WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [2] Management’s Discussion and Analysis of Results of Operations and Financial Condition for the Year Ended
Management’s Discussion and Analysis of Results of Operations and Financial Condition for the Year Ended December 31, 2019
This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with Wheaton Precious Metals Corp.’s (“Wheaton” or the “Company”) consolidated financial statements for the year ended December 31, 2019 and related notes thereto which have been prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board (“IASB”). Reference to Wheaton or the Company includes the Company’s wholly-owned subsidiaries. This MD&A contains “forward-looking” statements that are subject to risk factors set out in the cautionary note contained on page 57 of this MD&A as well as throughout this document. All figures are presented in United States dollars unless otherwise noted. This MD&A has been prepared as of March 11, 2020.
Table of Contents
Operational Overview ...................................................................................................................................................... 4 Highlights ......................................................................................................................................................................... 5 Outlook ............................................................................................................................................................................ 6 Mineral Stream Interests .................................................................................................................................................. 7 Mineral Royalty Interest ................................................................................................................................................... 9 Long-Term Equity Investments ...................................................................................................................................... 10 Investment in Associate ................................................................................................................................................. 11 Convertible Notes Receivable ........................................................................................................................................ 12 Summarized Financial Results ...................................................................................................................................... 14 Summary of Ounces Produced ...................................................................................................................................... 15 Summary of Ounces Sold .............................................................................................................................................. 16 Quarterly Financial Review ............................................................................................................................................ 17 Results of Operations and Operational Review ............................................................................................................. 18 Liquidity and Capital Resources..................................................................................................................................... 28 Contractual Obligations and Contingencies ................................................................................................................... 31 Share Capital ................................................................................................................................................................. 34 Financial Instruments ..................................................................................................................................................... 35 Risks and Uncertainties ................................................................................................................................................. 35 Critical Accounting Estimates ........................................................................................................................................ 42 New Accounting Standards Effective in 2019 ................................................................................................................ 44 Non-IFRS Measures ...................................................................................................................................................... 45 Subsequent Events ........................................................................................................................................................ 49 Controls and Procedures ............................................................................................................................................... 49 Attributable Reserves and Resources ............................................................................................................................ 51 Cautionary Note Regarding Forward-Looking Statements ............................................................................................. 57
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [2]
Overview
Wheaton Precious Metals Corp. is a precious metal streaming company which generates its revenue primarily from the sale of precious metals (gold, silver and palladium). The Company is listed on the New York Stock Exchange (“NYSE”) and the Toronto Stock Exchange (“TSX”) and trades under the symbol WPM.
