstanding share purchase options and warrants, with an average market price that exceeds the average exercise prices of the options and warrants for the year, are exercised and the proceeds are used to repurchase shares of the Company at the average market price of the common shares for the period.
FOREIGN CURRENCY TRANSLATION
Foreign currency monetary assets and liabilities are translated into United States dollars at the exchange rates prevailing at the balance sheet date. Non-monetary assets denominated in foreign currencies are translated using the rate of exchange at the transaction date. Foreign currency transactions are translated at the United States dollar rate prevailing on the transaction dates. Foreign exchange gains and losses are included in the determination of earnings except for the foreign exchange gains and losses on the Company's available for sale investments which are included in the determination of Comprehensive Income.
CHANGES IN ACCOUNTING POLICIES
Financial Instruments
The Company adopted the provisions of Sections 3855, Financial Instruments - Recognition and Measurement, 3861 - Financial Instruments - Disclosure and Presentation, 1530 - Comprehensive Income, 3865 - Hedges and 3251 - Equity, on January 1, 2007 which address the classification, recognition and measurement of financial instruments in the financial statements and the inclusion of other comprehensive income ("OCI"). As a result of adopting these new standards, the Company recorded a non-cash increase of $39.5 million to opening long-term investments, a non-cash increase of $3.3 million to future income tax liability and a non-cash pre-tax adjustment of $37.7 million ($31.1 million net of tax) as a one-time cumulative effect of a change in accounting policy in opening accumulated other comprehensive income. In addition, the Company recorded a non-cash increase of $5.1 million to opening retained earnings to recognize the value of income tax losses not previously recognized and to record the cumulative effect of the change in accounting policy as it relates to warrants held by the Company.
Under Section 3855, share purchase warrants held by the Company are classified as derivatives and marked-to-market each reporting period. As a result, the Company realized a non-cash increase of $1.9 million to opening long-term investments and retained earnings as a one-time cumulative effect of a change in accounting policy on January 1, 2007.
Also under Section 3855, the Company adopted a policy to expense debt financing costs that are not directly attributable to the acquisition, construction or production of a qualifying asset when they are incurred and as a result the Company recorded a non-cash adjustment to decrease opening retained earnings by $0.2 million to eliminate the opening balance of debt financing costs that were capitalized and amortized under the Company's previous accounting policy.
The carrying values of cash and cash equivalents, accounts receivable and accounts payable approximate their fair values due to their short term nature. Unless otherwise noted, it is management's opinion that the Company is not exposed to significant interest, currency or credit risk arising from these financial instruments.
FUTURE ACCOUNTING CHANGES
Capital Disclosures
The CICA issued a new accounting standard, Section 1535, Capital Disclosures ("Section 1535"), which requires the disclosure of both qualitative and quantitative information that enables users of financial statements to evaluate the entity's objectives, policies and processes for managing capital. Section 1535 specifies the disclosure of (i) an entity's objectives, policies and processes for managing capital; (ii) quantitative data about what the entity regards as capital; (iii) whether the entity has complied with any capital requirements; and (iv) if it has not complied, the consequences of such non-compliance. This new standard became effective for the Company on January 1, 2008.
Financial Instruments
The CICA issued two new accounting standards, Section 3862, Financial Instruments - Disclosures ("Section 3862"), and Section 3863, Financial Instruments - Presentation ("Section 3863"), which replace Handbook Section 3861, Financial Instruments - Disclosure and Presentation, revising and enhancing its disclosure requirements and carrying forward unchanged its presentation requirements for financial instruments. Sections 3862 and 3863 place increased emphasis on disclosures about the nature and extent of risks arising from financial instruments and how the entity manages those risks. These new standards will become effective for the Company for periods beginning on or after October 1, 2007.
Impact of adopting Sections 1535, 3862 and 3863
The Company is currently analyzing the requirements of these new standards.
