EX-99.2 3 exhibit99-2.htm EXHIBIT 99.2 Silver Wheaton Corp. - Exhibit 99.2 - Filed by newsfilecorp.com



Management’s Discussion and Analysis of Results of Operations and Financial Condition for the Year Ended December 31, 2012

This Management’s Discussion and Analysis (“MD&A”) should be read in conjunction with Silver Wheaton Corp.’s (“Silver Wheaton” or the “Company”) consolidated financial statements for the year ended December 31, 2012 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”). This MD&A contains “forward looking” statements that are subject to risk factors set out in the cautionary note contained on page 44 of this MD&A. All figures are presented in United States dollars unless otherwise noted. This MD&A has been prepared as of March 21, 2013.

Highlights

  • Record attributable silver equivalent production for the three months and year ended December 31, 2012 of 8.5 million ounces (7.0 million ounces of silver and 26,400 ounces of gold) and 29.6 million ounces (26.9 million ounces of silver and 50,000 ounces of gold), respectively, representing an increase of 22% and 17% over the comparable periods in 2011.

  • Record silver equivalent sales for the three months and year ended December 31, 2012 of 9.1 million ounces (7.3 million ounces of silver and 33,000 ounces of gold) and 27.3 million ounces (24.8 million ounces of silver and 46,100 ounces of gold), respectively, representing an increase of 53% and 30% over the comparable periods in 2011.

  • Record revenue for the three months and year ended December 31, 2012 of $287.2 million and $849.6 million, respectively, compared with $191.9 million and $730.0 million for the comparable periods in 2011, representing an increase of 50% and 16%.

  • Record net earnings for the three months and year ended December 31, 2012 of $177.7 million ($0.50 per share) and $586.0 million ($1.66 per share), respectively, compared with $144.7 million ($0.41 per share) and $550.0 million ($1.56 per share) for the comparable periods in 2011, representing an increase of 23% and 7%.

  • Record operating cash flows for the three months and year ended December 31, 2012 of $254.0 million ($0.72 per share¹) and $719.4 million ($2.03 per share¹), respectively, compared with $163.7 million ($0.46 per share¹) and $626.4 million ($1.77 per share¹) for the comparable periods in 2011, representing an increase of 55% and 15%.

  • Based on operating cash flows generated by the Company during the three months ended December 31, 2012, a dividend of $0.14 per common share has been approved for shareholders of record on April 2, 2013.

  • Average cash costs² for the three months and year ended December 31, 2012 of $4.70 and $4.30 per silver equivalent ounce, respectively, representing an increase of 16% and 5% over the comparable periods in 2011.

  • Cash operating margin³ for the three months and year ended December 31, 2012 of $26.76 and $26.79 per silver equivalent ounce, respectively, representing a decrease of 5% and 12% relative to the comparable periods in 2011.

  • As at December 31, 2012, approximately 3.8 million payable silver equivalent ounces attributable to the Company have been produced at the various mines and will be recognized in future sales as they are delivered to the Company under the terms of their contracts. This represents a decrease of 1.4 million payable silver equivalent ounces during the three month period ended December 31, 2012.

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1

Refer to discussion on non-IFRS measure (i) on page 25 of this MD&A.

2

Refer to discussion on non-IFRS measure (ii) on page 26 of this MD&A.

3

Refer to discussion on non-IFRS measure (iii) on page 27 of this MD&A.

SILVER WHEATON 2012 ANNUAL REPORT [1]


  • As per Barrick Gold Corporation’s (“Barrick”) year end 2012 MD&A, Barrick finalized the cost estimate and schedule for its world-class gold-silver Pascua-Lama project during the fourth quarter. Expected total mine construction capital remains unchanged in the range of $8.0 to $8.5 billion, and includes a contingency of 15% to 20% of remaining capital. First gold production continues to be targeted for the second half of 2014.

  • On September 28, 2012, the Company announced that it had closed the previously announced purchase from HudBay Minerals Inc. ("Hudbay") of 100% of the life of mine silver production from its currently producing 777 mine ("777"), 100% of the life of mine silver production from its Constancia project ("Constancia"), as well as 100% of gold production from the 777 mine until Constancia satisfies a completion test, or the end of 2016, whichever is later. At that point, Silver Wheaton's share of gold production from 777 will be reduced to 50% for the remainder of the mine life.

  • On February 28, 2013, the Company announced that it had entered into a definitive agreement to acquire from Vale S.A. ("Vale") an amount of gold equal to 25% of the life of mine gold production from its Brazilian Salobo mine, as well as 70% of the gold production, for a 20 year term, from certain of its Canadian Sudbury mines.

  • On March 19, 2013, the Company announced that its attributable silver and gold reserves had increased to 851.4 million ounces and 4.96 million ounces, respectively, as a result of organic and acquisition growth, inclusive of the acquisition of gold streams from Vale’s Salobo and Sudbury mines. Based on reserve estimates as at December 31, 20121 , following the Vale transaction, silver equivalent2 reserves attributable to Silver Wheaton have grown to 1.12 billion ounces.

  • On February 28, 2013, the Company entered into two new credit facilities, comprised of (i) a $1 billion revolving credit facility having a 5 year term; and (ii) a $1.5 billion bridge financing facility having a 1 year term, as more fully described in the Subsequent Events section of this MD&A. These facilities replaced the pre-existing $400 million revolving credit facility.

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1

Mineral reserves are reported as of December 31, 2012, other than as disclosed in footnote 6 to the Attributable Reserves and Resources tables on page 42 of this MD&A.

2

Attributable gold reserves have been converted to a silver equivalent basis on the ratio of 53.3:1.

SILVER WHEATON 2012 ANNUAL REPORT [2]



Overview

Silver Wheaton Corp. is a mining company which generates its revenue primarily from the sale of silver and gold. The Company is listed on the New York Stock Exchange and the Toronto Stock Exchange and trades under the symbol SLW. In addition, the Company has share purchase warrants that are listed on the Toronto Stock Exchange and trade under the symbol SLW.WT.U.

To date, the Company has entered into 20 long-term purchase agreements associated with silver and/or gold (“precious metal purchase agreements”), relating to 23 different mining assets, whereby Silver Wheaton acquires silver and gold production from the counterparties for a per ounce cash payment at or below the prevailing market price. Attributable silver and gold as referred to in this MD&A and financial statements is the silver and gold production to which Silver Wheaton is entitled pursuant to the various purchase agreements. During the year ended December 31, 2012, the per ounce price paid by the Company for silver and gold under the agreements averaged $4.06 and $362, respectively. The primary drivers of the Company’s financial results are the volume of silver and gold production at the various mines and the price of silver and gold realized by Silver Wheaton upon sale.

Outlook

Silver Wheaton is the largest precious metals streaming company in the world. Based upon its current agreements, forecast 2013 attributable production is approximately 33.5 million silver equivalent ounces, including 145,000 ounces of gold. By 2017, annual attributable production is anticipated to increase significantly to approximately 53 million silver equivalent ounces, including 180,000 ounces of gold. This growth is driven by the Company’s portfolio of low-cost and long-life assets, including the recently acquired gold streams on Vale’s Salobo and Sudbury mines in addition to silver streams on Barrick’s Pascua-Lama project and Hudbay’s Constancia project.

The $778 million of cash and cash equivalents as at December 31, 2012 combined with the liquidity provided by the $2.5 billion of new credit facilities positions the Company well to fund all outstanding commitments as well as providing flexibility to acquire additional accretive precious metal stream interests.

SILVER WHEATON 2012 ANNUAL REPORT [3]


Silver and Gold Interests

The following table summarizes the silver and gold interests currently owned by the Company:




Silver and Gold
Interests



Mine
Owner



Location of
Mine



Upfront
Consideration 1
Attributable
Production to be
Purchased



Term of
Agreement



Date of
Contract

Silver

Gold
San Dimas Primero 2 Mexico $   189,799 3 100% 2 - Life of Mine 15-Oct-04
Zinkgruvan Lundin Sweden $     77,866   100% - Life of Mine 8-Dec-04
Yauliyacu Glencore Peru $   285,000   100% 4 - 20 years 23-Mar-06
Peñasquito Goldcorp Mexico $   485,000   25% - Life of Mine 24-Jul-07
Minto Capstone Canada $    54,805 5 100% 100% 6 Life of Mine 1-Dec-08
Cozamin Capstone Mexico $    41,959 5 100% - 10 years 4-Apr-07
777 Hudbay Canada $   455,100   100% 100%/50% 7 Life of Mine 8-Aug-12
Salobo Vale Brazil  $ 1,330,000 8 - 25% Life of Mine 28-Feb-13
Sudbury Vale Canada  $   623,572 9 - 70% 20 years 28-Feb-13
Barrick     $   625,000          
   Pascua-Lama Barrick Chile/Argentina   25% - Life of Mine 8-Sep-09
   Lagunas Norte Barrick Peru   100% - 4 years 10 8-Sep-09
   Pierina Barrick Peru   100% - 4 years 10 8-Sep-09
   Veladero Barrick Argentina   100% 11 - 4 years 10 8-Sep-09
Other     $  839,203          
   Los Filos Goldcorp Mexico $     4,463 3 100% - 25 years 15-Oct-04
   Stratoni Eldorado Gold 12 Greece  $   57,500     100% - Life of Mine 23-Apr-07
   Neves-Corvo Lundin Portugal $   35,350 5 100% - 50 years 5-Jun-07
   Aljustrel I'M SGPS Portugal  $     2,451 5   100% - 50 years 5-Jun-07
   Mineral Park Mercator United States  $   42,000     100% - Life of Mine 17-Mar-08
   Campo Morado Nyrstar NV Mexico  $   79,250     75% - Life of Mine 13-May-08
   Keno Hill Alexco Canada   $    50,000     25% - Life of Mine 2-Oct-08
   Rosemont Augusta United States  $ 230,000 13 100% 100% Life of Mine 11-Feb-10
   Loma de La Plata Pan American Argentina  $   43,289 14 12.5% - Life of Mine n/a 15
   Constancia Hudbay Peru  $ 294,900 16 100% - Life of Mine 8-Aug-12

1)

Expressed in United States dollars, rounded to the nearest thousand; excludes closing costs and capitalized interest, where applicable.

2)

Until August 6, 2014, Primero will deliver to Silver Wheaton a per annum amount equal to the first 3.5 million ounces of payable silver produced at San Dimas and 50% of any excess, plus Silver Wheaton will receive an additional 1.5 million ounces of silver per annum to be delivered by Goldcorp. After August 6, 2014, Primero will deliver a per annum amount to Silver Wheaton equal to the first 6 million ounces of payable silver produced at San Dimas and 50% of any excess.

3)

As more fully described in the San Dimas section on page 5 of this MD&A, on August 6, 2010, Goldcorp completed the sale of the San Dimas mine, which was part of the Luismin mining operations (“Luismin”), to Primero. The original cost of Luismin was allocated to San Dimas and Los Filos based on the estimated fair values of these silver interests as at August 6, 2010.

4)

To a maximum of 4.75 million ounces per annum. In the event that silver sold and delivered to Silver Wheaton in any year totals less than 4.75 million ounces, the amount sold and delivered to Silver Wheaton in subsequent years will be increased to make up for any cumulative shortfall, to the extent production permits.

5)

Comprised of the value allocated to the silver and gold interests upon the Company’s acquisition of Silverstone Resources Corp., which was closed on May 21, 2009 (the “Silverstone Acquisition”).

6)

The Company is entitled to acquire 100% of the first 30,000 ounces of gold produced per annum and 50% thereafter.

7)

Silver Wheaton is entitled to acquire 100% of the life of mine gold production from Hudbay’s 777 mine until Hudbay’s Constancia project satisfies a completion test, or the end of 2016, whichever is later. At that point, Silver Wheaton’s share of gold production from 777 will be reduced to 50% for the life of the mine.

8)

Does not include the contingent liability related to the Salobo mine expansion (see the Other Contractual Obligations and Contingencies section of this MD&A).

9)

Comprised of a $570 million upfront cash payment plus warrants to purchase 10 million shares of Silver Wheaton common stock at a strike price of $65, with a term of 10 years.

10)

Barrick will deliver to Silver Wheaton silver production from the currently producing mines until December 31, 2013. In addition, during 2014 and 2015, Silver Wheaton will be entitled to all or a portion of the silver production from these mines to the extent of any production shortfall at Pascua-Lama relative to the completion guarantee provided by Barrick, until such time as the completion guarantee is satisfied.

11)

Silver Wheaton's attributable silver production is subject to a maximum of 8% of the silver contained in the ore mined at Veladero during the period.

12)

95% owned by Eldorado Gold Corporation.

13)

Currently reflected as a contingent obligation, payable on an installment basis to partially fund construction of the Rosemont mine once certain milestones are achieved, including the receipt of key permits and securing the necessary financing to complete construction of the mine.

14)

Comprised of $10.9 million allocated to the silver interest upon the Silverstone Acquisition in addition to a contingent liability of $32.4 million, payable upon the satisfaction of certain conditions, including Pan American receiving all necessary permits to proceed with the mine construction.

15)

Definitive terms of the agreement are in the process of being finalized.

16)

Comprised of $44.9 million which was paid on the closing date, with a further payment of $125 million to be made once $500 million in capital expenditures have been incurred at Constancia, and a final payment of $125 million to be made once $1 billion in capital expenditures have been incurred.

SILVER WHEATON 2012 ANNUAL REPORT [4]



San Dimas

On October 15, 2004, the Company entered into an agreement with Goldcorp Inc. (“Goldcorp”) to acquire an amount equal to 100% 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. The Luismin mining operations consisted primarily of the San Dimas and the Los Filos mines.