The Company has entered into 23 long-term purchase agreements (three of which are early deposit agreements), with 17 different mining companies, for the purchase of precious metals and cobalt (“precious metal purchase agreements” or "PMPA") relating to 20 mining assets which are currently operating, 9 which are at various stages of development and 1 which has been placed in care and maintenance, located in 11 countries. Pursuant to the PMPAs, Wheaton acquires metal production from the counterparties for an initial upfront payment plus an additional cash payment for each ounce or pound delivered which is fixed by contract, generally at or below the prevailing market price.
Attributable metal production as referred to in this MD&A and financial statements is the metal production to which Wheaton is entitled pursuant to the various PMPAs. During the year ended December 31, 2019, the per ounce price paid by the Company for the metals acquired under the agreements averaged $5.02 for silver, $421 for gold and $273 for palladium. The primary drivers of the Company’s financial results are the volume of metal production at the various mines to which the PMPAs relate and the price realized by Wheaton upon the sale of the metals received.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [3]
Operational Overview
| Q4 2019 | Q4 2018 Change | 2019 | 2018 Change | |||
| Ounces produced Gold Silver Palladium Gold equivalent 2 Silver equivalent 2 Ounces sold Gold Silver Palladium Gold equivalent 2 Silver equivalent 2 Change in PBND 3 Gold Silver Palladium | 107,160 0.1 % 5,499 8.4 % 5,869 3.2 % 180,936 3.3 % 14,701 3.3 % 102,813 (13.2)% 4,400 6.5 % 5,049 5.2 % 162,205 (6.1)% 13,179 (6.1)% (513) (13,804) 169 (239) 611 (98) | 383,974 5.9 % 24,474 (7.8)% 14,686 49.8 % 700,446 1.0 % 56,911 1.0 % 349,168 11.4 % 21,733 (18.5)% 8,717 137.2 % 625,701 0.4 % 50,838 0.4 % 15,464 16,311 (644) (2,006) 5,282 5,693 | ||||
| 107,225 | 406,675 | |||||
| 5,962 | 22,562 | |||||
| 6,057 | 21,993 | |||||
| 186,892 | 707,195 | |||||
| 15,185 | 57,460 | |||||
| 89,223 | 389,086 | |||||
| 4,684 | 17,703 | |||||
| 5,312 | 20,681 | |||||
| 152,389 | 628,447 | |||||
| 12,382 | 51,061 | |||||
| 13,291 | (847) | |||||
| 408 | 1,362 | |||||
| 709 | (411) | |||||
| Per ounce metrics Sales price Gold Silver Palladium Cash costs 4 Gold 4 Silver 4 Palladium 4 Cash operating margin 5 Gold 5 Silver 5 Palladium 5 | $ 1,229 20.7 % $ 14.66 18.4 % $ 1,137 58.7 % $ 409 4.2 % $ 4.66 10.1 % $ 205 56.6 % $ 820 28.9 % $ 10.00 22.3 % $ 932 59.1 % | $ 1,264 10.0 % $ 15.81 3.0 % $ 1,060 45.5 % $ 409 2.9 % $ 4.67 7.5 % $ 190 43.7 % $ 855 13.5 % $ 11.14 1.2 % $ 870 45.8 % | ||||
| $ | 1,483 | $ | 1,391 | |||
| $ | 17.36 | $ | 16.29 | |||
| $ | 1,804 | $ | 1,542 | |||
| $ | 426 | $ | 421 | |||
| $ | 5.13 | $ | 5.02 | |||
| $ | 321 | $ | 273 | |||
| $ | 1,057 | $ | 970 | |||
| $ | 12.23 | $ | 11.27 | |||
| $ | 1,483 | $ | 1,269 | |||
| Total revenue Gold revenue Silver revenue Palladium revenue Net earnings Per share Adjusted net earnings 6 Per share 6 Operating cash flows Per share 7 Dividends paid ⁸ Per share | $ | 223,222 | $ 196,591 13.5 % $ 126,343 4.7 % $ 64,510 26.0 % $ 5,738 67.0 % $ 6,828 1,035 % $ 0.02 750.0 % $ 36,745 112.1 % $ 0.08 110.5 % $ 108,461 21.6 % $ 0.24 20.8 % $ 39,959 0.7 % $ 0.09 0.0 % | $ | 861,332 | $ 794,012 8.5 % $ 441,193 22.6 % $ 343,579 (16.1)% $ 9,240 245.1 % $ 427,115 (79.8)% $ 0.96 (80.2)% $ 213,782 17.9 % $ 0.48 17.2 % $ 477,413 5.1 % $ 1.08 3.7 % $ 159,619 0.6 % $ 0.36 0.0 % |
| $ | 132,342 | $ | 541,045 | |||
| $ | 81,296 | $ | 288,401 | |||
| $ | 9,584 | $ | 31,886 | |||
| $ | 77,524 | $ | 86,138 | |||
| $ | 0.17 | $ | 0.19 | |||
| $ | 77,953 | $ | 251,993 | |||
| $ | 0.17 | $ | 0.56 | |||
| $ | 131,867 | $ | 501,620 | |||
| $ | 0.29 | $ | 1.12 | |||
| $ | 40,252 | $ | 160,656 | |||
| $ | 0.09 | $ | 0.36 |
1) All amounts in thousands except gold and palladium ounces produced and sold, per ounce amounts and per share amounts.
2) Please refer to the tables on the bottom of pages 18, 19, 21 and 22 for further information on the methodology of converting production and sales volumes to gold-equivalent ounces ("GEOs") and silver-equivalent ounces ("SEOs").
3) Represents the increase (decrease) in payable ounces produced but not delivered (“PBND”) relative to the various mines that the Company derives precious metal from. Payable ounces PBND will be recognized in future sales as they are delivered to the Company under the terms of their contracts. Payable ounces PBND to Wheaton is expected to average approximately two to three months of annualized production for both gold and palladium and two months for silver but may vary from quarter to quarter due to a number of factors, including mine ramp-up and the timing of shipments.1
4) Refer to discussion on non-IFRS measure (iii) on page 47 of this MD&A.
5) Refer to discussion on non-IFRS measure (iv) on page 48 of this MD&A.
6) Refer to discussion on non-IFRS measure (i) on page 46 of this MD&A.
7) Refer to discussion on non-IFRS measure (ii) on page 47 of this MD&A.
8) Dividends declared in the referenced calendar quarter, relative to the financial results of the prior quarter.
for material risks, assumptions and important disclosure associated with this information.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [4]
Highlights
Operations
- Relative to the comparable three-month period of the prior year:
- Wheaton generated $132 million in operating cash flow in the fourth quarter of 2019, representing a 22% increase relative to the comparable quarter of the prior year and leading to a reduction in net debt of $91 million.
- the increase in attributable silver production was primarily due to higher grades at Peñasquito.
- the increase in attributable palladium production was a result of higher throughput at Stillwater.
- the increase in adjusted net earnings was primarily due to higher margins resulting from increased realized prices for gold, silver and palladium sales of 21%, 19% and 59%, respectively.
