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Wheaton Precious Metals (NYSE:WPM) Q4 2018 Earnings Conference CallMarch 21, 2019 11:00 a.m. ET
Contents: Prepared Remarks Questions and Answers Call Participants Prepared Remarks:Operator
Good morning, ladies and gentlemen. Thank you for standing by. Welcome to Wheaton Precious Metals year-end 2018 financial results conference call. [Operator instructions] I would like to remind everyone that this conference call is being recorded on Thursday, March 21 at 11 AM Eastern Time.
I will now turn the conference over to Mr. Patrick Drouin, senior vice president of investor relations. Please go ahead.
Patrick Drouin -- Senior Vice President of Investor Relations
Thank you, operator. Good morning, ladies and gentlemen, and thank you for participating in today's call. I'm joined today by Randy Smallwood, Wheaton Precious Metals president and chief executive officer; Gary Brown, senior vice president and chief financial officer; and Haytham Hodaly, senior vice president, Corporate Development. I'd like to bring to your attention that some of commentaries in today's call may contain forward-looking statements.
There can be no assurances that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. In addition to our financial results' cautionary note regarding forward-looking statements, please refer to the sections titled Description of the Business Risk Factors in Wheaton's annual information form and the risks identified under Risks and Uncertainties in Management's Discussion and Analysis, both available on SEDAR and in Wheaton's Form 40-F and Wheaton's Form 6-K, both on file with the U.S. Securities and Exchange Commission. The annual information form, Q4 2018 Management's Discussion and Analysis and the press release from last night set out the material assumptions and risks that could cause actual results to differ, including, among others, fluctuations in the price of commodities, the absence of control over mining operations from which Wheaton purchase its precious metals, risks related to such mining operations and the continued operations of Wheaton's counterparties, risks in estimating cash taxes payable in respect to the 2005 to 2010 taxation years and assessing the impact of the settlement with CRA for years subsequent to 2010.
It should be noted that all figures referred to on today's call are in U.S. dollars unless otherwise noted. In addition, reference to Wheaton or Wheaton Precious Metals on this call will include Wheaton Precious Metals Corp. and/or its wholly owned subsidiaries as applicable.
Now I'd like to turn the call over to Randy Smallwood, our president and chief executive officer.
Randy Smallwood -- President and Chief Executive Officer
Thank you, Patrick, and good morning, ladies and gentlemen. Thank you for dialing into our conference call to discuss our 2018 fourth quarter and year-end results. I am pleased to report that Wheaton Precious Metals had an incredibly successful year on so many fronts. Our high-quality portfolio of low-cost, long-life assets once again delivered solid production results.
During 2018, we produced over 370,000 ounces of gold, 24 million ounces of silver and 14,000 ounces of palladium, all in excess of the company's guidance. Furthermore, annual gold production and sales represented a record. We continued to generate strong operating margins, resulting in sector-leading cash flow of over $475 million in 2018 from revenue of close to $800 million. In addition to our strong production and cash flow, we strengthened our stream on San Dimas, making it more sustainable.
We also completed the largest acquisitions of the year in the streaming space by adding two new high-quality streams to our portfolio, Voisey's Bay and the Stillwater mines. And perhaps most notably, we closed the year by reaching a settlement on our long-standing tax dispute with the Canada Revenue Agency. Our foreign income is not taxable in Canada. So from this firm foundation that 2018 has provided, we look forward to a steady and strong organic growth profile in the coming years.
Before I get to that, I'd like to turn the call over to Gary Brown, one of our senior vice presidents and our chief financial officer, who will provide more details on our results. Gary?
Gary Brown -- Senior Vice President and Chief Financial Officer
Thank you, Randy, and good morning, ladies and gentlemen. The company's precious metal interests produced 107,600 ounces of gold, 5.5 million ounces of silver and 5,900 ounces of palladium in the fourth quarter of 2018. Relative to the fourth quarter of the prior year, this represented an increase of 11% in gold production and a decrease of 23% in silver production, with the decrease in silver production being primarily due to the termination of the San Dimas silver stream effective May 10, 2018, and the expiry of the streams relative to the Lagunas Norte, Veladero and Pierina mines on March 31, 2018. The increase in gold production was due primarily to the new streaming agreements relative to the San Dimas and Stillwater mines, partially offset by lower production at Sudbury and the other gold interests, including Minto, which was placed into care and maintenance in October of 2018.
Sales volumes amounted to 102,800 ounces of gold, 4.4 million ounces of silver and 5,000 ounces of palladium in the fourth quarter of 2018, representing an increase of 9% for gold and a decrease of 40% for silver relative to the fourth quarter of 2017. The increase in gold sales volumes was attributable to the increased production, partially offset by relative changes to payable gold produced but not yet delivered to Wheaton. The decrease in silver sales volumes was attributable to the combination of decreased production, coupled with relative changes to payable silver produced but not yet delivered. As at December 31, 2018, approximately 77,500 payable gold ounces, 3.3 million payable silver ounces and 5,300 payable palladium ounces have been produced but not yet delivered to the company.
We estimate a normal level for payable ounces produced but not delivered to equate to approximately two to three months for gold, two months for silver and three months for palladium, with the balances at December 31 being consistent with these expectations. Revenue for the fourth quarter of 2018 amounted to $197 million, representing a 19% decrease relative to Q4 2017, primarily due to a 40% decrease in the number of silver ounces sold combined with a 12% decrease in the average realized silver price, partially offset by increased gold and palladium sales. Of this revenue, 65% was attributable to gold sales, 32% was attributable to silver sales and 3% was attributable to palladium sales. Gross margin for the fourth quarter of 2018 decreased 32% to $65 million, with the decrease being primarily driven by the decrease in silver-based revenue.