On August 6, 2010, Goldcorp completed the sale of the San Dimas mine to Primero Mining Corp. (“Primero”). In conjunction with the sale, Silver Wheaton amended its silver purchase agreement relating to the mine. The term of the agreement, as it relates to San Dimas, was extended to the life of mine. During the first four years following the closing of the transaction, Primero will deliver to Silver Wheaton a per annum amount equal to the first 3.5 million ounces of payable silver produced at San Dimas and 50% of any excess, plus Silver Wheaton will receive an additional 1.5 million ounces of silver per annum to be delivered by Goldcorp. Beginning in the fifth year after closing, Primero will deliver a per annum amount to Silver Wheaton equal to the first 6 million ounces of payable silver produced at San Dimas and 50% of any excess. Goldcorp will continue to guarantee the delivery by Primero of all silver produced and owing to the Company until 2029. Primero has provided Silver Wheaton with a right of first refusal on any metal stream or similar transaction it enters into. During the year ended December 31, 2012, San Dimas produced approximately 1.5 million ounces of payable silver in excess of the 3.5 million ounce threshold, of which Silver Wheaton received 50%.

On October 15, 2012, Primero announced a mine and mill expansion of San Dimas. Primero has elected a staged approach to the full expansion and has approved the expenditure of a total of $14.4 million to expand the San Dimas mine and mill from 2,000 tonnes per day currently to 2,500 tonnes per day. Construction of the mine and mill expansion began in October 2012, with an estimated completion during the first quarter of 2014. A further plant expansion to 3,000 tonnes per day continues to be assessed and is dependent on future exploration success by Primero.

As of December 31, 2012, the Company has received approximately 50.8 million ounces of silver related to San Dimas under the agreement, generating cumulative operating cash flows of approximately $678 million. As at June 30, 2012, the San Dimas mine had proven and probable silver reserves of 35.2 million ounces and inferred silver resources of 66.3 million ounces (as described in the Attributable Reserves and Resources section of this MD&A).

Zinkgruvan

On December 8, 2004, the Company entered into an agreement with Lundin Mining Corporation (“Lundin”) to acquire 100% of the silver produced by Lundin’s Zinkgruvan mining operations in Sweden for the life of mine.

As of December 31, 2012, the Company has received approximately 14.2 million ounces of silver related to the Zinkgruvan mine under the agreement, generating cumulative operating cash flows of approximately $208 million. As at June 30, 2012, the Zinkgruvan mine had proven and probable silver reserves of 34.1 million ounces, measured and indicated silver resources of 19.0 million ounces and inferred silver resources of 12.0 million ounces (as described in the Attributable Reserves and Resources section of this MD&A).

Yauliyacu

On March 23, 2006, the Company entered into an agreement with Glencore International AG (“Glencore”) to acquire an amount equal to 100% of the silver produced from Glencore’s Yauliyacu mining operations in Peru, up to a maximum of 4.75 million ounces per year, for a period of 20 years. In the event that silver sold and delivered to Silver Wheaton in any year totals less than 4.75 million ounces, the amount sold and delivered to Silver Wheaton in subsequent years will be increased to make up for any cumulative shortfall, to the extent production permits. The cumulative shortfall as at March 23, 2012, representing the six year anniversary, was 13.0 million ounces. During the term of the agreement, 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.

Since mid-2009, concentrate shipments from the Yauliyacu mine have been affected by the shut-down of the Doe Run Peru La Oroya smelter, historically the largest buyer of the silver bearing concentrate produced at the mine. Since that time, alternative arrangements have been made by Glencore. As at December 31, 2012, approximately 0.6 million ounces of cumulative payable silver equivalent ounces have been produced at Yauliyacu but not yet delivered to the Company, representing a decrease of 0.6 million payable silver equivalent ounces during the three month period ended December 31, 2012.

SILVER WHEATON 2012 ANNUAL REPORT [5]


As of December 31, 2012, the Company has received approximately 17.9 million ounces of silver related to the Yauliyacu mine under the agreement, generating cumulative operating cash flows of approximately $266 million. As at December 31, 2012, the Yauliyacu mine had proven and probable silver reserves of 12.7 million ounces and measured and indicated silver resources of 39.7 million ounces (as described in the Attributable Reserves and Resources section of this MD&A).

Peñasquito

On July 24, 2007, the Company entered into an agreement with Goldcorp to acquire an amount equal to 25% of the silver produced from Goldcorp’s Peñasquito mining operations in Mexico for the life of mine.

As stated in Goldcorp’s January 7, 2013 press release, the Peñasquito mine achieved throughput of 98,800 tonnes per day during the fourth quarter of 2012, which is expected to increase to 105,000 tonnes per day in 2013 as Goldcorp brings additional water wells into production within the Cedros Basin in addition to new dewatering wells within the Chile Colorado pit. A water and tailings study to develop a comprehensive long-term water strategy for the Peñasquito district is underway and Goldcorp expects this study to be completed during the first half of 2013.

As at December 31, 2012, approximately 1.3 million ounces of cumulative payable silver equivalent ounces have been produced at Peñasquito but not yet delivered to the Company, representing a decrease of 0.3 million payable silver equivalent ounces during the three month period ended December 31, 2012.

As of December 31, 2012, the Company has received approximately 14.0 million ounces of silver related to the Peñasquito mine under the agreement, generating cumulative operating cash flows of approximately $350 million. As at December 31, 2012, the Company’s 25% share of the Peñasquito proven and probable silver reserves was 227.9 million ounces, measured and indicated silver resources was 63.1 million ounces and inferred silver resources was 9.9 million ounces (as described in the Attributable Reserves and Resources section of this MD&A).

Minto

On May 21, 2009, the Company completed the acquisition of Silverstone Resources Corp. (the “Silverstone Acquisition”). As part of the Silverstone Acquisition, the Company acquired a precious metals purchase agreement with Capstone Mining Corp. (“Capstone”) to acquire 100% of the silver and gold produced (subject to certain thresholds) from Capstone’s Minto mine in Canada for the life of mine. The Company is entitled to acquire 100% of all the silver produced and 100% of the first 30,000 ounces of gold produced per annum and 50% thereafter. The silver production, sales and related costs associated with this agreement are reflected in this MD&A and financial statements as part of Other mines.

As of December 31, 2012, the Company has received approximately 0.6 million ounces of silver and 79,000 ounces of gold related to the Minto mine under the agreement, generating cumulative operating cash flows of approximately $98 million. As at December 31, 2011, Minto had proven and probable reserves of 1.8 million ounces of silver and 220,000 ounces of gold, measured and indicated resources of 3.9 million ounces of silver and 380,000 ounces of gold and inferred resources of 0.8 million ounces of silver and 70,000 ounces of gold (as described in the Attributable Reserves and Resources section of this MD&A).

Cozamin

As part of the Silverstone Acquisition, the Company acquired a silver purchase agreement with Capstone to acquire 100% of the silver produced from Capstone’s Cozamin mine in Mexico for a period of 10 years, commencing on April 4, 2007.

As of December 31, 2012, the Company has received approximately 5.1 million ounces of silver related to the Cozamin mine under the agreement, generating cumulative operating cash flows of approximately $116 million. As at December 31, 2011, the Company's share of the Cozamin proven and probable silver reserves was 9.8 million ounces (as described in the Attributable Reserves and Resources section of this MD&A).

SILVER WHEATON 2012 ANNUAL REPORT [6]


Barrick

On September 8, 2009, the Company entered into an agreement with Barrick to acquire an amount equal to 25% of the life of mine silver production from its Pascua-Lama project which is located in Chile and Argentina, as well as 100% of the silver production from its Lagunas Norte mine and Pierina mine, which are both located in Peru, and its Veladero1 mine which is located in Argentina (collectively referred to as the “Barrick mines”) until the end of 2013.

Barrick has provided Silver Wheaton with a completion guarantee, requiring Barrick to complete Pascua-Lama to at least 75% of design capacity by December 31, 2015. During 2014 and 2015, Silver Wheaton will be entitled to the silver production from the currently producing mines to the extent of any production shortfall at Pascua-Lama, until Barrick satisfies the completion guarantee. If the requirements of the completion guarantee have not been satisfied by December 31, 2015, the agreement may be terminated by Silver Wheaton. In such an event, Silver Wheaton will be entitled to the return of the upfront cash consideration of $625 million less a credit for silver delivered up to the date of that event.

As per Barrick’s year end 2012 MD&A, during the fourth quarter of 2012 Barrick finalized the cost estimate and schedule for its Pascua-Lama project. The total pre-production capital budget of $8.0 to $8.5 billion, of which $4.2 billion has been spent as at December 31, 2012, remains unchanged and includes a contingency of 15% to 20% of the remaining capital costs. As of December 31, 2012 construction was approximately 40% complete with first gold production continuing to be targeted for the second half of 2014. The four kilometer long tunnel which conveys the ore from Chile to Argentina was approximately 70% complete. Construction of the primary crusher in Chile commenced in January 2013 and in Argentina, construction of the process plant facility advanced with approximately 60 percent of structural steel erected. Once in production, Pascua-Lama is forecast to be one of the largest and lowest cost gold mines in the world with an expected mine life in excess of 25 years. In its first full five years of operation, Silver Wheaton’s silver production attributable to Pascua-Lama is expected to average 9 million ounces annually.

As of December 31, 2012, the Company has received approximately 8.9 million ounces of silver related to the Barrick mines under the agreement, generating cumulative operating cash flows of approximately $211 million. As at December 31, 2012, the Company’s 25% share of the Pascua-Lama proven and probable silver reserves was 169.1 million ounces, measured and indicated silver resources was 46.3 million ounces and inferred silver resources was 4.0 million ounces (as described in the Attributable Reserves and Resources section of this MD&A). In addition, the Company’s estimated share of the proven and probable silver reserves contained in the Lagunas Norte, Pierina, and Veladero mines is 33.9 million ounces.

Update on Matters Relating to Project Development

  i.

Argentine Glacier Legislation and Constitutional Litigation

     
 

In November 2010, a federal glacier protection law came into force that bans new mining exploration and exploitation activities on glaciers and in the “peri-glacial” environment, and subjects ongoing mining activities to an environmental audit. If such an audit identifies significant impacts on glaciers and the peri-glacial environment, the relevant authority is empowered to take action, which, according to the legislation, could include the suspension or relocation of the activity. In the case of the Veladero mine and the Pascua-Lama project, the competent authority is the Province of San Juan. In late January 2013, the Province of San Juan announced that it had completed the required environmental audit, which concluded that Veladero and Pascua-Lama do not impact glaciers or peri-glaciers.

     
 

On July 3, 2012, the Supreme Court of Argentina overturned temporary injunctions granted by the Federal Court in San Juan suspending the application of the federal law in the Province and in particular to Veladero and Pascua-Lama. The Supreme Court has not yet ruled on the constitutionality of the law.

     
  ii.

Pascua-Lama Constitutional Protection Actions

     
 

In September and October, 2012, two constitutional rights protection actions were filed in the Court of Appeals of Copiapo, Chile by representatives of indigenous communities and certain other individuals against Compania Minera Nevada (“CMN”), Barrick’s Chilean subsidiary that holds the Chilean portion of the Pascua-Lama project, and the Environmental Evaluation Commission (“EEC”) of the III Region of Atacama, Chile, the regulatory body with oversight authority over the Pascua-Lama project.

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1

Silver Wheaton's attributable silver production is subject to a maximum of 8% of the silver contained in the ore mined at Veladero during the period.

SILVER WHEATON 2012 ANNUAL REPORT [7]




 

The plaintiffs in the actions allege, among other matters, that the construction of the Pascua-Lama project affects their constitutional rights to life and to live in an environment free of contamination. The relief sought in the actions is the suspension of the construction of the Pascua-Lama project in Chile until all environmental obligations are fulfilled. Both cases have been admitted for review by the Court, with the first action proceeding toward a hearing. Barrick has stated that the outcome of the regulatory process related to these actions is uncertain but that it intends to vigorously defend itself against these actions.

     
  iii.

Dust Related Health and Safety Concerns

     
 

As per Barrick’s year-end 2012 MD&A, during the fourth quarter of 2012, after observing increased dust in the open pit area, exacerbated by stronger than normal winds, Barrick voluntarily halted pre-stripping activities at the Pascua-Lama project in order to implement additional dust mitigation and control measures. Regulatory authorities in Chile subsequently issued an order to suspend pre-stripping activities until dust-related health and safety concerns are addressed. Barrick has stated that the Pascua-Lama project is strengthening dust mitigation and control measures, including enhanced tunnel ventilation, revised blasting fragmentation, use of more robust protective equipment and a robust dust monitoring system. Barrick has also indicated that further restrictions may be placed on the Pascua-Lama project due to the need to repair and improve certain aspects of the water management system in Chile, and that pre-stripping is unlikely to recommence until matters related to dust and water management are resolved. Barrick has stated that to date, the suspension of pre-stripping has not altered Barrick’s target of first production in the second half of 2014. However, the outcomes of the regulatory processes related to dust and water management, and of the constitutional rights protection actions (see above) is uncertain and Barrick has stated that they will continue to assess the potential for impacts on the timing of first production.

777

On August 8, 2012, the Company entered into an agreement with Hudbay to acquire an amount equal to 100% of the life of mine silver and gold production from its currently producing 777 mine, located in Canada. Silver Wheaton’s share of gold production at 777 will remain at 100% until the later of the end of 2016 or the satisfaction of a completion test relating to Hudbay’s Constancia project, after which it will be reduced to 50% for the remainder of the mine life. Silver Wheaton made an upfront cash payment of $455.1 million on the closing date of September 28, 2012 and, in addition, will make ongoing payments of the lesser of $5.90 per ounce of silver and $400 per ounce of gold (both subject to an inflationary adjustment of 1% beginning in the fourth year) or the prevailing market price per ounce of silver and gold delivered. Hudbay has granted Silver Wheaton a right of first refusal on any future streaming agreement, royalty agreement, or similar transaction related to the production of silver or gold from 777. The silver production, sales and related costs associated with this agreement are reflected in this MD&A and financial statements as part of Other mines.