- Relative to the comparable twelve-month period of the prior year:
- Wheaton generated $502 million in operating cash flow during 2019, representing a 5% increase relative to the comparable period of the prior year and leading to a reduction in net debt of $418 million.
- the increase in attributable gold production, which represented a record for the Company, was primarily due to the commencement of the San Dimas gold stream effective May 10, 2018, and the Stillwater precious metals stream effective July 1, 2018, as well as higher production at Sudbury, partially offset by decreased production at Minto which was placed into care and maintenance from October 2018 to October 2019.
- the increase in attributable palladium production was a result of the acquisition of the Stillwater palladium stream effective July 1, 2018.
- the decrease in attributable silver production was primarily due to the termination of the San Dimas silver purchase agreement effective May 10, 2018.
- the decrease in net earnings during the year was a result of a non-cash impairment charge in the amount of $166 million relative to the Company’s Voisey’s Bay PMPA, while during the prior year the Company terminated the previously owned San Dimas silver purchase agreement, resulting in a gain on disposal of $246 million.
- the increase in adjusted net earnings was primarily due to higher margins resulting from increased realized prices for gold, silver and palladium sales of 10%, 3% and 45%, respectively.
- During the fourth quarter ended December 31, 2019, the Company declared dividends in the amount of $40 million. On March 11, 2020, the Board of Directors declared a dividend in the amount of $0.10 per common share representing an increase of 11% relative to the comparable period in 2019.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [5]
Outlook1
Wheaton’s estimated attributable production in 2020 is forecast to be between 685,000 and 725,000 gold equivalent ounces2 comprised of 390,000 to 410,000 gold ounces, 22.0 to 23.5 million silver ounces, and 23,000 to 24,500 palladium ounces. For the five-year period ending in 2024, the Company estimates that average annual gold equivalent production will amount to 750,000 ounces2. As a reminder, Wheaton does not include any production from Barrick’s Pascua-Lama project or Hudbay’s Rosemont project in its estimated average five-year production guidance.
From a liquidity perspective, the $104 million of cash and cash equivalents as at December 31, 2019 combined with the liquidity provided by the available credit under the $2 billion revolving term loan (“Revolving Facility”) and ongoing operating cash flows positions the Company well to fund all outstanding commitments and known contingencies as well as providing flexibility to acquire additional accretive mineral stream interests.
1 Statements made in this section contain forward-looking information with respect to forecast production, funding outstanding commitments and continuing to acquire accretive mineral stream interests and readers are cautioned that actual outcomes may vary. Please see “Cautionary Note Regarding Forward-Looking Statements” for material risks, assumptions and important disclosure associated with this information.
2 Commodity price assumptions for the forecasts of gold equivalent production for 2020 and the five-year average to 2024, are $1,500 / ounce gold, $18 / ounce silver, $2,000 / ounce palladium, and $16 / pound of cobalt.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [6]
Mineral Stream Interests1
The following table summarizes the mineral stream interests currently owned by the Company:
| Per Ounce Mineral Stream Mine Attributable Production Interests Owner ¹ Location¹ Production Payment 2,3 | Cash Flow Ounces Date of Generated to Received to Q4-2019 Original Date ³ Date ³ PBND 3, 4 Term ¹ Contract | |
| Total Upfront | ||
| Payment ³ |
Gold
| Salobo | Vale | BRA | 75% | $404 $ 3,059,360 $ 1,011,604 1,155,018 64,144 | LOM | 28-Feb-13 | ||
| Sudbury⁵ | Vale | CAN | 70% | $400 | 623,572 | 171,080 196,487 18,761 20 years | 28-Feb-13 | |
| Constancia | Hudbay | PER | 50%⁶ | $400 | 135,000 | 58,078 66,335 607 | LOM | 8-Aug-12 |
| San Dimas | FM | MEX | variable⁷ | $600 | 220,000 | 49,300 66,629 3,403 | LOM | 10-May-18 |
| Stillwater⁸ | Sibanye | USA | 100% | variable | 237,880 | 19,770 17,944 5,080 | LOM | 16-Jul-18 |
| Other | 439,442 | 453,082 469,605 6,631 | ||||||
| Minto | PERE | CAN | 100%⁹ | variable | LOM | 20-Nov-08 | ||