3. LONG-TERM INVESTMENTS
December 31, 2007 December 31, 2006
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(in thousands) Fair Value Fair Value
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Available-for-sale $ 118,333 $ 102,288
Warrants 1,076 3,210
Transitional adjustment on
available-for-sale (Note 2) - (37,652)
Transitional adjustment on warrants
(Note 2) - (1,854)
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$ 119,409 $ 65,992
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AVAILABLE-FOR-SALE
December 31, 2007 December 31, 2006
------------------------- ----------------- ------------------------------
Mark-
to-
Market
Gains
(Losses)
Fair Included Fair Book Transitional
Value in OCI Value Value Adjustment
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(Note 2)
Bear Creek(1) $ 59,361 $ (5,374)$ 61,264 $ 32,136 $ 29,128
Revett 10,777 (2,824) 13,602 10,849 2,753
Sabina 16,104 1,445 14,659 10,317 4,342
Mines Management 8,552 (1,448) - - -
Other 23,539 6,806 12,763 11,334 1,429
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$118,333 $ (1,395)$102,288 $ 64,636 $ 37,652
Future tax benefit
(expense) in OCI 3,702 (6,589)
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2,307 31,063
Reclassification adjustment for
loss included in net income, net
of tax of $28 142 -
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$118,333 $ 2,449 $102,288 $ 64,636 $ 31,063
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1) Certain of the Bear Creek warrants were exercised on January 11, 2007
WARRANTS
December 31, 2007 December 31, 2006
------------------------- ----------------- ------------------------------
Mark-
to-
Market
Gains
(Losses)
Included
Fair in Fair Book Transitional
Value Earnings Value Value Adjustment
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(Note 2)
Bear Creek(1) $ 33 $ (220)$ 1,170 $ 47 $ 1,123
Revett 49 (493) 542 423 119
Sabina 914 (583) 1,498 886 612
Other 80 (373) - - -
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$ 1,076 $ (1,669)$ 3,210 $ 1,356 $ 1,854
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1) Certain of the Bear Creek warrants were exercised on January 11, 2007
At December 31, 2007, Silver Wheaton owned 8,146,505 common shares and warrants exercisable to acquire an additional 100,000 common shares, representing approximately 18% of the outstanding shares of Bear Creek on an undiluted basis.
At December 31, 2007, Silver Wheaton owned 12,382,900 common shares and warrants exercisable to acquire an additional 2,400,000 common shares, representing approximately 17% of the outstanding shares of Revett Minerals Inc. ("Revett") on an undiluted basis.
At December 31, 2007, Silver Wheaton owned 7,800,000 common shares and warrants exercisable to acquire an additional 3,900,000 common shares, representing approximately 12% of the outstanding shares of Sabina Silver Corporation ("Sabina") on an undiluted basis.
During 2007, Silver Wheaton acquired by way of private placement 2,500,000 common shares of Mines Management, Inc. ("Mines Management"), at a price of $4.00 per share for total consideration of $10.0 million. As a result, at December 31, 2007, Silver Wheaton owned 2,500,000 common shares, representing approximately 11% of the outstanding shares of Mines Management on an undiluted basis.
The warrants acquired as part of the private placements have been valued using a Black-Scholes option pricing model.
By holding these long-term investments, the Company is inherently exposed to various risk factors including currency risk, market price risk and liquidity risk.
4. SILVER INTERESTS
December 31, 2007 December 31, 2006
-------------- ------------------------------- ---------------------------
Accum- Accum-
ulated ulated
Deprec- Deprec-
(in thousands) Cost iation Net Cost iation Net
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Luismin $ 194,807 $ (9,369) $ 185,438 $194,807 $ (6,660) $188,147
Zinkgruvan 77,919 (9,102) 68,817 77,919 (6,102) 71,817
Yauliyacu 285,292 (23,116) 262,176 285,292 (10,573) 274,719
Stratoni 57,724 (3,453) 54,271 - - -
Penasquito 504,321 - 504,321 - - -
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$1,120,063 $(45,040) $1,075,023 $558,018 $(23,335) $534,683
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The value allocated to reserves is classified as depletable and is depreciated on a units-of-sale basis over the estimated recoverable proven and probable reserves at the mine. The value associated with resources and exploration potential is the value beyond proven and probable reserves allocated at acquisition and is classified as non-depletable until such time as it is transferred to the depletable category as a result of the conversion of resources or exploration potential into reserves.