As of December 31, 2012, the Company has received approximately 0.3 million ounces of silver and 28,000 ounces of gold related to the 777 mine under the agreement, generating cumulative operating cash flows of approximately $49 million. As at December 31, 2011, the Company's share of 777's proven and probable reserves was 10.9 million ounces of silver and 600,000 ounces of gold and inferred resources was 1.5 million ounces of silver and 40,000 ounces of gold (as described in the Attributable Reserves and Resources section of this MD&A).

Salobo

On February 28, 2013, the Company entered into an agreement to acquire from Vale an amount of gold equal to 25% of the life of mine gold production from its currently producing Salobo mine, located in Brazil. Silver Wheaton made a total upfront cash payment of $1.33 billion on March 12, 2013 and, in addition, will make ongoing payments of the lesser of $400 per ounce of gold (subject to an inflationary adjustment of 1% beginning in the fourth year) or the prevailing market price per ounce of gold delivered.

Vale is in the process of expanding the mill throughput capacity at the Salobo mine to 24 million tonnes per annum (“Mtpa”) from its current 12 Mtpa. If the expansion to 24 Mtpa is not completed by December 31, 2016, Silver Wheaton would be entitled to a gross up (a temporary increased percentage of gold production) based on the pro-rata achievement of the target production. If throughput capacity is expanded above 28 Mtpa within a predetermined period, Silver Wheaton will be required to make an additional payment to Vale based on a set fee schedule ranging from $67 million up to $400 million, dependent on the timing and scale of any expansion.

As at December 31, 2012, the Company's 25% share of the Salobo proven and probable gold reserves was 3.4 million ounces, measured and indicated gold resources was 770,000 ounces and inferred gold resources was 370,000 ounces (as described in the Attributable Reserves and Resources section of this MD&A).

SILVER WHEATON 2012 ANNUAL REPORT [8]


Sudbury

On February 28, 2013, the Company entered into an agreement to acquire from Vale an amount of gold equal to 70% of the gold production from certain of its currently producing Sudbury mines located in Canada, including the Coleman mine, Copper Cliff mine, Garson mine, Stobie mine, Creighton mine, Totten mine and the Victor project (the “Sudbury mines”) for a period of 20 years. Silver Wheaton made a total upfront cash payment on March 12, 2013 of $570 million plus warrants to purchase 10 million shares of Silver Wheaton common stock at a strike price of $65, with a term of 10 years. In addition, Silver Wheaton will make ongoing payments of the lesser of $400 per ounce of gold or the prevailing market price per ounce of gold delivered.

As at December 31, 2011, the Company's 70% share of the Sudbury mines proven and probable gold reserves was 750,000 ounces, measured and indicated gold resources was 250,000 ounces and inferred gold resources was 400,000 ounces (as described in the Attributable Reserves and Resources section of this MD&A).

Other

Other silver and gold interests consist of the following:

  i.

As part of the agreement with Goldcorp to acquire silver from the Luismin mining operations, on October 15, 2004, the Company entered into an agreement with Goldcorp to acquire 100% of the silver production from its Los Filos mine in Mexico for a period of 25 years, commencing October 15, 2004. In addition, pursuant to Goldcorp’s sale of the San Dimas mine, Goldcorp is obligated to deliver to Silver Wheaton 1.5 million ounces of silver per year until August 6, 2014, which is reflected in this MD&A and financial statements as part of the silver production and sales relating to San Dimas;

     
  ii.

On April 23, 2007, the Company entered into an agreement with European Goldfields Limited, which was acquired by Eldorado Gold Corporation (“Eldorado Gold”) on February 24, 2012, to acquire 100% of the life of mine silver production from its 95% owned Stratoni mine in Greece;

     
  iii.

As part of the Silverstone Acquisition, the Company acquired an agreement with Lundin to acquire 100% of the silver production from its Neves-Corvo mine in Portugal for a period of 50 years, commencing June 5, 2007;

     
  iv.

As part of the Silverstone Acquisition, the Company acquired an agreement with I’M SGPS to acquire 100% of the silver production from its Aljustrel mine in Portugal for a period of 50 years, commencing June 5, 2007;

     
  v.

On March 17, 2008, the Company entered into an agreement with Mercator Minerals Ltd.1 (“Mercator”) to acquire an amount equal to 100% of the life of mine silver production from its Mineral Park mine in the United States;

     
  vi.

On May 13, 2008, the Company entered into an agreement with Farallon Mining Ltd., which was acquired by Nyrstar NV on January 5, 2011, to acquire an amount equal to 75% of the life of mine silver production from its Campo Morado mine in Mexico;

     
  vii.

On October 2, 2008, the Company entered into an agreement with Alexco Resource Corp. (“Alexco”) to acquire an amount equal to 25% of the life of mine silver production from its Keno Hill silver district in Canada, including the currently producing Bellekeno mine;

     
  viii.

On February 11, 2010, the Company entered into an agreement with Augusta Resource Corporation (“Augusta”) to acquire an amount equal to 100% of the life of mine silver and gold production from the Rosemont Copper project in the United States. The Company is committed to pay Augusta total upfront cash payments of $230 million, payable on an installment basis to partially fund construction of the Rosemont mine once certain milestones are achieved, including the receipt of key permits and securing the necessary financing to complete construction of the mine;

_______________________________
1

The Company has entered into a non-binding letter of intent with Mercator to amend the Mineral Park silver purchase agreement. Once signed, Mercator will have the right to exercise an option at any time until August 31, 2014 to defer delivery of up to 50% of the required silver deliveries for one year. All deferred silver will be delivered in equal installments over 18 months after the one year deferral period. Mercator will compensate Silver Wheaton for any shortfall arising from a decrease in the silver spot price at the time of the original delivery date until the date of actual delivery, including a 12% annualized interest rate. The amendment will also grant Silver Wheaton a right of first refusal on any future precious metals streams relating to the El Creston project.

SILVER WHEATON 2012 ANNUAL REPORT [9]




  ix.

As part of the Silverstone Acquisition, the Company acquired an agreement with Aquiline Resources Inc., which was acquired by Pan American Silver Corp. (“Pan American”) on December 22, 2009, to acquire an amount equal to 12.5% of the life of mine silver production from the Loma de La Plata zone of the Navidad project in Argentina, the definitive terms of which are in the process of being finalized. The Company is committed to pay Pan American total upfront cash payments of $32.4 million following the satisfaction of certain conditions, including Pan American receiving all necessary permits to proceed with the mine construction; and

     
  x.

On August 8, 2012, the Company entered into an agreement with Hudbay to acquire an amount equal to 100% of the life of mine silver production from the Constancia project in Peru. Silver Wheaton will pay Hudbay total cash consideration of $294.9 million, of which $44.9 million was paid on the closing date of September 28, 2012, with two further payments of $125 million to be made once capital expenditures of $500 million and $1 billion have been incurred at Constancia. In addition, Silver Wheaton will make ongoing payments of the lesser of $5.90 per ounce of silver (subject to an inflationary adjustment of 1% beginning in the fourth year) or the prevailing market price per ounce of silver delivered. If the Constancia processing plant fails to achieve at least 90% of expected throughput and recovery by December 31, 2020, Silver Wheaton would be entitled to a proportionate return of the $250 million upfront cash consideration relating to Constancia. Hudbay has granted Silver Wheaton a right of first refusal on any future streaming agreement, royalty agreement, or similar transaction related to the production of silver from Constancia.

As of December 31, 2012, the Company has received approximately 15.0 million ounces of silver under these agreements, generating cumulative operating cash flows of approximately $300 million.

As at December 31, 20121, unless otherwise noted, these silver and gold interests had proven and probable silver reserves of 316.0 million ounces, measured and indicated silver resources of 357.2 million ounces and inferred silver resources of 200.1 million ounces (as described in the Attributable Reserves and Resources section of this MD&A).

Long-Term Investments

The Company will, from time to time, invest in securities of publicly listed mining companies for strategic purposes. The Company held the following investments as at December 31, 2012:

    December 31     December 31  
(in thousands)   2012     2011  
Common shares held $  118,683   $  149,039  
Warrants held   2,694     2,582  
  $  121,377   $  151,621  
_______________________________
1

Mineral reserves and mineral resources are reported as of December 31, 2012, other than as disclosed in footnote 6 to the Attributable Reserves and Resources tables on page 42 of this MD&A.

SILVER WHEATON 2012 ANNUAL REPORT [10]



Common Shares Held

          Three Months              
          Ended     Year Ended     Year Ended  
    Dec 31 2012     Dec 31 2012     Dec 31 2012     Dec 31 2012  
                         
          Fair Value Adjustment Losses     Realized Gain  
(in thousands)   Fair Value     Included in OCI     on Disposal  
Bear Creek $  44,130   $  (5,896 ) $  (2,041 ) $  -  
Revett   14,824     (4,092 )   (9,747 )   -  
Sabina   31,164     (7,848 )   (13,013 )   -  
Other   28,565     (10,239 )   (6,333 )   -  
  $  118,683   $  (28,075 ) $  (31,134 ) $  -  

          Three Months              
          Ended     Year Ended     Year Ended  
    Dec 31 2011     Dec 31 2011     Dec 31 2011     Dec 31 2011  
                         
          Fair Value Adjustment Gains     Realized Gain on  
(in thousands)   Fair Value     (Losses) Included in OCI     Disposal  
Bear Creek $  46,171   $  (4,389 ) $  (80,524 ) $  -  
Revett   23,793     4,092     (1,043 )   -  
Sabina   44,177     11,067     (21,817 )   -  
Other   34,898     (78 )   (15,730 )   4,532  
  $  149,039   $  10,692   $  (119,114 ) $  4,532  

Warrants Held

          Three Months              
          Ended     Year Ended     Year Ended  
    Dec 31 2012     Dec 31 2012     Dec 31 2012     Dec 31 2012  
                         
          Fair Value Adjustment (Losses)     Realized Loss on  
(in thousands)   Fair Value     Gains Included in Net Earnings     Disposal  
Revett $  -   $  -   $  (357 ) $  -  
Other   2,694     (1,441 )   853     -  
  $  2,694   $  (1,441 ) $  496   $  -  

SILVER WHEATON 2012 ANNUAL REPORT [11]




          Three Months              
          Ended     Year Ended     Year Ended  
    Dec 31 2011     Dec 31 2011     Dec 31 2011     Dec 31 2011  
                         
          Fair Value Adjustment Gains        
          (Losses) Included in     Realized Loss  
(in thousands)   Fair Value     Net Earnings     on Disposal  
                         
Revett $  741   $  188   $  (55 ) $  -  
Other   1,841     74     (3,063 )   (16 )
                         
  $  2,582   $  262   $  (3,118 ) $  (16 )

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 as a component of other comprehensive income (“OCI”).

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 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.

During the three months and year ended December 31, 2012, the value of the Company’s LTI’s decreased by $28.1 million and $31.1 million, respectively. As a result of this decrease, the deferred tax liability attributable to the LTI’s was reduced and the Company recorded a deferred income tax recovery in OCI of $1.8 million and $2.5 million for the three months and year ended December 31, 2012, respectively. The reduction in the deferred tax liability attributable to the LTI’s resulted in the reversal of previously recognized deferred income tax assets which increased the deferred income tax expense reflected in net earnings.

Bear Creek

At December 31, 2012, Silver Wheaton owned approximately 13.3 million (December 31, 2011 – 13.3 million) common shares of Bear Creek Mining Corporation (“Bear Creek”), representing approximately 14% (December 31, 2011 – 14%) of the outstanding shares of Bear Creek. At December 31, 2012, the fair value of the Company’s investment in Bear Creek was $44.1 million (December 31, 2011 - $46.2 million).

During the year ended December 31, 2011, the value of the Company’s investment in Bear Creek declined by approximately $80.5 million. The value of this investment was adversely affected by an action by the Peruvian government relating to Bear Creek’s title over the mineral concessions covering the Santa Ana project. While the Santa Ana project remains an important asset for Bear Creek, Silver Wheaton’s strategic focus related to its investment in Bear Creek is the Corani project, which is proceeding towards permitting.

Revett

At December 31, 2012, Silver Wheaton owned 5.3 million common shares (December 31, 2011 – 5.0 million common shares and common share purchase warrants exercisable to acquire an additional 0.3 million common shares) of Revett Minerals Inc. (“Revett”), representing approximately 15% (December 31, 2011 – 16%) of the outstanding shares of Revett. During the year ended December 31, 2012, the Company acquired 0.3 million common shares of Revett from the exercise of 0.3 million Revett warrants for total consideration of $0.4 million. At December 31, 2012, the fair value of the Company’s investment in Revett was $14.8 million (December 31, 2011 - $24.5 million).

SILVER WHEATON 2012 ANNUAL REPORT [12]


Sabina

At December 31, 2012, Silver Wheaton owned 11.7 million (December 31, 2011 - 11.7 million) common shares of Sabina Gold & Silver Corp. ("Sabina"), representing approximately 7% (December 31, 2011 - 7%) of the outstanding shares of Sabina. At December 31, 2012, the fair value of the Company's investment in Sabina was $31.2 million (December 31, 2011 - $44.2 million).

Other

At December 31, 2012, Silver Wheaton owned common shares and common share purchase warrants of several other publicly traded mineral exploration, development and mining companies. As Silver Wheaton's investment represents less than 10% of the outstanding shares of each of the respective companies and is not considered material to Silver Wheaton's overall financial position, these investments have been reflected in this MD&A and financial statements as part of Other long-term investments.

During the year ended December 31, 2011, the Company acquired, by way of private placement, 10 million common shares of Wildcat Silver Corporation for total consideration of Cdn$13.0 million ($13.7 million). In addition, Silver Wheaton sold its investment of 1.8 million common shares of Ventana Gold Corp. ("Ventana") for proceeds of Cdn$23.5 million ($24.3 million) after the successful acquisition of Ventana by AUX Canada, resulting in a realized gain of $4.5 million.