| Rosemont | Hudbay | USA | 100% | $450 | LOM | 10-Feb-10 | ||
| 777¹⁰ | Hudbay | CAN | 50% | $416 | LOM | 8-Aug-12 |
$ 4,715,254 $ 1,762,914 1,972,018 98,626
Silver
| Peñasquito | Newmont | MEX | 25% | $4.91 $ 485,000 $ 880,276 52,358 1,734 | LOM | 24-Jul-07 |
| Antamina | Glencore | PER | 33.75%¹¹ | variable 900,000 322,431 24,631 1,195 | LOM | 3-Nov-15 |
| Constancia | Hudbay | PER | 100% | $5.90 294,900 105,461 10,093 88 | LOM | 8-Aug-12 |
| Other | 1,103,708 1,216,371 85,972 1,529 | |||||
| Los Filos | Equinox¹² | MEX | 100% | $4.39 | 25 years | 15-Oct-04 |
| Zinkgruvan | Lundin | SWE | 100% | $4.39 | LOM | 8-Dec-04 |
| Yauliyacu | Glencore | PER | 100%¹³ | $8.89 | LOM | 23-Mar-06 |
| Stratoni | Eldorado | GRC | 100% | $9.31 | LOM | 23-Apr-07 |
| Neves-Corvo | Lundin | PRT | 100% | $4.30 | 50 years | 5-Jun-07 |
| Aljustrel | Almina | PRT | 100%¹⁴ | variable | 50 years | 5-Jun-07 |
| Keno Hill | Alexco | CAN | 25% | variable | LOM | 2-Oct-08 |
| Minto | PERE | CAN | 100% | $4.22 | LOM | 20-Nov-08 |
| Pascua-Lama | Barrick CHL/ARG | 25% | $3.90 | LOM | 8-Sep-09 | |
| Rosemont | Hudbay | USA | 100% | $3.90 | LOM | 10-Feb-10 |
| 777¹⁰ | Hudbay | CAN | 100% | $6.14 | LOM | 8-Aug-12 |
| Navidad | PAAS | ARG | 12.5% | $4.00 | LOM | n/a¹⁵ |
$ 2,783,608 $ 2,524,539 173,054 4,546
Palladium
Stillwater ⁸ Sibanye USA 4.5% ¹⁶ variable $ 262,120 $ 33,815 29,398 4,872 LOM 16-Jul-18
Cobalt
Voisey's Bay Vale CAN 42.4% ¹⁷ variable $ 390,000 $ - - - LOM 11-Jun-18 Total $ 8,150,982 $ 4,321,268
1) Abbreviations as follows: FM = First Majestic Silver Corp; PERE = Pembridge Resources plc; PAAS = Pan American Silver Corp; BRA = Brazil; CAN = Canada; CHL = Chile, PER = Peru; MEX = Mexico; USA = United States; SWE = Sweden; GRC = Greece; PRT = Portugal; ARG = Argentina; and LOM = Life of Mine.
2) The per ounce production payment is either a fixed price per ounce purchased, subject to an annual inflationary adjustment with the exception of Sudbury and Loma de La Plata, or a percentage of the spot price of the applicable metal for each ounce of the applicable metal delivered. Please refer to the section entitled “Contractual Obligations and Contingencies – Mineral Stream Interests” on page 31 of this MD&A for more information.
3) All figures in thousands except gold and palladium ounces received to date, gold and palladium ounces produced but not yet delivered (“PBND”) and per ounce amounts. The total upfront consideration excludes closing costs and capitalized interest, where applicable. Please refer to the section entitled “Other Contractual Obligations and Contingencies” on page 32 of this MD&A for details of when the remaining upfront consideration to be paid becomes due.
4) Payable gold, silver and palladium ounces PBND are based on management estimates. These figures may be updated in future periods as additional information is received.
5) Comprised of the operating Coleman, Copper Cliff, Garson, Creighton and Totten gold interests as well as the non-operating Stobie and Victor gold interests. As of December 31, 2019, the Company has received approximately $171 million of operating cash flows relative to the Sudbury PMPA. Should the market value of gold delivered to Wheaton through the 20 year term of the contract, net of the per ounce cash payment, be lower than the initial $670 million refundable deposit, the Company will be entitled to a refund of the difference at the conclusion of the term.
6) Gold recoveries will be set at 55% for the Constancia deposit and 70% for the Pampacancha deposit until 265,000 ounces of gold have been delivered to the Company. Should Hudbay fail to achieve a minimum level of throughput at the Pampacancha deposit during 2018, 2019 and 2020, Wheaton will be entitled to an additional 8,020 ounces of gold in each of 2019, 2020 and 2021, of which 8,020 ounces of gold was received during 2019.
7) Under the terms of the San Dimas PMPA, the Company is entitled to an amount equal to 25% of the payable gold production plus an additional amount of gold equal to 25% of the payable silver production converted to gold at a fixed gold to silver exchange ratio of 70:1 from the San Dimas mine. If the average gold to silver price ratio decreases to less than 50:1 or increases to more than 90:1 for a period of 6 months or more, then the "70" shall be revised to "50" or "90", as the case may be, until such time as the average gold to silver price ratio is between 50:1 to 90:1 for a period of 6 months or more in which event the "70" shall be reinstated.