December 31, 2007 December 31, 2006
-------------- ------------------------------- ---------------------------
Non- Non-
Deplet- Deplet- Deplet- Deplet-
(in thousands) able able Total able able Total
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Luismin $ 17,237 $168,201 $ 185,438 $ 19,946 $168,201 $188,147
Zinkgruvan 33,740 35,077 68,817 36,740 35,077 71,817
Yauliyacu 21,715 240,461 262,176 34,258 240,461 274,719
Stratoni 35,408 18,863 54,271 - - -
Penasquito - 504,321 504,321 - - -
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$ 108,100 $966,923 $1,075,023 $ 90,944 $443,739 $534,683
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LUISMIN
On October 15, 2004, SW Caymans entered into an agreement (amended on March 30, 2006) to acquire all of the silver produced by Goldcorp's Luismin mining operations in Mexico (owned at the date of the transaction) for a period of 25 years. Total consideration, including consideration issued as part of the March 30, 2006 amendment, was $36.7 million in cash up front, a $20 million promissory note and 126 million common shares of the Company. In addition, a per ounce cash payment of the lesser of $3.95 and the prevailing market price is due (subject to an inflationary adjustment on October 15 of each year).
On February 14, 2008, Goldcorp sold its entire 48% interest in Silver Wheaton by way of a secondary offering, as described in Note 14.
ZINKGRUVAN
In December, 2004, SW Caymans entered into an agreement to acquire all of the silver produced by Lundin Mining Corporation's Zinkgruvan mine in Sweden for an upfront payment of $50 million in cash, 6 million Silver Wheaton common shares and 30 million Silver Wheaton common share purchase warrants (each warrant grants the holder the right to purchase 0.20 of one of the Company's common shares). In addition, a per ounce cash payment of the lesser of $3.96 and the prevailing market price is due (subject to an inflationary adjustment on December 8 each year).
YAULIYACU
On March 23, 2006, SW Caymans entered into an agreement with Glencore International AG ("Glencore") to acquire up to 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. The upfront payment 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 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 owned by Glencore at the time of the initial transaction. 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.
STRATONI
On April 23, 2007, SW Caymans entered into an agreement with Hellas Gold S.A. ("Hellas Gold"), a subsidiary of European Goldfields Ltd. ("European Goldfields") to acquire all of the silver produced from Hellas Gold's Stratoni mining operations in Greece for the life of mine. Silver Wheaton made an upfront cash payment of $57.5 million. 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 2010), for silver delivered under the contract.
During the term of the contract, Silver Wheaton will have a right of first refusal on any future sales of silver streams from any other mine owned by European Goldfields or Hellas Gold.
The allocation of the purchase price is summarized in the table below:
(in thousands)
Purchase Price
Cash $ 57,500
Acquisition costs 224
------------------------------------------------------------
$ 57,724
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PENASQUITO
On July 24, 2007, SW Caymans entered into an agreement to acquire 25% of the silver produced from Goldcorp's Penasquito project in Mexico for the life of mine, for an upfront cash payment of $485 million. 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 2011), for silver delivered under the contract.
Silver Wheaton is not required to fund any capital expenditures at Penasquito, including any expansion scenarios. Goldcorp has provided a completion guarantee to Silver Wheaton that the Penasquito Mine will be constructed with certain minimum production criteria by certain dates.
The allocation of the purchase price is summarized in the table below:
(in thousands)
Purchase Price
Cash $ 485,000
Acquisition costs 3,560
Capitalized interest and debt financing costs 15,761
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$ 504,321
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ROSEMONT
On December 20, 2007, the Company signed a binding letter agreement to acquire between 45% and 90% of silver produced by Augusta Resource Corporation's ("Augusta") Rosemont Copper Project in Arizona for the life of mine. Augusta must elect the percentage of life of mine silver subject to the transaction, which will be between a minimum of 45% and a maximum of 90%, on or before March 31, 2008.
Subject to the finalization of the transaction structure, including tax considerations, Silver Wheaton will pay an upfront cash payment ranging in value from $135 million to $165 million to acquire 45% of the payable silver, and $240 million to $320 million to acquire 90% of the payable silver, produced for the life of mine.
The upfront payment will be made on a drawdown basis to fund construction of the mine as construction milestones are achieved. Silver Wheaton will not be required to pay any further ongoing per ounce payments for silver delivered from Rosemont and is not required to fund or contribute to ongoing capital expenditures, including expansion scenarios. Augusta will provide a completion guarantee that the Rosemont mine will be constructed with certain minimum production criteria by certain dates.