At December 31, 2012, the fair value of the Other long-term investments was $31.3 million (December 31, 2011 - $36.7 million).

SILVER WHEATON 2012 ANNUAL REPORT [13]


Summarized Financial Results

    Years Ended December 31  
    2012     2011     2010  
Silver equivalent production 1                  
         Attributable silver ounces produced (000’s)   26,894     24,557     21,984  
         Attributable gold ounces produced   50,039     18,436     28,795  
         Attributable silver equivalent ounces produced (000’s) 1   29,571     25,374     23,758  
Silver equivalent sales 1                  
         Silver ounces sold (000’s)   24,850     20,247     18,878  
         Gold ounces sold   46,094     18,256     25,884  
         Silver equivalent ounces sold (000’s) 1   27,328     21,069     20,483  
Average realized price ($'s per ounce)                  
         Average realized silver price $  31.03   $  34.60   $  20.75  
         Average realized gold price $  1,701   $  1,609   $  1,224  
         Average realized silver equivalent price 1 $  31.09   $  34.65   $  20.67  
Average cash cost ($'s per ounce) 2                  
         Average silver cash cost $  4.06   $  3.99   $  3.97  
         Average gold cash cost $  362   $  300   $  300  
         Average silver equivalent cash cost 1 $  4.30   $  4.09   $  4.04  
Total revenue ($000's) $  849,560   $  729,997   $  423,353  
Net earnings ($000's) $  586,036   $  550,028   $  153,381  
Add back - loss on fair value adjustment of Canadian dollar share purchase warrants issued   -     -     133,210  
Adjusted net earnings 3 ($000's) $  586,036   $  550,028   $  286,591  
Earnings per share                  
         Basic $  1.66   $  1.56   $  0.45  
         Diluted $  1.65   $  1.55   $  0.44  
Adjusted earnings per share 3                  
         Basic $  1.66   $  1.56   $  0.83  
         Diluted $  1.65   $  1.55   $  0.83  
Cash flow from operations ($000's) $  719,404   $  626,427   $  319,726  
Dividends                  
         Dividends paid ($000's) $  123,852   $  63,612   $  -  
         Dividends paid per share $  0.35   $  0.18   $  -  
Total assets ($000's) $  3,189,337   $  2,872,335   $  2,635,383  
Total non-current financial liabilities ($000’s) $  23,555   $  50,424   $  200,966  
Shareholders' equity ($000's) $  3,107,074   $  2,654,217   $  2,261,949  

1)

Gold ounces produced and sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both gold and silver.

2)

Refer to discussion on non-IFRS measure (ii) on page 26 of this MD&A.

3)

Refer to discussion on non-IFRS measure (iv) on page 27 of this MD&A.

SILVER WHEATON 2012 ANNUAL REPORT [14]



Summary of Ounces Produced and Sold

          2012                 2011        
(in thousands)   Q4     Q3     Q2     Q1     Q4     Q3     Q2     Q1  
Silver ounces produced¹                                                
San Dimas²   1,694     1,288     1,231     1,692     1,578     1,251     1,150     1,606  
Zinkgruvan   566     621     673     642     390     379     414     508  
Yauliyacu   616     640     606     550     583     608     674     683  
Peñasquito   1,445     1,940     1,822     1,365     1,633     1,162     1,282     1,207  
Cozamin   372     370     429     405     433     395     414     325  
Barrick³   934     627     468     667     723     794     741     722  
Other4   1,407     1,260     1,276     1,288     1,389     1,272     1,153     1,088  
    7,034     6,746     6,505     6,609     6,729     5,861     5,828     6,139  
Silver equivalent ounces of gold produced 5                                
Minto   373     337     189     107     202     257     261     97  
777   1,059     6126     -     -     -     -     -     -  
Silver equivalent ounces produced 5   8,466     7,695     6,694     6,716     6,931     6,118     6,089     6,236  
                                                 
Silver ounces sold                                                
San Dimas²   1,629     1,178     1,295     1,701     1,488     1,232     1,149     1,748  
Zinkgruvan   532     495     580     517     425     319     401     321  
Yauliyacu   1,097     184     1,155     497     655     11     471     120  
Peñasquito   1,642     1,304     1,845     1,189     851     1,382     961     941  
Cozamin   406     301     395     376     374     335     281     271  
Barrick ³   826     528     470     656     755     747     726     680  
Other4   1,215     796     1,049     992     1,230     770     862     741  
    7,347     4,786     6,789     5,928     5,778     4,796     4,851     4,822  
Silver equivalent ounces of gold sold 5                                
Minto   268     357     139     198     196     316     227     83  
777   1,516     -     -     -     -     -     -     -  
Silver equivalent ounces sold 5   9,131     5,143     6,928     6,126     5,974     5,112     5,078     4,905  
                                                 
Gold / silver ratio 5   54.1     51.7     58.7     51.2     51.9     50.4     40.1     33.0  
Cumulative payable silver equivalent ounces produced but not yet delivered 7   3,824     5,195     3,212     4,166     4,127     3,805     3,537     3,018  

1)

Ounces produced represent the quantity of silver and gold contained in concentrate or doré prior to smelting or refining deductions. Production figures are based on information provided by the operators of the mining operations to which the silver or gold interests relate or management estimates in those situations where other information is not available. Certain production figures may be updated in future periods as additional information is received. The Company has been informed that reported production related to the Yauliyacu mine may have been overstated by a total of approximately 200,000 ounces for all or some portion of the period between April 1, 2011 and June 30, 2012. The required adjustments to production, if any, related to the Yauliyacu mine for these periods will be made once management completes a review of the timing and amount of any production variance.

2)

The ounces produced and sold include ounces received from Goldcorp in connection with Goldcorp’s four year commitment to deliver to Silver Wheaton 1.5 million ounces of silver per annum resulting from their sale of San Dimas to Primero.

3)

Comprised of the Lagunas Norte, Pierina and Veladero silver interests.

4)

Comprised of the Los Filos, Mineral Park, Neves-Corvo, Stratoni, Keno Hill, Minto, 777, Aljustrel and Campo Morado silver interests.

5)

Gold ounces produced and sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both gold and silver.

6)

Represents production for the period August 8, 2012 to September 30, 2012.

7)

Based on management estimates.

SILVER WHEATON 2012 ANNUAL REPORT [15]



Quarterly Financial Review

          2012                 2011        
    Q4     Q3     Q2     Q1     Q4     Q3     Q2     Q1  
Total silver ounces sold (000's)   7,347     4,786     6,789     5,928     5,778     4,796     4,851     4,822  
Average realized silver price1 $  31.47   $  31.16   $  29.12   $  32.58   $  32.09   $  36.44   $  38.38   $  32.00  
Silver sales (000's) $  231,226   $  149,086   $  197,694   $  193,162   $  185,401   $  174,733   $  186,191   $  154,304  
Total gold ounces sold   32,960     6,905     2,369     3,860     3,777     6,280     5,674     2,524  
Average realized gold price1 $  1,699   $  1,765   $  1,568   $  1,678   $  1,712   $  1,666   $  1,509   $  1,537  
Gold sales (000's) $  56,015   $  12,187   $  3,714   $  6,476   $  6,466   $  10,462   $  8,561   $  3,879  
Total silver equivalent                                                
   ounces sold (000's) 2   9,131     5,143     6,928     6,126     5,974     5,112     5,078     4,905  
Average realized silver equivalent price 1, 2 $  31.46   $  31.36   $  29.07   $  32.59   $  32.12   $  36.23   $  38.35   $  32.24  
Total sales (000's) $  287,241   $  161,273   $  201,408   $  199,638   $  191,867   $  185,195   $  194,752   $  158,183  
Average cash cost, silver 1, 3 $  4.12   $  4.04   $  4.04   $  4.02   $  4.01   $  3.99   $  3.98   $  3.98  
Average cash cost, gold 1, 3 $  386   $  303   $  303   $  303   $  301   $  300   $  300   $  300  
Average cash cost, silver equivalent 1, 2, 3 $  4.70   $  4.16   $  4.06   $  4.08   $  4.06   $  4.12   $  4.14   $  4.07  
Net earnings (000's) $  177,744   $  119,697   $  141,414   $  147,181   $  144,747   $  135,040   $  148,065   $  122,176  
Earnings per share                                                
   Basic $  0.50   $  0.34   $  0.40   $  0.42   $  0.41   $  0.38   $  0.42   $  0.35  
   Diluted $  0.50   $  0.34   $  0.40   $  0.41   $  0.41   $  0.38   $  0.42   $  0.34  
Cash flow from operations (000's) $  254,026   $  128,651   $  172,916   $  163,811   $  163,714   $  167,236   $  168,281   $  127,196  
Cash flow from operations per share 4                                
   Basic $  0.72   $  0.36   $  0.49   $  0.46   $  0.46   $  0.47   $  0.48   $  0.36  
   Diluted $  0.71   $  0.36   $  0.49   $  0.46   $  0.46   $  0.47   $  0.47   $  0.36  
Dividends                                                
   Dividends declared (000's) $  24,806   $  35,388   $  31,829   $  31,829 5   $  31,814   $  10,603   $  10,599   $  10,595  
   Dividends declared per share $  0.07   $  0.10   $  0.09   $  0.09   $  0.09   $  0.03   $  0.03   $  0.03  
Total assets (000's) $  3,189,337   $  3,046,564   $  3,056,825   $  3,005,839   $  2,872,335   $  2,760,675   $  2,807,346   $  2,757,065  
Total liabilities (000's) $  82,263   $  71,076   $  212,147   $  242,873   $  218,118   $  229,676   $  359,544   $  363,131  
Total shareholders' equity (000's) $  3,107,074   $  2,975,488   $  2,844,678   $  2,762,966   $  2,654,217   $  2,530,999   $  2,447,802   $  2,393,934  

1)

Expressed as United States dollars per ounce.

2)

Gold ounces sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both gold and silver.

3)

Refer to discussion on non-IFRS measure (ii) on page 26 of this MD&A.

4)

Refer to discussion on non-IFRS measure (i) on page 25 of this MD&A.

5)

On March 22, 2012, the Company declared dividends of $0.09 per common share for total dividends of $31.8 million, which was paid on April 17, 2012.

Changes in sales, net earnings and cash flow from operations from quarter to quarter are affected primarily by fluctuations in production at the mines, the timing of shipments, changes in the price of silver, as well as acquisitions of precious metal purchase agreements and the commencement of operations of mines under construction.

SILVER WHEATON 2012 ANNUAL REPORT [16]


Results of Operations and Operational Review

The Company currently has ten business segments: the silver produced by the San Dimas, Zinkgruvan, Yauliyacu, Peñasquito, Cozamin, Barrick and Other mines, the gold produced by the Minto and 777 mines and corporate operations.

Three Months Ended December 31, 2012  
                    Average        Average                               
                      Realized     Cash     Average                    
                      Price     Cost     Depletion           Cash Flow        
    Ounces     Ounces           ($'s Per     ($'s Per     ($'s Per     Net     From        
    Produced²     Sold     Sales     Ounce)     Ounce) 3     Ounce)     Earnings     Operations     Total Assets  
Silver                                                      
   San Dimas 4   1,694     1,629   $  52,080   $  31.97   $  4.13   $  0.79   $  44,059   $  45,351   $  162,936  
   Zinkgruvan   566     532     16,485     30.99     4.15     1.68     13,387     16,668     54,075  
   Yauliyacu   616     1,097     30,753     28.03     4.08     5.02     20,773     32,106     215,295  
   Peñasquito   1,445     1,642     53,697     32.71     3.99     2.96     42,287     47,147     487,272  
   Cozamin   372     406     13,109     32.25     4.12     4.05     9,790     11,873     19,135  
   Barrick 5   934     826     26,920     32.59     3.90     4.34     20,112     23,561     597,736  
   Other 6   1,407     1,215     38,182     31.43     4.43     6.29     25,167     33,296     381,467  
    7,034     7,347   $  231,226   $  31.47   $  4.12   $  3.46   $  175,575   $  210,002   $  1,917,916  
Gold                                                      
   Minto   6,785     4,876   $  8,247   $  1,691   $  303   $  171   $  5,937   $  8,052   $  30,586  
   777   19,615     28,084     47,768     1,701     400     773     14,813     40,507     332,732  
    26,400     32,960   $  56,015   $  1,699   $  386   $  684   $  20,750   $  48,559   $  363,318  
Silver equivalent 7   8,466     9,131   $  287,241   $  31.46   $  4.70   $  5.25   $  196,325   $  258,561   $  2,281,234  
Corporate                                                      
   General and administrative                                     $  (9,159 )            
   Other                                       (9,422 )            
Total corporate                                     $  (18,581 ) $  (4,535 ) $  908,103  
    8,466     9,131   $  287,241   $  31.46   $  4.70   $  5.25   $  177,744   $  254,026   $  3,189,337  

1)

All figures in thousands except gold ounces produced and sold and per ounce amounts.

2)

Ounces produced represent the quantity of silver and gold contained in concentrate or doré prior to smelting or refining deductions. Production figures are based on information provided by the operators of the mining operations to which the silver or gold interests relate or management estimates in those situations where other information is not available. Certain production figures may be updated in future periods as additional information is received.

3)

Refer to discussion on non-IFRS measure (ii) on page 26 of this MD&A.

4)

Results for San Dimas include 375,000 ounces received from Goldcorp in connection with Goldcorp’s four year commitment to deliver to Silver Wheaton 1.5 million ounces of silver per annum resulting from their sale of San Dimas to Primero.

5)

Comprised of the operating Lagunas Norte, Pierina and Veladero silver interests in addition to the non-operating Pascua-Lama silver interest.

6)

Comprised of the operating Los Filos, Keno Hill, Mineral Park, Neves-Corvo, Stratoni, Campo Morado, Minto, 777 and Aljustrel silver interests in addition to the non-operating Rosemont silver and gold interest and Loma de La Plata and Constancia silver interests.