8) Comprised of the Stillwater and East Boulder gold and palladium interests.
9) The Company is entitled to acquire 100% of the first 30,000 ounces of gold produced per annum and 50% thereafter.
10) As of December 31, 2019, the Company has received approximately $292 million of operating cash flows relative to the 777 PMPA. Should the market value of gold and silver delivered to Wheaton through the initial 40 year term of the contract, net of the per ounce cash payment, be lower than the initial $455 million upfront consideration, the Company will be entitled to a refund of the difference at the conclusion of the 40 year term.
11) Once Wheaton has received 140 million ounces of silver under the Antamina PMPA, the Company’s attributable silver production to be purchased will be reduced to 22.5%.
12) On March 10, 2020, Leagold Mining Corporation (“Leagold”) and Equinox Gold Corp. (“Equinox”) completed their previously announced plan of arrangement pursuant to which Equinox has acquired all of the issued and outstanding shares of Leagold.
13) Glencore will deliver a per annum amount to Wheaton equal to the first 1.5 million ounces of payable silver produced at Yauliyacu and 50% of any excess.
14) Wheaton only has the rights to silver contained in concentrate containing less than 15% copper at the Aljustrel mine.
15) Wheaton and PAAS have not yet finalized the definitive terms of the agreement.
16) Once the Company has received 375,000 ounces of palladium under the Stillwater agreement, the Company’s attributable palladium production to be purchased will be reduced to 2.25%, and once the Company has received 550,000 ounces of palladium under the agreement, the Company’s attributable palladium production to be purchased will be reduced to 1.00%.
17) Once the Company has received 31 million pounds of cobalt under the Voisey’s Bay agreement, the Company’s attributable cobalt production to be purchased will be reduced to 21.2%.
material risks, assumptions and important disclosure associated with this information.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [7]
Updates Relative to the Mineral Stream Interests
Salobo – Mill Throughput Expansion
The Salobo mine currently has a mill throughput capacity of 24 million tonnes per annum (“Mtpa”). As per Vale S.A.’s (“Vale”) third quarter 2018 report, in October 2018 Vale’s Board of Directors approved the investment in the Salobo III mine expansion (the “Salobo Expansion”). The Salobo Expansion is proposed to include a third concentrator line and will use Salobo’s existing infrastructure. Vale anticipates that the Salobo Expansion, which is scheduled to start up in the first half of 2022, will result in an increase of throughput capacity from 24 Mtpa to 36 Mtpa once fully ramped up.
Minto – Ownership Change
The Minto mine, which was placed into care and maintenance as of October 2018, was sold by Capstone Mining Corp. to Pembridge Resources plc (“Pembridge”) effective June 3, 2019. According to Pembridge’s news release dated October 16, 2019, milling operations at Minto recommenced on October 10, 2019. Pembridge states that the mill will operate on a 2-weeks-on, 2-weeks-off schedule until sufficient development has been achieved underground to enable a higher monthly processing capacity.
In conjunction with the resumption of mining activity at Minto, the Company has amended the Minto PMPA such that the cash payment per ounce of gold delivered will be 75% of the spot price of gold for each ounce of gold delivered under the Minto PMPA. This amended pricing will end on the earlier of (i) 14 months after the first delivery is due; or (ii) once 11,000 ounces of gold have been delivered to the Company.
Peñasquito – Illegal Blockade
On September 15, 2019, Newmont Mining Corporation (“Newmont”) announced that the dialogue sponsored by the government of Mexico to resolve issues with a trucking contractor and the San Juan de Cedros community (one of Peñasquito’s 25 neighboring communities) had been suspended and that an illegal blockade had resumed. On October 22, 2019, Newmont announced that they were starting up production at Peñasquito following the lifting of the illegal blockade on October 8.
On December 13, 2019, Newmont announced that the Peñasquito mine and the San Juan de Cedros community had mutually agreed to an infrastructure solution securing sustainable water availability for the community’s domestic and agricultural uses. Newmont states that the 30-year water agreement, which was developed and signed under the auspices of the Dialogue Table sponsored by Mexico’s Federal Department of the Interior and representatives of the state government of Zacatecas, represents a significant milestone and an important step in the ongoing negotiations between the parties.
Constancia – Pampacancha Update
As per Hudbay Minerals Inc.’s (“Hudbay”) news release dated February 18, 2020, Hudbay secured the surface rights for the Pampacancha deposit and expects to begin mining ore from the satellite deposit in late 2020.