The transaction is subject to (a) Augusta receiving all necessary permits to construct and operate a mine in accordance with their August 2007 Rosemont Feasibility Study, (b) Augusta having entered into committed arrangements for sufficient financing to construct and operate the mine, and (c) execution by the parties of definitive agreements on or before June 30, 2008 as well as receipt of any required regulatory approvals and third-party consents. Augusta expects production at the Rosemont project to start in late 2010 with an average of 2.7 million ounces of silver produced each year over the life of mine, currently expected to be a minimum of 18 years.
5. PROMISSORY NOTE
On March 30, 2006, as partial consideration for amendments made to the Luismin silver purchase contract, the Company issued a non-interest bearing $20 million promissory note to Goldcorp, due on March 30, 2007. The promissory note was repaid in full during March 2007.
6. BANK DEBT
On July 24, 2007, the Company cancelled its undrawn $25 million revolving loan facility and entered into a credit agreement with the Bank of Nova Scotia and BMO Capital Markets, as co-lead arrangers and administrative agents, to borrow $200 million under a non revolving term loan (the "Term Loan") and up to $300 million under a revolving term loan (the "Revolving Loan"). The Revolving Loan is for a period of 7 years and the Term Loan is to be repaid in equal installments over a period of 7 years, however, prepayments are allowed at any time. Silver Wheaton has committed to pay down the Revolving Loan, within 61 days after the end of each fiscal quarter, by an amount equal to 90% of the cash flows reported for the quarter. The Revolving Loan can be drawn down at any time to finance acquisitions or investments. In order to fund the Penasquito transaction, the Term Loan was drawn in full and the Revolving Loan was drawn in the amount of $246 million.
Amounts drawn incur interest at LIBOR plus 0.875% to 1.75% per annum dependent upon the Company's leverage ratio. Undrawn amounts are subject to a 0.2% to 0.45% per annum commitment fee dependent on 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, a Leverage Ratio less than or equal to 5 : 1 (decreasing to 4 : 1 on September 30, 2008 and to 3.5 : 1 on September 30, 2009), and a Tangible Net Worth greater than 80% of the Tangible Net Worth at June 30, 2007 plus 50% of Net Income for each fiscal quarter thereafter. Both the Term Loan and the Revolving Loan are secured against the Company's assets, including the Company's silver interests. The Company has paid $2.5 million in debt financing costs relating to the credit agreement which was capitalized to the cost of the Penasquito contract. During 2007, the Company repaid $7.1 million and $19.0 million of the balances outstanding on the Term Loan and Revolving Loan, respectively.
December 31, 2007
----------------------------------------------------------------------
(in thousands) Term Loan Revolving Loan Total
----------------------------------------------------------------------
Current portion $ 28,560 $ - $ 28,560
Long-term portion 164,300 227,000 391,300
----------------------------------------------------------------------
$ 192,860 $ 227,000 $ 419,860
----------------------------------------------------------------------
----------------------------------------------------------------------
Interest capitalized $ 6,045 $ 7,206 $ 13,251
Effective interest rate 6.88% 6.85% 6.87%
The required principal payments under the Term Loan and the Revolving Loan for the next five years and thereafter are as follows:
(in thousands) Term Loan Revolving Loan
-----------------------------------------
2008 $ 28,560 $ -
2009 28,560 -
2010 28,560 -
2011 28,560 -
2012 28,560 -
Thereafter 50,060 227,000
-----------------------------------------
$ 192,860 $ 227,000
-----------------------------------------
-----------------------------------------
7. SHAREHOLDERS' EQUITY
(A) SHARES ISSUED
A summary of the Company's issued and outstanding shares at December 31, 2007, 2006 and 2005, and the changes for the periods ending on those dates is presented below:
Weighted
Number of Average Price
Shares (Cdn$)
--------------------------------------------------------------------------
At December 31, 2004 167,010,000
Public offering 15,625,000 $ 6.40
Options exercised 710,000 3.27
Warrants exercised 30,000 4.00
--------------------------------------------------------------------------
At December 31, 2005 183,375,000
Shares issued to Goldcorp in connection with
Luismin Transaction 18,000,000 7.41
Public offering 16,644,000 12.00
Options exercised 2,477,331 3.27
Warrants exercised 63,280 5.08
Restricted share units exercised 2,500 -
--------------------------------------------------------------------------
At December 31, 2006 220,562,111
Options exercised 2,331,965 3.39
Warrants exercised 37,661 9.05
Restricted share units exercised 2,500 -
--------------------------------------------------------------------------
At December 31, 2007 222,934,237
--------------------------------------------------------------------------
--------------------------------------------------------------------------
On December 22, 2005, the Company raised gross proceeds of $86.2 million (Cdn$100.0 million) from a private placement of 15,625,000 subscription receipts at a price of Cdn$6.40 per unit. Each subscription receipt was automatically converted without payment of additional consideration into one common share and one-half of one Series "B" common share purchase warrant (TSX:SLW.WT.B) of the Company. Each Series "B" warrant entitles the holder to purchase one common share at a price of Cdn$10.00 per share for a period of 5 years expiring December 22, 2010.