7)

Gold ounces produced and sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both gold and silver.

SILVER WHEATON 2012 ANNUAL REPORT [17]




                                  Three Months Ended December 31, 2011  
                    Average     Average                           
                      Realized     Cash     Average                    
                      Price     Cost     Depletion           Cash Flow        
    Ounces     Ounces           ($'s Per     ($'s Per       ($'s Per       Net     From        
    Produced 2     Sold     Sales     Ounce)     Ounce) 3     Ounce)     Earnings     Operations     Total Assets  
Silver                                                      
   San Dimas 4   1,578     1,488   $  44,641   $  30.00   $  4.09   $  0.71   $  37,494   $  38,551   $  167,527  
   Zinkgruvan   390     425     13,537     31.87     4.10     1.69     11,077     14,061     57,639  
   Yauliyacu   583     655     22,270     34.00     4.02     5.02     16,350     19,637     230,012  
   Peñasquito   1,633     851     27,374     32.17     3.96     2.41     21,954     24,004     504,973  
   Cozamin   433     374     12,786     34.18     4.08     4.62     9,531     10,260     25,115  
   Barrick 5   723     755     24,673     32.67     3.90     3.60     19,008     21,728     601,085  
   Other 6   1,389     1,230     40,120     32.63     3.94     4.22     30,089     36,301     251,716  
    6,729     5,778   $  185,401   $  32.09   $  4.01   $  2.90   $  145,503   $  164,542   $  1,838,067  
Gold                                                      
   Minto   3,891     3,777     6,466     1,712     301     169     4,689     6,314     33,659  
Silver equivalent 7   6,931     5,974   $  191,867   $  32.12   $  4.06   $  2.91   $  150,192   $  170,856   $  1,871,726  
Corporate                                                      
   General and administrative                                     $  (6,115 )            
   Other                                       670              
Total corporate                                     $  (5,445 ) $  (7,142 ) $  1,000,609  
    6,931     5,974   $  191,867   $  32.12   $  4.06   $  2.91   $  144,747   $  163,714   $  2,872,335  

1)

All figures in thousands except gold ounces produced and sold and per ounce amounts.

2)

Ounces produced represent the quantity of silver and gold contained in concentrate or doré prior to smelting or refining deductions. Production figures are based on information provided by the operators of the mining operations to which the silver or gold interests relate or management estimates in those situations where other information is not available. Certain production figures may be updated in future periods as additional information is received.

3)

Refer to discussion on non-IFRS measure (ii) on page 26 of this MD&A.

4)

Results for San Dimas include 375,000 ounces received from Goldcorp in connection with Goldcorp’s four year commitment to deliver to Silver Wheaton 1.5 million ounces of silver per annum resulting from their sale of San Dimas to Primero.

5)

Comprised of the operating Lagunas Norte, Pierina and Veladero silver interests in addition to the non-operating Pascua-Lama silver interest.

6)

Comprised of the operating Los Filos, Keno Hill, Mineral Park, Neves-Corvo, Stratoni, Campo Morado, Minto and Aljustrel silver interests in addition to the non-operating Rosemont silver and gold interest and Loma de La Plata silver interest.

7)

Gold ounces produced and sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both gold and silver.

For the three months ended December 31, 2012, attributable silver equivalent production was 8.5 million ounces (7.0 million ounces of silver and 26,400 ounces of gold), compared with 6.9 million ounces (6.7 million ounces of silver and 3,900 ounces of gold) for the comparable period in 2011, with the variance being primarily attributable to the following factors:

  • 1.1 million silver equivalent ounces of gold production from the 777 mine;

  • 176,000 ounce (45%) increase related to the Zinkgruvan mine, achieved primarily through higher recoveries;

  • 211,000 ounce (29%) increase related to the Barrick mines, primarily related to higher grades and recoveries at the Veladero mine; partially offset by

  • 188,000 ounce (12%) reduction related to the Peñasquito mine, primarily due to lower grades.

SILVER WHEATON 2012 ANNUAL REPORT [18]


For the three months ended December 31, 2012, net earnings and cash flow from operations were $177.7 million and $254.0 million, respectively, compared with $144.7 million and $163.7 million for the comparable period in 2011, with the variance in net earnings being primarily attributable to the following factors:

 

$17.7 million increase due to a 22% increase in payable silver equivalent ounces produced during the three months ended December 31, 2012, primarily attributable to:


  i.

$10.0 million increase related to gold production at the 777 mine; and

     
  ii.

$5.6 million increase related to a 29% increase in payable silver production at the Barrick mines; and


  $32.7 million increase as a result of the timing of shipments of stockpiled concentrate and doré, primarily attributable to the following factors:

  i.

$4.8 million increase relating to gold at the 777 mine;

     
  ii.

$25.1 million increase relating to the Peñasquito mine;

     
  iii.

$10.0 million increase relating to the Yauliyacu mine; partially offset by

     
  iv.

$4.8 million decrease relating to Other mines; partially offset by


 

$6.2 million decrease due to a reduction in the operating margin per ounce due primarily to a higher cost per silver equivalent ounce sold; and

   

 

$13.1 million decrease as a result of an increase in corporate costs, as explained in the Corporate Costs section of this MD&A ($2.6 million decrease from a cash flow perspective).


SILVER WHEATON 2012 ANNUAL REPORT [19]



                                  Year Ended December 31, 2012  
                    Average       Average                          
                      Realized     Cash     Average                    
                      Price     Cost     Depletion           Cash Flow        
    Ounces     Ounces           ($'s Per     ($'s Per      ($'s Per      Net     From        
    Produced 2     Sold     Sales     Ounce)     Ounce) 3     Ounce)     Earnings     Operations     Total Assets  
Silver                                                      
   San Dimas 4   5,905     5,803   $  181,906   $  31.35   $  4.11   $  0.79   $  153,469   $  158,060   $  162,936  
   Zinkgruvan   2,502     2,124     65,914     31.03     4.14     1.68     53,553     55,855     54,075  
   Yauliyacu   2,412     2,933     86,185     29.38     4.07     5.02     59,531     80,077     215,295  
   Peñasquito   6,572     5,980     186,085     31.12     3.99     2.96     144,524     162,225     487,272  
   Cozamin   1,576     1,478     46,601     31.54     4.11     4.05     34,552     40,143     19,135  
   Barrick 5   2,696     2,480     78,359     31.60     3.90     4.34     57,926     69,504     597,736  
   Other 6   5,231     4,052     126,118     31.12     4.10     4.72     90,381     108,208     381,467  
    26,894     24,850   $  771,168   $  31.03   $  4.06   $  3.08   $  593,936   $  674,072   $  1,917,916  
Gold                                                      
   Minto   18,600     18,010   $  30,624   $  1,700   $  303   $  171   $  22,094   $  25,059   $  30,586  
   777   31,439     28,084     47,768     1,701     400     773     14,812     40,507     332,732  
    50,039     46,094   $  78,392   $  1,701   $  362   $  538   $  36,906   $  65,566   $  363,318  
Silver equivalent 7   29,571     27,328   $  849,560   $  31.09   $  4.30   $  3.70   $  630,842   $  739,638   $  2,281,234  
Corporate                                                      
   General and administrative                                     $  (30,839 )            
   Other                                       (13,967 )            
Total corporate                                     $  (44,806 ) $  (20,234 ) $  908,103  
    29,571     27,328   $  849,560   $  31.09   $  4.30   $  3.70   $  586,036   $  719,404   $  3,189,337  

1)

All figures in thousands except gold ounces produced and sold and per ounce amounts.

2)

Ounces produced represent the quantity of silver and gold contained in concentrate or doré prior to smelting or refining deductions. Production figures are based on information provided by the operators of the mining operations to which the silver or gold interests relate or management estimates in those situations where other information is not available. Certain production figures may be updated in future periods as additional information is received.

3)

Refer to discussion on non-IFRS measure (ii) on page 26 of this MD&A.

4)

Results for San Dimas include 1.5 million ounces received from Goldcorp in connection with Goldcorp’s four year commitment to deliver to Silver Wheaton 1.5 million ounces of silver per annum resulting from their sale of San Dimas to Primero.

5)

Comprised of the operating Lagunas Norte, Pierina and Veladero silver interests in addition to the non-operating Pascua-Lama silver interest.

6)

Comprised of the operating Los Filos, Keno Hill, Mineral Park, Neves-Corvo, Stratoni, Campo Morado, Minto, 777 and Aljustrel silver interests in addition to the non-operating Rosemont silver and gold interest and Loma de La Plata and Constancia silver interests.

7)

Gold ounces produced and sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both gold and silver.


SILVER WHEATON 2012 ANNUAL REPORT [20]



                                        Year Ended December 31, 2011  
                    Average     Average                          
                      Realized     Cash     Average                    
                      Price     Cost     Depletion           Cash Flow        
    Ounces     Ounces           ($'s Per     ($'s Per       ($'s Per       Net     From        
    Produced 2     Sold     Sales     Ounce)      Ounce) 3     Ounce)     Earnings     Operations     Total Assets  
Silver                                                      
   San Dimas 4   5,585     5,617   $  188,377   $  33.54   $  4.06   $  0.71   $  161,554   $  164,453   $  167,527  
   Zinkgruvan   1,691     1,466     52,974     36.14     4.08     1.69     44,503     49,377     57,639  
   Yauliyacu   2,548     1,257     43,911     34.93     4.02     5.02     32,555     38,863     230,012  
   Peñasquito   5,284     4,135     143,069     34.61     3.93     2.41     116,855     126,812     504,973  
   Cozamin   1,567     1,261     43,990     34.85     4.07     4.62     33,018     40,586     25,115  
   Barrick 5   2,980     2,908     102,454     35.23     3.90     3.58     80,692     89,554     601,085  
   Other 6   4,902     3,603     125,854     34.93     3.94     4.27     96,298     112,414     251,716  
    24,557     20,247   $  700,629   $  34.60   $  3.99   $  2.69   $  565,475   $  622,059   $  1,838,067  
Gold                                                      
   Minto   18,436     18,256     29,368     1,609     300     169     20,799     24,240     33,659  
Silver equivalent 7   25,374     21,069   $  729,997   $  34.65   $  4.09   $  2.73   $  586,274   $  646,299   $  1,871,726  
Corporate                                                      
   General and administrative                                     $  (25,180 )            
   Other                                       (11,066 )            
Total corporate                                     $  (36,246 ) $  (19,872 ) $  1,000,609  
    25,374     21,069   $  729,997   $  34.65   $  4.09   $  2.73   $  550,028   $  626,427   $  2,872,335  

1)

All figures in thousands except gold ounces produced and sold and per ounce amounts.

2)

Ounces produced represent the quantity of silver and gold contained in concentrate or doré prior to smelting or refining deductions. Production figures are based on information provided by the operators of the mining operations to which the silver or gold interests relate or management estimates in those situations where other information is not available. Certain production figures may be updated in future periods as additional information is received.

3)

Refer to discussion on non-IFRS measure (ii) on page 26 of this MD&A.

4)

Results for San Dimas include 1.5 million ounces received from Goldcorp in connection with Goldcorp’s four year commitment to deliver to Silver Wheaton 1.5 million ounces of silver per annum resulting from their sale of San Dimas to Primero.

5)

Comprised of the operating Lagunas Norte, Pierina and Veladero silver interests in addition to the non-operating Pascua-Lama silver interest.

6)

Comprised of the operating Los Filos, Keno Hill, Mineral Park, Neves-Corvo, Stratoni, Campo Morado, Minto and Aljustrel silver interests in addition to the non-operating Rosemont silver and gold interest and Loma de La Plata silver interest.

7)

Gold ounces produced and sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both gold and silver.

For the year ended December 31, 2012, attributable silver equivalent production was 29.6 million ounces (26.9 million ounces of silver and 50,000 ounces of gold), compared with 25.4 million ounces (24.6 million ounces of silver and 18,400 ounces of gold) for the comparable period in 2011, with the variance being primarily attributable to the following factors:

  • 1.7 million silver equivalent ounces of gold production from the 777 mine;

  • 810,000 ounce (48%) increase related to the Zinkgruvan mine, achieved through higher grades and recoveries; and

  • 1.3 million ounce (25%) increase related to the Peñasquito mine reflecting the ramping up of milling operations, including the successful commissioning of the high pressure grinding circuit during the three month period ended June 30, 2012.

SILVER WHEATON 2012 ANNUAL REPORT [21]


For the year ended December 31, 2012, net earnings and cash flow from operations were $586.0 million and $719.4 million, respectively, compared with $550.0 million and $626.4 million for the comparable period in 2011, with the variance in net earnings being primarily attributable to the following factors:

 

$70.8 million increase due to a 17% increase in payable silver equivalent ounces produced during the year ended December 31, 2012, primarily attributable to:

       
  i.

$16.1 million increase related to gold production at the 777 mine;

       
  ii.

$20.3 million increase relating to a 48% increase in payable silver production at the Zinkgruvan mine;

       
  iii.

$32.3 million increase related to a 24% increase in payable silver production at the Peñasquito mine; and


 

$58.9 million increase as a result of the timing of shipments of stockpiled concentrate and doré, primarily attributable to a $46.3 million increase due to Yauliyacu having made alternate arrangements to sell its bulk concentrates, resulting in a more consistent delivery schedule during the year; partially offset by

   

 

$91.9 million decrease as a result of a 12% decrease in the average earnings from operations on a per ounce basis, driven primarily by a 10% decrease in the average realized selling price in addition to the Company paying a higher per ounce cost on its recently acquired 777 silver and gold interest in comparison to the per ounce cost paid related to silver and gold interests acquired in the past; and

   

 

$8.6 million decrease as a result of an increase in corporate costs, as explained in the Corporate Costs section of this MD&A ($0.4 million increase from a cash flow perspective).