Rosemont – Updates
As per Hudbay’s MD&A for the year ended December 31, 2019, in July 2019, the U.S. District Court for the District of Arizona (“Court”) issued a ruling in two of the lawsuits challenging the U.S. Forest Service’s issuance of the Final Record of Decision (“FROD”) for the Rosemont project in Arizona. Hudbay notes that the Court ruled to vacate and remand the FROD thereby delaying the expected start of construction of Rosemont. Hudbay further reported that in December of 2019, Hudbay and the U.S. Department of Justice each filed a notice of appeal in respect of the Court’s decision to the U.S. Ninth Circuit Court of Appeals. Hudbay reports that on February 10, 2020, the Court issued a ruling in the third lawsuit challenging the U.S. Forest Service's issuance of the FROD for the Rosemont mine. In this lawsuit, the plaintiffs challenged the Biological Opinion that was issued by the U.S. Fish and Wildlife Service and relied on by the U.S. Forest Service as part of the permitting process. The Court ruled to remand certain aspects of the U.S. Fish and Wildlife Service's analysis and findings related to the Biological Opinion back to the agencies for further review. Hudbay has indicated that it believes remanding these issues is unnecessary as the federal agencies’
research and studies concluded that the potential impacts to endangered species would comply with the regulations. Hudbay has also indicated that it is reviewing the decision and will continue following the direction of the government agencies through the permitting process.
As per Hudbay’s annual financial statements for the year ended December 31, 2019, in April 2019, Hudbay entered into an agreement with United Copper & Moly LLC (“UCM”) to purchase UCM’s remaining 7.95% interest in the Rosemont project and to terminate all of UCM’s remaining earn-in and offtake rights. This acquisition provides Hudbay with 100% ownership of the Rosemont project.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [8]
Early Deposit Mineral Stream Interests
Early deposit mineral stream interests represent agreements relative to early stage development projects whereby Wheaton can choose not to proceed with the agreement once certain documentation has been received including, but not limited to, feasibility studies, environmental studies and impact assessment studies. Once Wheaton has elected to proceed with the agreement, the carrying value of the stream will be transferred to Mineral Stream Interests.
The following table summarizes the early deposit mineral stream interests currently owned by the Company:
| Attributable | |||||||||
| Production to be | |||||||||
| Purchased | |||||||||
| Early Deposit | Location | Upfront | Upfront | Total | Date of | ||||
| Mineral Stream | Mine | of | Consideration | Consideration | Upfront | Term of | Original | ||
| Interests | Owner | Mine | Paid to Date 1 | to be Paid 1, 2 | Consideration¹ | Gold | Silver | Agreement | Contract |
| Toroparu | Gold X | Guyana $ | 15,500 $ | 138,000 $ | 153,500 | 10% 50% Life of Mine 11-Nov-13 |
| Cotabambas | Panoro | Peru | 8,500 | 131,500 | 140,000 | 25%³ 100%³Life of Mine 21-Mar-16 |
| Kutcho | Kutcho | Canada 7,000 | 58,000 | 65,000 100%⁴ 100%⁴Life of Mine 14-Dec-17 | ||
| $ 31,000 $ | 327,500 $ | 358,500 |
1) Expressed in thousands of United States dollars; excludes closing costs and capitalized interest, where applicable.
2) Please refer to the section entitled “Other Contractual Obligations and Contingencies” on page 32 of this MD&A for details of when the remaining upfront consideration to be paid becomes due.
3) Once 90 million silver equivalent ounces attributable to Wheaton have been produced, the attributable production to be purchased will decrease to 16.67% of gold production and 66.67% of silver production for the life of mine.
4) Once 51,000 ounces of gold and 5.6 million ounces of silver have been delivered to Wheaton, the stream will decrease to 66.67% of gold and silver production for the life of mine.
Toroparu - Development Update
Gold X Mining Corp. (“Gold X”, previously Sandspring Resources Ltd.), announced results from a Preliminary Economic Assessment (“PEA”) of its Toroparu Gold Project in Guyana (“Toroparu”) in a news release dated June 4, 2019, and subsequently filed the PEA on July 23, 2019. As per the PEA, Toroparu has been re‐scoped to include the Sona Hill satellite deposit, modification of the processing strategy to start with gold‐only production from a Carbon‐in‐ Leach circuit for the initial ten years, and an expansion in year 11 to add flotation processing capacity. In connection with Wheaton’s Toroparu Early Deposit Agreement, Wheaton may elect to pay Gold X an additional upfront payment, payable on an installment basis to partially fund construction of the mine, in return for 10% of the gold and 50% of the silver for the life of the mine. Gold X has indicated that it has estimated revised, lower potential upfront payments from Wheaton as a result of the revised scope of the project, however such revised payments have not been approved by Wheaton.
Mineral Royalty Interest
On August 7, 2014, the Company purchased a 1.5% net smelter return royalty interest (the “Royalty”) in the Metates properties located in Mexico from Chesapeake Gold Corp. (“Chesapeake”) for the life of mine. Under the terms of the agreement, the Company paid total upfront cash consideration of $9 million. In accordance with the terms of the agreement, on August 7, 2019, Chesapeake exercised its option to re-acquire two-thirds of the Royalty, or 1%, for $9 million. As a result, the Company’s Royalty has been reduced to 0.5%. The Company has reflected the transaction as a disposal of two-thirds of its original investment, resulting in a gain on disposal of $3 million. The Company also has a right of first refusal on any silver streaming, royalty or any other transaction on the Metates properties.