On March 30, 2006, in connection with the Luismin amendment, the Company issued 18 million common shares to Goldcorp (Note 4), valued on the date of announcement (February 13, 2006) at the closing price of $6.42 (Cdn - $7.41) per share.
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 $7.5 million were incurred as a part of this offering.
(B) WARRANTS
A summary of the Company's warrants at December 31, 2007, 2006 and 2005, and the changes for the periods ending on those dates is presented below:
Weighted
Warrants Avg Exercise Exchange
Outstanding Price (Cdn$) 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 December 31, 2006 165,346,100 1.31 0.24
Exercised (61,905) 5.50 0.61
---------------------------------------------------------------------------
At December 31, 2007 165,284,195 $ 1.31 0.24
---------------------------------------------------------------------------
---------------------------------------------------------------------------
Each share purchase warrant and Series "A" warrant (TSX: SLW.WT and SLW.WT.A, respectively) entitles the holder the right to purchase 0.20 of one of the Company's common shares at the applicable exercise price. Each Series "B" warrant entitles the holder the right to purchase one of the Company's common shares.
The following table summarizes information about the warrants outstanding at December 31, 2007:
Common Effec-
Shares to tive
Exer- be Issued Price
cise Exch- Upon Per
Warrants Price ange Exercise Share Expiry
Outstanding (Cdn$) Ratio of Warrants (Cdn$) Date
---------------------------------------------------------------------------
Share
purchase
warrants 117,232,000 $ 0.80 0.20 23,446,400 $ 4.00 Aug 5, 2009
Series "A"
warrants 40,271,295 1.10 0.20 8,054,259 5.50 Nov 30, 2009
Series "B"
warrants 7,780,900 10.00 1.00 7,780,900 10.00 Dec 22, 2010
---------------------------------------------------------------------------
165,284,195 39,281,559 $ 5.50
---------------------------------------------------------------------------
---------------------------------------------------------------------------
(C) SHARE PURCHASE OPTIONS
The Company has established a share purchase option plan whereby the Company's board of directors may, from time to time, grant options to directors, employees or consultants. The maximum term of any option may be ten years, but generally options are granted for five years. The exercise price of an option is not less than the closing price on the TSX on the last trading day preceding the grant date.
Stock-based compensation expense during 2007 included $2.6 million (2006 - $1.7 million) of amortization of the fair value of share purchase options issued. During 2007, 945,000 options were issued with a fair market value of $4.1 million which was determined using the Black-Scholes option valuation method assuming no dividends are to be paid, a weighted average volatility of the Company's share price of 48%, an annual risk-free interest rate of 4.1% and expected lives of 2.9 years.
At December 31, 2007 there were 2,745,000 options available for grant under the plan.
A summary of the Company's options at December 31, 2007, 2006 and 2005, and the changes for the periods ending on those dates is presented below:
Weighted
Number of Avg Exercise
Shares Price (Cdn$)
-------------------------------------------------------------------
At December 31, 2004 6,500,000 $ 3.26
Granted 630,000 5.59
Exercised (710,000) 3.27
-------------------------------------------------------------------
At December 31, 2005 6,420,000 3.48
Granted 550,000 12.10
Exercised (2,477,334) 3.27
-------------------------------------------------------------------
At December 31, 2006 4,492,666 4.66
Granted 945,000 13.30
Exercised (2,331,965) 3.39
-------------------------------------------------------------------
At December 31, 2007 3,105,701 $ 8.24
-------------------------------------------------------------------
-------------------------------------------------------------------
The following table summarizes information about the options outstanding and exercisable at December 31, 2007.