Corporate Costs

    Three Months Ended     Years Ended  
    December 31     December 31  
(in thousands)   2012     2011     2012     2011  
General and administrative $  9,159   $  6,115   $  30,839   $  25,180  
Foreign exchange loss (gain)   (57 )   65     29     (453 )
Other (income) expense   1,335     (345 )   (817 )   3,182  
Income tax expense (recovery)   8,144     (390 )   14,755     8,337  
Total corporate costs $  18,581   $  5,445   $  44,806   $  36,246  

For the three months and year ended December 31, 2012, corporate costs increased by $13.1 million and $8.6 million, respectively, relative to the comparable periods in the previous year.

SILVER WHEATON 2012 ANNUAL REPORT [22]


General and Administrative

    Three Months Ended     Years Ended  
    December 31     December 31  
(in thousands)   2012     2011     2012     2011  
Salaries and benefits                        
   Salaries and benefits, excluding PSUs $  3,663   $  1,819   $  10,173   $  8,036  
   PSUs   472     36     1,685     377  
Total salaries and benefits $  4,135   $  1,855   $  11,858   $  8,413  
Depreciation   49     61     228     261  
Charitable donations   649     422     1,857     1,208  
Professional fees   840     611     2,981     2,313  
Other   1,914     1,607     7,495     6,656  
Cash settled general and administrative $  7,587   $  4,556   $  24,419   $  18,851  
Equity settled stock based compensation (a non-cash expense)   1,572     1,559     6,420     6,329  
Total general and administrative $  9,159   $  6,115   $  30,839   $  25,180  

For the three months and year ended December 31, 2012, general and administrative costs increased by $3.0 million and $5.7 million, respectively, as compared to the comparable periods of the prior year. This increase was primarily due to increased compensation costs, including the fair value adjustment of the Company’s performance share units (“PSUs”) as more fully described in Note 14.1 to the financial statements.

Other (Income) Expense

    Three Months Ended     Years Ended  
    December 31     December 31  
(in thousands)   2012     2011     2012     2011  
Dividend income $  (23 ) $  (11 ) $  (80 ) $  (57 )
Interest income   (238 )   (348 )   (1,222 )   (983 )
Stand-by fees   214     214     897     850  
Loss (gain) on long-term investments - share purchase warrants held   1,441     (262 )   (496 )   3,118  
Other   (59 )   62     84     254  
Total other (income) expense $  1,335   $  (345 ) $  (817 ) $  3,182  

During the three months ended December 31, 2012, other expense was $1.3 million as compared to other income of $0.3 million during the comparable period of the previous year. This was primarily the result of a $1.4 million unrealized loss related to the fair value adjustment in warrants held during the current period as compared to a $0.3 million unrealized gain during the comparable period of the previous year.

During the year ended December 31, 2012, other income was $0.8 million as compared to other expense of $3.2 million during the previous year. This was primarily the result of a $0.5 million unrealized gain related to the fair value adjustment in warrants held during the current period as compared to a $3.1 million unrealized loss during the previous year.

The Company incurred interest costs of $7.4 million during the year ended December 31, 2012, of which $6.7 million represents accreted interest on the payments due in relation to the Barrick silver interest, with the remainder being attributable to interest on bank debt. All of the interest costs incurred during 2012 have been capitalized in relation to the Barrick and Constancia silver interests. During the year ended December 31, 2011, the Company incurred interest costs of $16.2 million, of which $15.2 million represents accreted interest on the payments due in relation to the Barrick silver interest, with the remainder being attributable to interest on bank debt. All of the interest costs incurred during the year ended December 31, 2011 were capitalized in relation to the Barrick silver interest.

SILVER WHEATON 2012 ANNUAL REPORT [23]


Income Tax Expense (Recovery)

    Three Months Ended     Years Ended  
    December 31     December 31  
(in thousands)   2012     2011     2012     2011  
                         
Current income tax expense related to foreign jurisdictions $  40   $  150   $  724   $  762  
Deferred income tax expense (recovery) related to:                        
       Origination and reversal of temporary differences ¹ $  6,159   $  1,518   $  11,615   $  3,578  
       Write down (reversal of write down) of previously
            recognized temporary differences
  1,945     (2,058 )   2,416     3,997  
  $  8,104   $  (540 ) $  14,031   $  7,575  
Total income tax expense (recovery) $  8,144   $  (390 ) $  14,755   $  8,337  

1)

Primarily related to income from Canadian operations.

For the three months and year ended December 31, 2012, income tax expense increased by $8.5 million and $6.4 million, respectively, relative to the comparable periods of the prior year. This increase was primarily due to an increase in deferred income tax expense associated with income from Canadian operations and the change in deferred income tax assets recognized which is primarily affected by the change in unrealized gains in long-term investments in common shares held.

SILVER WHEATON 2012 ANNUAL REPORT [24]


Non-IFRS Measures

Silver Wheaton has included, throughout this document, certain non-IFRS performance measures, including (i) operating cash flow per share (basic and diluted); (ii) average cash costs of silver and gold on a per ounce basis; (iii) cash operating margin; and (iv) adjusted net earnings and adjusted net earnings per share.

  i.

Operating cash flow per share (basic and diluted) is calculated by dividing cash generated by operating activities by the weighted average number of shares outstanding (basic and diluted). The Company presents operating cash flow per share as it believes that certain investors use this information to evaluate the Company’s performance in comparison to other companies in the precious metals mining industry who present results on a similar basis.

     
 

The following table provides a reconciliation of operating cash flow per share (basic and diluted).


      Three Months Ended     Years Ended  
      December 31     December 31  
  (in thousands, except for per share amounts)   2012     2011     2012     2011  
  Cash generated by operating activities $  254,026   $  163,714   $  719,404   $  626,427  
  Divided by:                        
     Basic weighted average number of shares
              outstanding
  354,301     353,497     353,874     353,249  
     Diluted weighted average number of shares
              outstanding
  356,566     355,797     356,008     355,904  
  Equals:                        
     Operating cash flow per share - basic $  0.72   $  0.46   $  2.03   $  1.77  
     Operating cash flow per share - diluted $  0.71   $  0.46   $  2.02   $  1.76  

SILVER WHEATON 2012 ANNUAL REPORT [25]



  ii.

Average cash cost of silver and gold on a per ounce basis is calculated by dividing the total cost of sales, less depletion, by the ounces sold. In the precious metals mining industry, this is a common performance measure but does not have any standardized meaning. The Company believes that, in addition to conventional measures prepared in accordance with IFRS, certain investors use this information to evaluate the Company’s performance and ability to generate cash flow.

     
 

The following table provides a reconciliation of average cash cost of silver and gold on a per ounce basis.


      Three Months Ended     Years Ended  
      December 31     December 31  
  (in thousands, except for gold ounces sold and per ounce amounts)   2012     2011     2012     2011  
  Cost of sales $  90,916   $  41,675   $  218,718   $  143,723  
  Less: depletion   (47,968 )   (17,393 )   (101,229 )   (57,457 )
  Cash cost of sales $  42,948   $  24,282   $  117,489   $  86,266  
  Cash cost of sales is comprised of:                        
     Total cash cost of silver sold $  30,237   $  23,144   $  100,798   $  80,785  
     Total cash cost of gold sold   12,711     1,138     16,691     5,481  
     Total cash cost of sales $  42,948   $  24,282   $  117,489   $  86,266  
  Divided by:                        
     Total silver ounces sold   7,347     5,778     24,850     20,247  
     Total gold ounces sold   32,960     3,777     46,094     18,256  
     Total silver equivalent ounces sold 1   9,131     5,974     27,328     21,069  
  Equals:                        
     Average cash cost of silver (per ounce) $  4.12   $  4.01   $  4.06   $  3.99  
     Average cash cost of gold (per ounce) $  386   $  301   $  362   $  300  
     Average cash cost (per silver equivalent
           ounce 1 )
$  4.70   $  4.06   $  4.30   $  4.09  

  1)

Gold ounces sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both silver and gold.


SILVER WHEATON 2012 ANNUAL REPORT [26]



  iii.

Cash operating margin is calculated by subtracting the average cash cost of silver and gold on a per ounce basis from the average realized selling price of silver and gold on a per ounce basis. The Company presents cash operating margin as it believes that certain investors use this information to evaluate the Company’s performance in comparison to other companies in the precious metals mining industry who present results on a similar basis.

     
 

The following table provides a reconciliation of cash operating margin.


      Three Months Ended     Years Ended  
      December 31     December 31  
                           
  (in thousands, except for per ounce amounts)   2012     2011     2012     2011  
                           
  Average realized selling price of silver and gold                        
     Sales $  287,241   $  191,867   $  849,560   $  729,997  
     Divided by - total silver equivalent ounces sold 1   9,131     5,974     27,328     21,069  
                           
  Equals - average realized price ($'s per silver
      equivalent ounce 1 )
$  31.46   $  32.12   $  31.09   $  34.65  
  Less - average cash cost ($'s per silver
       equivalent ounce 1 )
  (4.70 )   (4.06 )   (4.30 )   (4.09 )
                           
  Cash operating margin per silver equivalent ounce 1 $  26.76   $  28.06   $  26.79   $  30.56  

  1)

Gold ounces sold are converted to a silver equivalent basis on the ratio of the average silver price received to the average gold price received during the period from the assets that produce both silver and gold.


  iv.

Adjusted net earnings and adjusted net earnings per share is calculated by removing the effects of the non- cash, fair value adjustment on the Company’s previously issued and outstanding share purchase warrants, which had an exercise price denominated in Canadian dollars, from net earnings of the Company. These share purchase warrants are classified as a financial liability with any fair value adjustments being reflected as a component of net earnings. This accounting treatment was applicable to the share purchase warrants which expired or were exercised prior to December 22, 2010. The Company believes that, in addition to conventional measures prepared in accordance with IFRS, the Company and certain investors use this information to evaluate the Company’s performance.

These non-IFRS measures do not have any standardized meaning prescribed by IFRS, and other companies may calculate these measures differently. The presentation of these non-IFRS measures 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 IFRS.

SILVER WHEATON 2012 ANNUAL REPORT [27]


Liquidity and Capital Resources

As at December 31, 2012, the Company had cash and cash equivalents of $778.2 million (December 31, 2011 - $840.2 million) and working capital of $735.9 million (December 31, 2011 – $677.6 million). The Company invests excess cash in short-term, high credit quality, money market instruments.

On February 28, 2013, the Company entered into two new unsecured credit facilities, comprised of (i) a $1 billion revolving credit facility having a 5 year term; and (ii) a $1.5 billion bridge financing facility having a 1 year term, as more fully described in the Subsequent Events section of this MD&A. These facilities replaced the pre-existing $400 million revolving credit facility. In the opinion of management, the $778 million of cash and cash equivalents as at December 31, 2012 combined with the liquidity provided by the $2.5 billion of new credit facilities positions the Company well to fund all outstanding commitments as well as providing flexibility to acquire additional accretive precious metal stream interests.

During the year ended December 31, 2012, the Company generated operating cash flows of $719.4 million compared with $626.4 million during the previous year, with the increase being primarily related to an increase in the number of silver equivalent ounces sold.

During the year ended December 31, 2012, the Company had net cash outflows from financing activities of $139.5 million, which was comprised of dividend payments of $123.9 million and scheduled principal repayments of $28.6 million relating to the Company’s term loan, partially offset by proceeds in the amount of $12.9 million from share purchase options and share purchase warrants exercised during the year. During the year ended December 31, 2011, the Company had net cash outflows from financing activities of $84.2 million, which was comprised of dividend payments in the amount of $63.6 million as well as scheduled principal repayments of $28.6 million relating to the Company’s term loan, partially offset by proceeds in the amount of $7.9 million from share purchase options and share purchase warrants exercised during the year.

During the year ended December 31, 2012, the Company had net cash outflows relating to investing activities of $641.9 million, which was primarily related to upfront payments to Hudbay totaling $500 million related to the Company’s 777 silver and gold interest and Constancia silver interest, in addition to the scheduled final upfront payment of $137.5 million to Barrick. During the year ended December 31, 2011, the Company had net cash outflows relating to investing activities of $130.7 million, which was primarily related to the scheduled upfront payment of $137.5 million to Barrick and the acquisition, by way of private placement, of 10 million common shares of Wildcat Silver Corporation for total consideration of Cdn$13.0 million ($13.7 million), partially offset by proceeds in the amount of Cdn$23.5 million ($24.3 million) received from the sale of 1.8 million common shares of Ventana Gold Corp.

SILVER WHEATON 2012 ANNUAL REPORT [28]


Contractual Obligations and Contingencies

Silver and Gold Interests

The following table summarizes the Company’s commitments to pay for silver and gold to which it has the contractual right pursuant to the precious metal purchase agreements:

Silver and Gold Interests Attributable Payable
Production to be
Purchased

Per Ounce Cash
Payment 1,2



Term of
Agreement



Date of
Contract

Silver

Gold

Silver

Gold
San Dimas 100% 3 - $ 4.12 n/a Life of Mine 15-Oct-04
Zinkgruvan 100% - $ 4.18 n/a Life of Mine 8-Dec-04
Yauliyacu 100% 4 - $ 4.08 n/a 20 years 23-Mar-06
Peñasquito 25% - $ 3.99 n/a Life of Mine 24-Jul-07
Minto 100% 100% 5 $ 3.94 $ 303 Life of Mine 1-Dec-08
Cozamin 100% - $ 4.12 n/a 10 years 4-Apr-07
777 100% 100%/50% 6 $ 5.90 $ 400 Life of Mine 8-Aug-12
Salobo - 25% n/a $ 400 Life of Mine 28-Feb-13
Sudbury - 70% n/a $ 400 20 years 28-Feb-13
Barrick            
   Pascua-Lama 25% - $ 3.90 n/a Life of Mine 8-Sep-09
   Lagunas Norte 100% - $ 3.90 n/a 4 years 7 8-Sep-09
   Pierina 100% - $ 3.90 n/a 4 years 7 8-Sep-09
   Veladero 100% 8 - $ 3.90 n/a 4 years 7 8-Sep-09
Other            
   Los Filos 3 100% - $ 4.17 n/a 25 years 15-Oct-04
   Keno Hill 25% - $ 3.90 n/a Life of Mine 2-Oct-08
   Mineral Park 100% - $ 3.90 n/a Life of Mine 17-Mar-08
   Neves-Corvo 100% - $ 4.02 n/a 50 years 5-Jun-07
   Stratoni 100% - $ 4.02 n/a Life of Mine 23-Apr-07
   Campo Morado 75% - $ 3.94 n/a Life of Mine 13-May-08
   Aljustrel 100% - $ 3.98 n/a 50 years 5-Jun-07
   Loma de La Plata 12.5% - $ 4.00 n/a Life of Mine n/a 9
   Rosemont 100% 100% $ 3.90 $ 450 Life of Mine 11-Feb-10
   Constancia 100% - $ 5.90 n/a Life of Mine 8-Aug-12

1)

Subject to an annual inflationary adjustment with the exception of Loma de La Plata and Sudbury.