To date, no revenue has been recognized and no depletion has been taken with respect to this royalty agreement.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [9]
Long-Term Equity Investments
The Company will, from time to time, invest in securities of companies for strategic purposes including, but not limited to, exploration and mining companies. The Company held the following investments as at December 31, 2019:
Common Shares Held
| (in thousands, except shares owned) | ||||||
|---|---|---|---|---|---|---|
| Fair Value Adjustment Gains | Realized Gain | |||||
| (Losses) Included in OCI | (Loss) on Disposal | |||||
| Percentage of | ||||||
| Outstanding | Three Months | Year | Year | |||
| Shares | Shares | Fair Value at | Ended | Ended | Ended | |
| Owned | Owned | Dec 31, 2019 | Dec 31, 2019 | Dec 31, 2019 | Dec 31, 2019 | |
| Bear Creek Sabina First Majestic Other | ||||||
| 13,264,305 | 12.84% | $ 27,983 | $ 8,151 | $ 17,871 | $ - | |
| 11,700,000 | 3.95% | 17,296 | 2,100 | 6,747 | - | |
| 20,239,590 | 9.73% | 248,137 | 64,160 | 130,346 | 521 | |
| 16,341 | 2,037 | 6,972 | (7,803) | |||
| Total | ||||||
| $ 309,757 | $ 76,448 | $ 161,936 | $ (7,282) |
Fair Value Adjustment Gains Realized Gain (Losses) Included in OCI on Disposal
Three Months Year Year Fair Value at Ended Ended Ended (in thousands) Dec 31, 2018 Dec 31, 2018 Dec 31, 2018 Dec 31, 2018
Bear Creek $ 10,112 $ (3,516) $ (11,247) $ - Sabina 10,549 (297) (10,622) - Arizona Mining - - 20,153 34,061 First Majestic 123,187 4,392 (27,813) - Other 20,905 (4,252) (10,456) -
Total $ 164,753 $ (3,673) $ (39,985) $ 34,061
The Company’s long-term investments in common shares (“LTI’s”) are held for long-term strategic purposes and not for trading purposes. As such, the Company has elected to reflect any fair value adjustments, net of tax, as a component of other comprehensive income (“OCI”). The cumulative gain or loss will not be reclassified to net earnings on disposal of these long-term investments.
While long-term investments in warrants are also held for long-term strategic purposes, they meet the definition of a derivative and therefore are classified as financial assets with fair value adjustments being recorded as a component of net earnings under the classification Other (Income) Expense. Warrants that do not have a quoted market price are 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.
Acquisitions of Long-Term Equity Investments
On May 10, 2018, the San Dimas silver purchase agreement (the “San Dimas SPA”) was terminated and concurrently the Company entered into the new San Dimas PMPA. In connection with the termination of the San Dimas SPA, the Company received 20,914,590 First Majestic common shares with a fair value of $151 million.
On April 25, 2018, the Company made a strategic investment of $1 million by participating in a private placement undertaken by Tradewind Markets, Inc. ("Tradewind"), a financial technology company that uses blockchain to speed up and streamline digital gold and silver trading.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [10]
On July 17, 2018, the Company acquired 7,093,392 common shares of Adventus Zinc Corporation ("Adventus") in a private placement transaction, for total consideration of Cdn$6 million, representing 9.99% of Adventus’ issued and outstanding common shares. Concurrently, the Company paid an additional Cdn$1 million to acquire a right of first refusal on any new streaming or royalty transactions on precious metals on the Adventus existing properties in Ecuador and a right of first offer on any subsequently acquired properties in Ecuador (the “Adventus ROFR”).
On May 17, 2019, the Company acquired an additional 1,371,711 common shares of Adventus in a private placement transaction for total consideration of Cdn$1 million, thus maintaining the Company’s ownership position.
The shares of Tradewind and Adventus have been classified as part of the Other long-term equity investments in this MD&A, while the Adventus ROFR has been classified as a component of Other non-current assets on the Company’s balance sheet.
Disposal of Long-Term Equity Investments
On August 10, 2018, South32 Limited announced that it had completed its acquisition of all the issued and outstanding common shares of Arizona Mining Inc. (“Arizona Mining”), which resulted in a disposition of the Company’s investment in Arizona Mining for total proceeds of $48 million (Cdn$62 million), and a realized gain of $34 million.
During the year ended December 31, 2019, the Company disposed of 675,000 shares of First Majestic reducing its ownership position to under 10% of the issued and outstanding common shares. The Company received total proceeds of $5 million and realized a gain on disposal of $0.5 million.