However, it is important to highlight that the cash operating margins continued to be robust at 68% for the quarter, just 3% lower than Q4 2017. By far, the most significant highlight for the fourth quarter of 2018 was the settlement agreement that the company reached with the Canada Revenue Agency, or the CRA, on December 13, 2018. This agreement provides a definitive resolution of Wheaton's tax appeal in connection with the reassessment of the 2005 to 2010 taxation years. As a reminder, under the terms of the settlement, foreign income on earnings generated by Wheaton's wholly owned foreign subsidiaries will not be subject to tax in Canada.
In addition, Wheaton agreed to increase the fees charged by the parent company for the services rendered to its foreign subsidiaries by: first, including the third-party cost incurred by Wheaton directly associated with the raise in capital that was used to fund the investments made by its foreign subsidiaries in precious metal purchase agreements; and secondly, increasing the markup on costs incurred from 20% to 30%. Importantly, subject to there being no material changes in tax or changes in law or jurisprudence, the principles included in this settlement will apply to all taxation years subsequent to 2010, providing clarity on the implications of Canadian taxes to our business model moving forward. As a result of this settlement, we recorded several onetime adjustments in the statement of earnings during the fourth quarter of 2018. Specifically, we have recorded an income tax expense of $20 million, of which $16 million represented a noncash expense.
Additionally, we have reflected interest and penalties totaling $4 million and a onetime success fee relating to legal services rendered in the amount of $5 million. In total, expenses relative to the CRA settlement amounted to $29 million in Q4 2018, with net cash expenses amounting to $13 million, consistent with company guidance. Cash-based G&A expenses amounted to $20 million in the fourth quarter of 2018, representing an increase of $12 million from Q4 2017, with the increase being primarily related to increased accruals relative to the outstanding performance share units, or PSUs, during Q4 2018, coupled with the previously noted onetime success fee of $5 million. Interest costs for the fourth quarter of 2018 amounted to $13 million, resulting in an effective interest rate on outstanding debt of 3.83% as compared to $6 million of interest costs at an effective interest rate of 2.8% incurred in Q4 2017.
After reflecting the impact of the CRA settlement, net earnings amounted to $7 million in the fourth quarter of 2018 compared to a net loss of $138 million in Q4 2017, with the prior year loss reflecting a $229 million impairment taken on the Pascua Lama silver stream. After negating the impact of the CRA settlement for Q4 2018, the impairment charge for Q4 2017 and other items that are nonrecurring in nature, adjusted net earnings in the fourth quarter of 2018 amounted to $37 million, a decrease of $46 million relative to Q4 2017, with the decrease being primarily due to the lower silver sales volumes and prices combined with increased interest costs and PSU charges. Basic adjusted earnings per share decreased to $0.08 compared to $0.19 in the prior year. Operating cash flow for the fourth quarter of 2018 amounted to $108 million or $0.24 per share compared to $165 million or $0.37 per share in the prior year, representing a 35% decrease on a per share basis.
Under the company's dividend policy, the quarterly dividend per common share is targeted to equal approximately 30% of the average cash generated by operating activities over the previous four quarters. To minimize the volatility in quarterly dividend, the company has set a minimum quarterly dividend of $0.09 per common share for the duration of 2019. On this basis, the company's board has declared a dividend of $0.09 a share payable to shareholders of record on April 5, 2019. Under the dividend reinvestment plan, the board has elected to offer shareholders the option of having their dividends reinvested in newly issued common shares of the company at a 3% discount to market.
For the year ended December 31, 2018, gold, silver and palladium production all exceeded company guidance, with gold production representing a record for the company. As anticipated, silver experienced a 14% decrease relative to 2017, with this decrease being the result of the termination of the San Dimas stream and the cessation of deliveries from Lagunas Norte, Veladero and Pierina. This decrease in silver production was partially offset by the introduction of palladium to the company's product mix and a 5% increase in gold production, with the contribution from the new streaming agreements relative to the San Dimas and Stillwater mines being partially offset by lower production at the Sudbury and the other gold interests. Revenue for 2018 amounted to $794 million, representing a 6% decrease relative to 2017.
Of this revenue, 55% was attributable to gold, 44% was attributable to silver and 1% was attributable to palladium, with gold sales volumes of 349,200 ounces representing a record for the company. Gross margin amounted to $296 million, a decrease of 12% relative to 2017, with operating margins decreasing to 37% in 2018 from 40% in 2017 due primarily to lower realized silver prices, partially offset by lower silver depletion rates. Cash-based G&A expenses in 2018 totaled $46 million, representing a $17 million increase relative to 2017, with such increase being primarily related to a $9 million increase in expenses related to PSUs, combined with the $5 million success fee relating to the successful resolution of the company's dispute with the CRA. For 2019, the company estimates that nonstock-based G&A expenses, which excludes expenses relating to the value of stock options and PSUs, will amount to $36 million to $38 million.
Interest costs for 2018 amounted to $36 million, an increase of $11 million relative to 2017, resulting in an effective interest rate on outstanding debt of 3.57%. After neutralizing for the effect of the gain on disposal of the San Dimas silver stream, which was reflected in the second quarter of 2018, the impact of the CRA settlement and for other nonrecurring charges, adjusted net earnings for 2018 amounted to $214 million, representing a 23% decrease from adjusted net earnings for 2017 due primarily to the lower silver sales volumes and prices in 2018, combined with the higher G&A and interest costs. Basic adjusted earnings per share amounted to $0.48 i
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