2)

Should the prevailing market price for silver or gold be lower than this amount, the per ounce cash payment will be reduced to the prevailing market price, with the exception of Yauliyacu.

3)

Until August 6, 2014, Silver Wheaton is committed to purchase from Primero a per annum amount equal to the first 3.5 million ounces of payable silver produced at San Dimas and 50% of any excess, plus Silver Wheaton is committed to purchase an additional 1.5 million ounces of silver per annum to be delivered by Goldcorp for a per ounce cash payment equal to that applicable under the Los Filos silver purchase agreement. After August 6, 2014, Silver Wheaton is committed to purchase from Primero a per annum amount equal to the first 6 million ounces of payable silver produced at San Dimas and 50% of any excess.

4)

To a maximum of 4.75 million ounces per annum. In the event that silver sold and delivered to Silver Wheaton in any year totals less than 4.75 million ounces, the amount sold and delivered to Silver Wheaton in subsequent years will be increased to make up for any cumulative shortfall, to the extent production permits. The cumulative shortfall as at March 23, 2012, representing the six year anniversary, was 13.0 million ounces.

5)

The Company is committed to acquire 100% of the first 30,000 ounces of gold produced per annum and 50% thereafter.

6)

The Company’s share of gold production at 777 will remain at 100% until the later of the end of 2016 or the satisfaction of a completion test relating to Hudbay’s Constancia project, after which it will be reduced to 50% for the remainder of the mine life.

7)

The Company is committed to purchase silver production from the currently producing mines until December 31, 2013. In addition, during 2014 and 2015, the Company is committed to purchase all or a portion of the silver production from these mines to the extent of any production shortfall at Pascua-Lama relative to the completion guarantee provided by Barrick, until such time as the completion guarantee is satisfied.

8)

Silver Wheaton's attributable silver production is subject to a maximum of 8% of the silver contained in the ore mined at Veladero during the period.

9)

Terms of the agreement not yet finalized.


SILVER WHEATON 2012 ANNUAL REPORT [29]


Other Contractual Obligations and Contingencies

     Obligations With Scheduled Payment Dates                   
                                  Other        
(in thousands)   2013     2014 - 2016     2017 - 2018     After 2018     Sub-Total     Commitments     Total  
                                           
Bank debt ¹ $  28,560   $  21,500   $  -   $  -   $  50,060   $  -   $  50,060  
Interest on bank debt 2   472     145     -     -     617     -     617  
Silver and gold interest payments 3                              
     Rosemont   -     -     -     -     -     230,000     230,000  
     Loma de La Plata   -     -     -     -     -     32,400     32,400  
     Constancia   -     -     -     -     -     250,000     250,000  
Operating leases   507     1,520     132     -     2,159     -     2,159  
Total contractual obligations $  29,539   $  23,165   $  132   $  -   $  52,836   $  512,400   $  565,236  

1)

As more fully disclosed in the Subsequent Events section of this MD&A, the bank debt was repaid in full on February 22, 2013.

2)

As the applicable interest rates are floating in nature, the interest charges are estimated based on market-based forward interest rate curves at the end of the reporting period.

3)

Does not reflect the contingent payment due related to the Salobo gold purchase agreement.

Rosemont

In connection with the Rosemont precious metals purchase agreement, the Company is committed to pay Augusta total upfront cash payments of $230 million, payable on an installment basis to partially fund construction of the Rosemont mine once certain milestones are achieved, including the receipt of key permits and securing the necessary financing to complete construction of the mine.

Loma de La Plata

In connection with the Company’s election to convert the debenture with Pan American into a silver purchase agreement, the Company is committed to pay Pan American total upfront cash payments of $32.4 million following the satisfaction of certain conditions, including Pan American receiving all necessary permits to proceed with the mine construction.

Constancia

In connection with the Constancia silver purchase agreement, the Company is committed to pay Hudbay two further payments of $125 million to be made once capital expenditures of $500 million and $1 billion have been incurred at Constancia.

Salobo

Vale is in the process of expanding the mill throughput capacity at the Salobo mine to 24 million tonnes per annum (“Mtpa”) from its current 12 Mtpa. If throughput capacity is expanded above 28 Mtpa within a predetermined period, Silver Wheaton will be required to make an additional payment to Vale based on a set fee schedule ranging from $67 million up to $400 million, dependent on the timing and scale of any expansion.

Other

Due to the size, complexity and nature of the Company’s operations, various legal and tax matters are outstanding from time to time, including an audit by the Canada Revenue Agency of the Company’s international transactions covering the 2005 to 2010 taxation years, which is currently ongoing. By their nature, contingencies will only be resolved when one or more future events occur or fail to occur. The assessment of contingencies inherently involves the exercise of significant judgment and estimates of the outcome of future events. Based on information available to management at March 21, 2013, the outstanding legal and tax matters are not expected to have a material adverse effect on the Company. However, if the Company is unable to resolve any of these matters favorably, there may be a material adverse impact on the Company’s financial performance, cash flows or results of operations. In the event that management’s estimate of the future resolution of these matters changes, the Company will recognize the effects of the changes in its consolidated financial statements in the appropriate period relative to when such changes occur.

SILVER WHEATON 2012 ANNUAL REPORT [30]


Share Capital

During the year ended December 31, 2012, the Company received cash proceeds of $11.0 million from the exercise of 721,632 share purchase options at a weighted average exercise price of Cdn$15.17 per option. For the comparable period in 2011, the Company received cash proceeds of $7.8 million from the exercise of 642,173 share purchase options at a weighted average exercise price of Cdn$11.96 per option.

During the year ended December 31, 2012, the Company received cash proceeds of $1.9 million from the exercise of 93,897 share purchase warrants with an exercise price of $20.00 per warrant. For the comparable period in 2011, the Company received cash proceeds of $99,000 from the exercise of 4,968 share purchase warrants with an exercise price of $20.00 per warrant.

As of March 21, 2013, there were 354,433,902 outstanding common shares, 2,273,895 share purchase options, 130,191 restricted share units and 12,613,290 share purchase warrants.

Risks and Uncertainties

The primary risk factors affecting the Company are set forth below. For discussion of additional risk factors, please refer to the Company’s Annual Information Form, which is available on the Company’s website, www.silverwheaton.com, and on SEDAR, www.sedar.com, or is available upon request from the Company.

Commodity Prices

The price of the common shares and the Company’s financial results may be significantly adversely affected by a decline in the price of silver or gold. The price of silver and gold fluctuates widely, especially in recent years, and is affected by numerous factors beyond the Company’s control, including, but not limited to, the sale or purchase of silver and gold by various central banks and financial institutions, interest rates, exchange rates, inflation or deflation, fluctuation in the value of the United States dollar and foreign currencies, global and regional supply and demand, and the political and economic conditions of major silver and gold producing countries throughout the world.

In the event that the prevailing market price of silver or gold is at or below the price at which the Company can purchase such pursuant to the terms of the agreements associated with its silver and gold interests, the Company will not generate positive cash flow or earnings.

The “Mining Operations” consist of the San Dimas mine, the Zinkgruvan mine, the Yauliyacu mine, the Stratoni mine, the Mineral Park mine, the Los Filos mine, the Peñasquito mine, the Campo Morado mine, the Keno Hill mine, the Neves-Corvo mine, the Cozamin mine, the Minto mine, the Barrick mines (including the Pascua-Lama project), the Aljustrel mine, the 777 mine, the Salobo mine, the Sudbury mines, the Rosemont project, the Loma de La Plata project and the Constancia project. Silver and gold are by-product metals at all of the Mining Operations, other than at the Keno Hill mine and the Loma de La Plata project, and therefore, the economic cut-off applied to the reporting of silver and gold reserves and resources will be influenced by changes in the commodity prices of other metals at the mines.

Risks Relating to Mining Operations

To the extent that they relate to the production of silver and gold from, or the continued operation of, the Mining Operations, the Company will be subject to the risk factors applicable to the operators of such mines or projects, including the following as more fully described in the Company’s Annual Information Form: government regulations; international operations; exploration, development and operating risks; environmental regulation; permitting; compliance with laws; infrastructure; mineral reserve and mineral resource estimates; need for additional mineral reserves; land title; commodity price fluctuations; additional capital; and permitting, construction, development and expansion risk.

SILVER WHEATON 2012 ANNUAL REPORT [31]


No Control Over Mining Operations

The Company has agreed to purchase a certain percentage of the silver and / or gold produced by the Mining Operations. The Company is not directly involved in the ownership or operation of mines and has no contractual rights relating to the operation of the Mining Operations. As a result, the cash flow of the Company is dependent upon the activities of third parties which creates the risk that at any time those third parties may: (i) have business interests or targets that are inconsistent with those of the Company, (ii) take action contrary to the Company’s policies or objectives, (iii) be unable or unwilling to fulfill their obligations under their agreements with the Company, or (iv) experience financial, operational or other difficulties, including insolvency, which could limit a third party’s ability to perform its obligations under the precious metal purchase agreements. Except in limited circumstances, the Company will not be entitled to any material compensation if such operations do not meet their forecasted silver or gold production targets in any specified period or if the operations shut down or discontinue their operations on a temporary or permanent basis. There can be no assurance that the silver or gold production from such properties will ultimately meet forecasts or targets. At any time, any of the operators of the Mining Operations may decide to suspend or discontinue operations.

Taxes

A significant portion of the Company’s operating profit is derived from its subsidiaries, Silver Wheaton (Caymans) Ltd. and, historically, Silverstone Resources (Barbados) Corp, which are incorporated and operated in the Cayman Islands and Barbados, respectively, such that the Company’s profits are subject to minimal income tax.

The introduction of new tax laws or regulations, or changes to, or differing interpretation of, or application of, existing tax laws or regulations in Canada, the Cayman Islands, Luxembourg, Barbados, the Netherlands or any of the countries in which the Mining Operations are located or to which shipments of silver or gold are made, could result in an increase in the Company’s taxes, or other governmental charges, duties or impositions. Due to the size, complexity and nature of the Company’s operations, various tax matters are outstanding from time to time, including an audit by the Canada Revenue Agency of the Company’s international transactions covering the 2005 to 2010 taxation years. No assurance can be given that new tax laws or regulations will not be enacted or that existing tax laws or regulations will not be changed, interpreted or applied in a manner which could have a material adverse effect on the Company.

Credit and Liquidity Risk

The Company is exposed to various counterparty risks and liquidity risks including, but not limited to: (i) through the companies with which the Company has precious metal purchase agreements; (ii) through financial institutions that hold the Company’s cash and cash equivalents; (iii) through companies that have payables to the Company, including concentrate customers; (iv) through the Company’s insurance providers; and (v) through the Company’s lenders. The Company is also exposed to liquidity risks in meeting its operating expenditure requirements in instances where cash positions are unable to be maintained or appropriate financing is unavailable. These factors may impact the ability of the Company to obtain loans and other credit facilities in the future and, if obtained, on terms favourable to the Company. If these risks materialize, the Company’s operations could be adversely impacted and the trading price of the common shares could be adversely affected.

Competition

The Company competes with other companies for precious metal purchase agreements and similar transactions. Some of these companies may possess greater financial and technical resources than the Company. Such competition may result in the Company being unable to enter into desirable precious metal purchase agreements or similar transactions, to recruit or retain qualified employees or to acquire the capital necessary to fund its precious metal purchase agreements. Existing or future competition in the mining industry could materially adversely affect the Company’s prospects for entering into additional precious metal purchase agreements in the future.

Acquisition Strategy

As part of the Company’s business strategy, it has sought and will continue to seek new exploration, mining and development opportunities in the resource industry. In pursuit of such opportunities, the Company may fail to select appropriate acquisition candidates or negotiate acceptable arrangements, including arrangements to finance acquisitions or integrate the acquired businesses and their personnel into the Company. The Company cannot assure that it can complete any acquisition or business arrangement that it pursues, or is pursuing, on favourable terms, or that any acquisitions or business arrangements completed will ultimately benefit the Company.

SILVER WHEATON 2012 ANNUAL REPORT [32]


Market Price of the Common Shares and the Common Share Purchase Warrants

The common shares are listed and posted for trading on the Toronto Stock Exchange and on the New York Stock Exchange and the Company’s common share purchase warrants are listed and posted for trading on the Toronto Stock Exchange. An investment in the Company’s securities is highly speculative. Securities of companies involved in the resource industry have experienced substantial volatility in the past, often based on factors unrelated to the financial performance or prospects of the companies involved. The price of the common shares and the Company’s common share purchase warrants are also likely to be significantly affected by short-term changes in silver and gold prices, the Company’s financial condition or results of operations as reflected in its quarterly earnings reports, and the other risk factors identified herein.