Weighted
Average
Options Remaining Options
Exercise Prices (Cdn$) Outstanding Contractual Life Exercisable
-------------------------------------------------------------------
$ 3.25 1,174,000 1.8 years 1,174,000
$ 6.03 - $ 8.55 486,701 3.0 years 470,034
$ 12.45 500,000 3.3 years 333,333
$ 12.60 740,000 4.1 years -
$ 15.83 205,000 4.8 years 68,334
-------------------------------------------------------------------
3,105,701 3.0 years 2,045,701
-------------------------------------------------------------------
-------------------------------------------------------------------
(D) RESTRICTED SHARE UNITS
During the year, the Company issued 20,000 restricted share units at a price of Cdn$12.60 and 1,333 restricted share units at a price of Cdn$12.01 (2006 - 15,000 restricted share units at a price of Cdn$11.83). At December 31, 2007 there were 45,394 restricted share units outstanding.
(E) DILUTED EARNINGS PER SHARE
Diluted earnings per share is calculated based on the following weighted-average number of shares outstanding:
Years Ended December 31
2007 2006 2005
--------------------------------------------------------------------------
Basic weighted average number of shares
outstanding (000's) 221,909 210,538 167,538
Effect of dilutive securities
Stock options 1,944 3,075 1,490
Share purchase warrants 22,833 18,921 1,950
Restricted share units 42 32 9
--------------------------------------------------------------------------
Diluted weighted average number of shares
outstanding 246,728 232,566 170,987
--------------------------------------------------------------------------
--------------------------------------------------------------------------
The following lists the stock options and share purchase warrants excluded from the computation of diluted earnings per share because the exercise prices exceeded the average market value of the common shares of C$13.12 (2006 - C$10.60, 2005 - C$4.36).
Years Ended December 31
(in thousands) 2007 2006 2005
--------------------------------------------------------------------------
Stock options 205 500 530
Share purchase warrants - - 15,913
8. SUPPLEMENTAL CASH FLOW INFORMATION
Years Ended December 31
(in thousands) Note 2007 2006 2005
--------------------------------------------------------------------------
Change in non-cash working capital
Accounts receivable $ (208) $ 1,271 $ (2,074)
Accounts payable 654 (1,251) (9)
Accrued liabilities 697 681 139
Other (170) (234) 101
--------------------------------------------------------------------------
$ 973 $ 467 $ (1,843)
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Non-cash investing activities, in
connection with the acquisition
of silver contracts
Shares issued to Goldcorp 4 $ - $ 115,560 $ -
Promissory note issued to Goldcorp 5 $ - $ 20,000 $ -
Interest paid $ 9,699 $ 717 $ -
Income tax paid $ - $ - $ -
9. RELATED PARTY TRANSACTIONS
At December 31, 2007, Goldcorp owned 48% of the Company's outstanding common shares. During the year, the Company purchased 6.9 million ounces (2006 - 9.0 million ounces) of silver from a subsidiary of Goldcorp at an average price of $3.91 per ounce (2006 - $3.90 per ounce), for total consideration of approximately $27.0 million (2006 - $35.0 million).
During the year, Silver Wheaton repaid a $20 million promissory note due to Goldcorp.
On July 24, 2007, SW Caymans entered into an agreement to acquire 25% of the silver produced from Goldcorp's Penasquito project in Mexico for the life of mine, for an upfront cash payment of $485 million, as described in Note 4.
The Company has an agreement with Goldcorp whereby Goldcorp provides certain management and administrative services at cost. During the year, total costs reimbursed to Goldcorp were $193,000 compared to $249,000 during 2006. This agreement allows for cancellation by Silver Wheaton with 30 days notice at any time.
During May 2007, the Company entered into a 9 year lease agreement with Goldcorp for office space. The Company began making lease payments in December 2007 which totaled $17,500.
At December 31, 2007, the Company owed Goldcorp $152,000 (2006, Goldcorp owed the Company - $18,000).
On February 14, 2008, Goldcorp sold its entire 48% interest in Silver Wheaton by way of a secondary offering, as described in Note 14.