During the year ended December 31, 2019 the Company disposed of several investments which had been classified as “Other” long-term equity investments as they were no longer considered to have strategic value. The Company received total proceeds of $13 million and realized a loss on disposal of $8 million.
Investment in Associate
Kutcho Copper Corp.
On June 6, 2019, the Company acquired 1 million common shares and warrants to acquire an additional 1 million common shares of Kutcho Copper Corp. (“Kutcho”) for Cdn$0.2 million, resulting in the Company owning 7,153,846 common shares and warrants to acquire an additional 4,076,923 common shares of Kutcho. Additionally, the Company holds a Cdn$20 million subordinated secured convertible term debt loan agreement bearing interest at 10% per annum with Kutcho (the “Kutcho Convertible Note”).
As at December 31, 2019, Kutcho had 68,247,628 shares issued and outstanding, resulting in Wheaton owning approximately 10% of Kutcho on a non-diluted basis. However, as the convertible instruments described above are currently exercisable, on a fully diluted basis, Wheaton has the potential to own approximately 29% of Kutcho (37% on a non-fully diluted basis). As a result of the potential ownership position, the Company has concluded that it has significant influence over Kutcho and as such, the investment in Kutcho is considered an Investment in Associate which is accounted for using the equity method. The Company records its share of Kutcho's profit or loss based on Wheaton’s ownership interest in Kutcho on a non-diluted basis.
Indicator of Impairment
Since the original investment in Kutcho on December 14, 2017, the value of Kutcho’s shares have had a significant decline in value. This decline in value was determined to be an indicator of impairment relative to the Company’s investment in Kutcho.
During the year, the Company recorded an impairment charge of $1.6 million to its recoverable amount of $1 million. The recoverable amount, which represents Kutcho’s fair value less cost of disposal (“FVLCD”), was calculated as the quoted market price of the common share multiplied by the quantity of shares held by the Company, and as such is classified within Level 1 of the fair value hierarchy.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [11]
A continuity schedule of the Kutcho Investment in Associate from January 1, 2018 to December 31, 2019 is presented below:
Investment in (in thousands) Associate
At January 1, 2018 $ 2,994 Share of losses (432) At December 31, 2018 $ 2,562 Amount invested 133 Share of losses (164) Impairment (1,649)
At December 31, 2019 $ 882
Convertible Notes Receivable
Kutcho Copper Corp.
Effective December 14, 2017, in connection with the Kutcho Early Deposit Agreement, the Company advanced to Kutcho $16 million (Cdn$20 million) and received the Kutcho Convertible Note. The Kutcho Convertible Note, which has a seven year term to maturity, carries interest at 10% per annum, compounded and payable semi-annually. Kutcho elected to defer the first three interest payments until December 31, 2019 and, as per an amendment entered into on November 27, 2019, can defer this interest in addition to the fourth interest payment for an additional period not to exceed 4 years. The deferred interest carries interest at 15% per annum, compounded semi-annually. As part of the November 27, 2019 amendment, Wheaton forfeited its option to convert the outstanding deferred interest into common shares of Kutcho.
At any time prior to the maturity date, the Company has the right to convert all or any part of the outstanding amount of the Kutcho Convertible Note, excluding outstanding deferred interest, into common shares of Kutcho at Cdn$0.8125 per share. Kutcho has the right to repay the Kutcho Convertible Note early, subject to the applicable pre-payment cash penalties as follows:
- 25% of the outstanding amount if pre-paid on or after 24 months until 36 months;
- 20% of the outstanding amount if pre-paid on or after 36 months until 60 months; and
- 15% of the outstanding amount if pre-paid on or after 60 months until maturity.
Gold X Mining Corp.
Effective December 24, 2019, in connection with the Toroparu Early Deposit Agreement, the Company advanced $10 million to Gold X as part of a $20 million 10% secured convertible debenture private placement offering completed by Gold X (the “Gold X Convertible Note”). The Gold X Convertible Note, which has a three-year term to maturity, carries interest at 10% per annum, compounded semi-annually and payable annually. Gold X has the option to defer the interest payments until December 4, 2022, being the maturity date. Wheaton can, at its option, convert the deferred interest into common shares of Gold X.
At any time prior to the maturity date, the Company has the right to convert all or any part of the outstanding amount of the Gold X Convertible Note, converted into Canadian dollars using the exchange rate published by the Bank of Canada on the business day prior to the conversion, into common shares of Gold X at Cdn$3.20 per share.
Funds raised under the Gold X 10% secured convertible debenture private placement are intended to be used to exercise Gold X’s option to acquire a 100% interest in certain of Gold X’s joint venture Toroparu project properties.
WHEATON PRECIOUS METALS 2019 ANNUAL REPORT [12]