10. INCOME TAXES
The provision for income taxes differs from the amount that would be obtained by applying the statutory income tax rate to consolidated earnings before income taxes due to the following:
Years Ended December 31
(in thousands) 2007 2006 2005
-------------------------------------------------------------------------
Earnings from continuing operations before
income taxes $ 91,862 $ 85,220 $ 25,291
Canadian federal and provincial income tax
rates 34.1% 34.1% 35.6%
-------------------------------------------------------------------------
Income tax expense based on above rates 31,343 29,077 9,004
Change in valuation allowance (5,320) 2,677 568
Tax effect of non-deductible expenditures 6,715 603 174
Lower effective tax rates on earnings of
foreign subsidiary (30,556) (32,357) (9,746)
Impact of reduction in tax rates on future
income taxes (2,160) - -
-------------------------------------------------------------------------
Future income tax expense $ 22 $ - $ -
-------------------------------------------------------------------------
-------------------------------------------------------------------------
The components of future income taxes are as follows:
Years Ended December 31
(in thousands) 2007 2006
--------------------------------------------------------------------------
Future income tax assets
Non-capital losses $ 8,894 $ 4,436
Deductible temporary differences 3,724 3,986
--------------------------------------------------------------------------
Value of future income tax assets 12,618 8,422
Valuation allowance (575) (8,422)
--------------------------------------------------------------------------
12,043 -
--------------------------------------------------------------------------
Future income tax liabilities
Taxable temporary differences (12,043) -
--------------------------------------------------------------------------
$ - $ -
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Deductible temporary differences are comprised primarily of book to tax differences relating to debt and equity financing fees. Taxable temporary differences are comprised primarily of book to tax differences relating to the value of the Company's long term investments and an unrealized foreign exchange gain on the Company's long term debt.
All of the Company's income generating activities, including the sale of silver, are conducted by its 100% owned subsidiary SW Caymans. SW Caymans operates in the Cayman Islands and is subject to a statutory tax rate of nil%. The Company does not have any plans to repatriate this money to Canada.
At December 31, 2007, the Company had available non-capital losses for Canadian income tax purposes which may be carried forward to reduce taxable income in future years. If not utilized, the non-capital losses in the amount of Cdn$27.9 million will expire as follows: 2013 - Cdn$0.5 million, 2014 - Cdn$0.4 million, 2015 - Cdn$4.0 million, 2026 - Cdn$8.4 million, 2027 - Cdn$14.6 million.
11. COMMITMENTS
In connection with the Luismin, Zinkgruvan and Stratoni silver contracts (Note 4), the Company has committed to purchase 100% of the silver produced by each mine for a per-ounce cash payment of the lesser of $3.95, $3.96 and $3.90 respectively, and the then prevailing market price, subject to an inflationary adjustment. In connection with the Yauliyacu silver purchase contract, the Company has committed to purchase up to 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 an inflationary adjustment. In connection with the Penasquito silver purchase contract, the Company has committed to purchase 25% of the silver produced by the Penasquito mine for a per-ounce cash payment of the lesser of $3.90 and the then prevailing market price, subject to an inflationary adjustment.
In addition, on December 20, 2007 the Company signed a binding letter agreement to purchase between 45% and 90% of the life of mine silver to be produced by Augusta's Rosemont Copper Project (Note 4).
The Company is committed to an annual operating lease for the Company's office space and certain other commitments. The minimum annual payments for the next five years and thereafter are as follows:
(in thousands)
2008 $ 695
2009 705
2010 711
2011 726
2012 503
Thereafter 2,167
-----------------------------
$ 5,507
-----------------------------
-----------------------------
12. SEGMENTED INFORMATION
The Company's reportable operating segments are summarized in the table below. This information has been segmented on a silver interest basis.
Year Ended December 31, 2007
(in thousands) Luismin Zinkgruvan Yauliyacu
--------------------------------------------------------------------------
Statements of Operations
Silver sales $ 92,284 $ 25,315 $ 46,055
--------------------------------------------------------------------------
Cost of sales 27,043 7,206 13,424
Depreciation 2,709 3,000 12,543
--------------------------------------------------------------------------
Earnings from operations 62,532 15,109 20,088
Expenses and other income - - -
--------------------------------------------------------------------------
Net earnings (loss) $ 62,532 $ 15,109 $ 20,088
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash flow from (used in) operations $ 65,782 $ 17,991 $ 32,632
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets $ 185,438 $ 69,252 $ 262,176
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Year Ended December 31, 2007
(in thousands) Stratoni Penasquito Corporate Consolidated
--------------------------------------------------------------------------
Statements of Operations
Silver sales $ 11,780 $ - $ - $ 175,434
--------------------------------------------------------------------------
Cost of sales 3,386 - - 51,059
Depreciation 3,453 - - 21,705
--------------------------------------------------------------------------
Earnings from operations 4,941 - - 102,670
Expenses and other income - - (10,808) (10,808)
--------------------------------------------------------------------------
Net earnings (loss) $ 4,941 $ - $ (10,808) $ 91,862
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash flow from (used in)
operations $ 8,337 $ - $ (5,481) $ 119,261
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets $ 54,942 $ 504,321 $ 132,345 $ 1,208,474
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Year Ended December 31, 2006
Consoli-
(in thousands) Luismin Zinkgruvan Yauliyacu Corporate dated
--------------------------------------------------------------------------
Statements of
Operations
Silver sales $ 103,850 $ 18,903 $ 35,788 $ - $ 158,541
--------------------------------------------------------------------------
Cost of sales 35,016 6,575 11,181 - 52,772
Depreciation 3,143 2,822 10,573 - 16,538
--------------------------------------------------------------------------
Earnings from
operations 65,691 9,506 14,034 - 89,231
Expenses and other
income - - - (4,011) (4,011)
--------------------------------------------------------------------------
Net earnings
(loss) $ 65,691 $ 9,506 $ 14,034 $ (4,011) $ 85,220
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash flow from
(used in)
operations $ 68,293 $ 13,152 $ 24,607 $ (1,330) $ 104,722
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Total assets $ 188,935 $ 72,072 $ 274,720 $ 127,166 $ 662,893
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Year Ended December 31, 2005
(in thousands) Luismin Zinkgruvan Corporate Consolidated
--------------------------------------------------------------------------
Statements of Operations
Silver sales $ 57,406 $ 13,489 $ - $ 70,895
--------------------------------------------------------------------------
Cost of sales 30,754 7,085 - 37,839
Depreciation 2,931 3,069 - 6,000
--------------------------------------------------------------------------
Earnings from operations 23,721 3,335 - 27,056
Expenses and other income - - (1,765) (1,765)
--------------------------------------------------------------------------
Net earnings (loss) $ 23,721 $ 3,335 $ (1,765) $ 25,291
--------------------------------------------------------------------------
--------------------------------------------------------------------------
Cash flow from (used in)
operations $ 26,485 $ 4,340 $ (854) $ 29,971
--------------------------------------------------------------------------
--------------------------------------------------------------------------
13. SUBSEQUENT EVENT
Subsequent to year end, Goldcorp sold its entire 48% interest in Silver Wheaton of 108 million common shares, on a bought deal basis, at a price of Cdn$14.50 per common share for aggregate gross cash proceeds to Goldcorp of Cdn$1.6 billion.
CANADA - HEAD OFFICE TRANSFER AGENT
SILVER WHEATON CORP. CIBC MELLON TRUST COMPANY
Park Place, Suite 3150-666 Burrard 1600-1066 West Hastings Street
Street Vancouver, BC V6E 3X1
Vancouver, BC V6C 2X8 Toll-free in Canada and the
T 604 684 9648 United States: 800 387 0825
F 604 684 3123 Outside of Canada and the
United States: 416 643 5500
Email: inquiries@cibcmellon.com
CAYMAN ISLANDS OFFICE
SILVER WHEATON (CAYMANS) LTD.
Unit #5 - 201 Governors Square AUDITORS
23 Lime Tree Bay Ave Deloitte & Touche LLP
P.O. Box 1791 George Town, Grand Cayman Vancouver, BC
Cayman Islands KY1-1109
INVESTOR RELATIONS
STOCK EXCHANGE LISTING DAVID AWRAM
Toronto Stock Exchange: SLW Director, Investor Relations
New York Stock Exchange: SLW Toll-free: 800 380 8687
Email: info@silverwheaton.com
DIRECTORS
Peter Barnes
Lawrence Bell
John Brough
Peter Gillin
Douglas Holtby
Eduardo Luna, Chairman
Wade Nesmith
OFFICERS
PETER BARNES
President and Chief Executive Officer
RANDY SMALLWOOD
Executive Vice President, Corporate Development
NOLAN WATSON
Chief Financial Officer
MICHAEL JOHNSON
Vice President, Legal
FOR FURTHER INFORMATION PLEASE CONTACT:
Silver Wheaton Corp.
David Awram
Director, Investor Relations
1-800-380-8687
Email: info@silverwheaton.com
Website: www.silverwheaton.com