Equity Price Risk

The Company is exposed to equity price risk as a result of holding long-term investments in other exploration and mining companies. Just as investing in the Company is inherent with risks such as those set out in this MD&A, by investing in these other companies, the Company is exposed to the risks associated with owning equity securities and those risks inherent in the investee companies. The Company does not actively trade these investments.

Dividend Policy

The declaration, timing, amount and payment of dividends is at the discretion of the Board of Directors. There can be no assurance that the Company will continue to declare a dividend on a quarterly, annual or other basis.

Dependence Upon Key Management Personnel

The Company is dependent on the services of a small number of key executives who are highly skilled and experienced. The loss of these employees or the Company’s inability to attract and retain additional highly skilled employees may adversely affect its business and future operations.

Litigation

The Company is from time to time involved in various claims, legal proceedings and disputes arising in the ordinary course of business. If the Company is unable to resolve these disputes favorably, it may have a material adverse impact on the Company’s financial performance, cash flow or results of operations.

Other Risks

Critical Accounting Estimates

The preparation of financial statements in conformity with IFRS 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 consolidated financial statements describes all of the significant accounting policies.

Silver and Gold Interests

Attributable Reserve and Resource Estimates

Silver and gold interests are significant assets of the Company, with a carrying value of $2.3 billion at December 31, 2012. This amount represents the capitalized expenditures related to the acquisition of the silver and gold interests, net of accumulated depletion. The Company estimates the reserves and resources relating to each agreement. Reserves are estimates of the amount of silver or gold that can be economically and legally extracted from the mining properties at which the Company has precious metal purchase agreements, adjusted where applicable to reflect the Company’s percentage entitlement to silver and gold produced from such mines. The Company estimates its reserves and resources based on information compiled by appropriately qualified persons relating to the geological data on the size, depth and shape of the ore body, and require complex geological judgments to interpret the data. The estimation of recoverable reserves is based upon factors such as estimates of foreign exchange rates, commodity prices, future capital requirements, and production costs along with geological assumptions and judgments made in estimating the size and grade of the ore body. Changes in the reserve or resource estimates may impact upon the carrying value of the Company’s silver and gold interests and depletion charges.

SILVER WHEATON 2012 ANNUAL REPORT [33]


Depletion

As described above, the cost of these silver and gold interests is separately allocated to reserves, resources and exploration potential. The value allocated to reserves is classified as depletable and is depleted on a unit-of-sale basis over the estimated recoverable proven and probable reserves at the mine corresponding to the specific agreement. 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 and / or exploration potential into reserves. These calculations require the use of estimates and assumptions, including the amount of recoverable reserves. Changes in the estimated recoverable reserves, resources or exploration potential will directly impact the depletion rate used. Changes to depletion rates are accounted for prospectively.

Impairment of Assets

Management considers each silver and gold interest to be a separate cash generating unit, which is the lowest level for which cash inflows are largely independent of those of other assets. At the end of each reporting period, the Company reviews the carrying amounts of each silver and gold interest to determine whether there is any indication that those silver and gold interests have suffered an impairment loss. If such an indication exists, the recoverable amount of the silver and gold interest is estimated in order to determine the extent of the impairment (if any). The recoverable amount of each silver and gold interest is the higher of fair value less costs to sell (“Fair Value Approach”) and value in use (“Value-In-Use Approach”).

Under the Fair Value Approach, the net asset value (“NAV”) methodology is used to determine the fair value that could be received from each silver and gold interest in an arm’s length transaction at the measurement date. NAV is estimated by using an appropriate discount rate to calculate the present value of expected future cash flows associated with each mineral category. The values are adjusted for each mineral category dependent on the likelihood of conversion from resources to reserves. A market multiple is applied to the NAV computed in order to assess the estimated fair value. Silver and precious metals companies typically trade at a market capitalization that is based on a multiple of their underlying NAV. Consequently, a market participant would generally apply a NAV multiple when estimating the fair value of a silver and gold interest.

Under the Value-In-Use Approach, the net present value (“NPV”) methodology is used. NPV is estimated by using a discount rate to calculate the present value of expected future cash flows. The discount rate is based on the Company’s weighted average cost of capital, adjusted for various risks.

The expected future cash flows are management’s best estimates of expected future revenues and costs. Under each method, expected future revenues reflect the estimated future production for each mine at which the Company has a precious metal purchase agreement based on detailed life of mine plans received from each of the partners. Included in these forecasts is the production of mineral resources that do not currently qualify for inclusion in proven and probable ore reserves where there is a high degree of confidence in its economic extraction. This is consistent with the methodology that is used to measure value beyond proven and probable reserves when allocating the purchase price to acquired silver and gold interests. Expected future revenues also reflect management’s estimated long-term metal prices, which are determined based on current prices, forward pricing curves and forecasts of expected long-term metal prices prepared by analysts. These estimates often differ from current price levels, but are consistent with how a market participant would assess future long-term metal prices. Estimated future cash costs are fixed based on the terms of each precious metal purchase agreement, as disclosed in Note 20 to the financial statements.

If the carrying amount of the asset exceeds its recoverable amount, the asset is considered impaired and an impairment charge is reflected as a component of net earnings so as to reduce the carrying amount to its recoverable value. A previously recognized impairment charge is reversed only if there has been a change in the estimates used to determine the asset’s recoverable amount since the last impairment charge was recognized. If this is the case, the carrying amount of the asset is increased to its recoverable amount. The increased amount cannot exceed the carrying amount that would have been determined, net of depletion, had no impairment charge been recognized for the asset in prior years. Such reversal is reflected as a component of net earnings.

No impairment charge was required at December 31, 2012 and December 31, 2011.

Valuation of Stock Based Compensation

The Company has various forms of stock based compensation, including share purchase options, restricted share units (“RSUs”) and performance share units (“PSUs”). The calculation of the fair value of share purchase options, RSUs and PSUs issued requires the use of estimates as more fully described below.

SILVER WHEATON 2012 ANNUAL REPORT [34]


The Company recognizes a stock based compensation expense for all share purchase options and RSUs awarded to employees, officers and directors based on the fair values of the share purchase options and RSUs at the date of grant. The fair values of share purchase options and RSUs at the date of grant are expensed over the vesting periods of the share purchase options and RSUs, respectively, with a corresponding increase to equity. The fair value of share purchase options is determined using the Black-Scholes option pricing model with market related inputs as of the date of grant. Share purchase options with graded vesting schedules are accounted for as separate grants with different vesting periods and fair values. The fair value of RSUs is the market value of the underlying shares at the date of grant. At the end of each reporting period, the Company re-assesses its estimates of the number of awards that are expected to vest and recognizes the impact of any revisions to this estimate in the consolidated statement of earnings.

The Company recognizes a stock based compensation expense for PSUs which are awarded to eligible employees and are settled in cash. The related expense is based on the value of the anticipated settlement and multiplier for current performance at the end of the associated performance periods. This estimated expense is reflected as a component of net earnings over the vesting period of the PSUs with the related obligation recorded as a liability on the balance sheet. The amount of compensation expense is adjusted at the end of each reporting period to reflect the fair market value of common shares and the number of PSUs anticipated to vest based on the anticipated performance factor.

Revenue Recognition

Revenue from the sale of silver and gold 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. Selling prices are determined at the point revenue is recognized by reference to active and freely traded commodity markets, for example the London Bullion Market for commodities, in an identical form to the product sold.

Where the Company acquires silver or gold in concentrate form, final silver or gold prices are set on a specified future period (the “Quotational Period”) pursuant to the concentrate sales contracts with third-party smelters, typically one to three months after the shipment date, based on market prices for silver or gold. Revenues and the associated cost of sales are recorded on a gross basis under these contracts at the time title passes to the buyer based on the forward price for the expected settlement period. The contracts, in general, provide for a provisional payment of 90% of the estimated value of the silver and/or gold sold under the concentrate sales contract based upon provisional assays and quoted silver and gold prices, with the 10% holdback being payable upon final settlement, which is based upon the average applicable price for the Quotational Period applied to the actual number of silver or gold ounces recovered calculated using confirmed smelter weights and settlement assays. This 10% holdback is reflected as a component of Accounts Receivable in the Company’s consolidated balance sheet. Final settlement generally occurs from three to six months after shipment. The Company’s provisionally priced sales contain an embedded derivative that is required to be separated from the host contract for accounting purposes. The host contract is the receivable from the sale of concentrates measured at the forward price at the time of sale. The embedded derivative does not qualify for hedge accounting. The embedded derivative is recorded on the balance sheet as a derivative asset in Accounts Receivable or as a derivative liability in Accounts Payable and Accrued Liabilities and is adjusted to fair value through revenue each period until the date of final settlement.

At December 31, 2012, the Company had outstanding provisionally priced sales of $12.7 million (2011 - $3.6 million) where the quotational period pricing was estimated based on the forward price for silver. These sales consisted of 0.4 million ounces of silver (2011 – 0.1 million ounces of silver) and had a fair value loss adjustment of approximately $1.1 million (2011 - $0.3 million gain) associated with the embedded derivative. For each one cent per ounce increase or decrease in realized silver price, revenue would increase or decrease by approximately $3,800 (2011 - $1,200).

Financial Instruments

In order to mitigate the effect of short-term volatility in silver and gold prices, the Company will occasionally enter into forward contracts in relation to silver and gold deliveries that it is highly confident will occur within a given quarter. The Company does not hedge its long-term exposure to commodity prices. Other than these very short-term forward contracts, the Company has not used 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. No forward contracts were outstanding at December 31, 2012 and December 31, 2011.

The Company owns equity interests in several publicly traded mineral exploration, development and mining companies as long-term investments and therefore is inherently exposed to various risk factors including currency risk, market price risk and liquidity risk.

SILVER WHEATON 2012 ANNUAL REPORT [35]


Changes in Accounting Policies

IFRS 7 – Financial Instruments (amended 2010)

In October 2010, the International Accounting Standards Board (“IASB”) issued amendments to IFRS 7 – Financial Instruments: Disclosures, which improves the disclosure requirements in relation to transferred financial assets. This amendment is applicable for the Company’s interim and annual consolidated financial statements for its fiscal year beginning January 1, 2012. The adoption of this amended standard did not result in a material impact on the Company’s consolidated financial statements.

IAS 12 – Income Taxes (amended 2010)

In December 2010, the IASB issued amendments to IAS 12 – Income Taxes, which provides a practical solution to determining the recovery of investment properties as it relates to the accounting for deferred income taxes. This amendment is applicable for the Company’s interim and annual consolidated financial statements for its fiscal year beginning January 1, 2012. The adoption of this amended standard did not result in a material impact on the Company’s consolidated financial statements.

Future Changes in Accounting Policies

The IASB has issued the following new or amended standards:

Standards required to be applied for periods beginning on or after July 1, 2012:

  • IAS 1 - Presentation of Financial Statements (amended 2011)

Standards required to be applied for periods beginning on or after January 1, 2013:

  • IFRS 7 – Financial Instruments (amended 2011)

  • IFRS 10 - Consolidated Financial Statements (“IFRS 10”)

  • IFRS 11 - Joint Arrangements (“IFRS 11”)

  • IFRS 12 - Disclosure of Interests in Other Entities (“IFRS 12”)

  • IFRS 13 - Fair Value Measurement

  • IAS 19 – Employee Benefits (amended 2011)

  • IAS 27 - Separate Financial Statements (amended 2011) (“IAS 27”)

  • IAS 28 - Investments in Associates (amended 2011) (“IAS 28”)

  • IFRIC 20 - Stripping Costs in the Production Phase of a Surface Mine

Standards required to be applied for periods beginning on or after January 1, 2014:

  • IAS 32 – Financial Instruments: Presentation (amended 2011)

Standards required to be applied for periods beginning on or after January 1, 2015:

  • IFRS 9 (2010) – Financial Instruments (amended 2010)

The Company has early adopted IFRS 9 (2009) – Financial Instruments. Early adoption of the above standards is permitted, however, IFRS 10, IFRS 11, IFRS 12, IAS 27 and IAS 28 must be initially applied concurrently.

Based upon its current facts and circumstances, the Company does not expect to be materially affected by the application of these new standards.

SILVER WHEATON 2012 ANNUAL REPORT [36]


Subsequent Events

Declaration of Dividend

On March 21, 2013, the Board of Directors declared a dividend in the amount of $0.14 per common share, representing 20% of the cash generated by operating activities during the three months ended December 31, 2012, payable to shareholders of record on April 2, 2013. This dividend is expected to be distributed on or about April 12, 2013.

Acquisition of New Gold Interests

Salobo

On February 28, 2013, the Company entered into an agreement to acquire from Vale an amount of gold equal to 25% of the life of mine gold production from its currently producing Salobo mine, located in Brazil. Silver Wheaton made a total upfront cash payment of $1.33 billion on March 12, 2013 and, in addition, will make ongoing payments of the lesser of $400 per ounce of gold (subject to an inflationary adjustment of 1% beginning in the fourth year) or the prevailing market price per ounce of gold delivered. Vale is in the process of expanding the mill throughput at the Salobo mine to 24 million tonnes per annum (“Mtpa”) from its current 12 Mtpa. If the expansion to 24 Mtpa is not completed by December 31, 2016, Silver Wheaton would be entitled to a gross up (a temporary increased percentage of gold production) based on the pro-rata achievement of the target production. If throughput capacity is expanded above 28 Mtpa within a predetermined period, Silver Wheaton will be required to make an additional payment to Vale based on a set fee schedule ranging from $67 million up to $400 million, dependent on the timing and scale of any expansion.

Sudbury

On February 28, 2013, the Company entered into an agreement to acquire from Vale an amount of gold equal to 70% of the gold production from certain of its currently producing Sudbury mines located in Canada, including the Coleman mine, Copper Cliff mine, Garson mine, Stobie mine, Creighton mine, Totten mine and the Victor project for a period of 20 years. Silver Wheaton made a total upfront cash payment on March 12, 2013 of $570 million plus warrants to purchase 10 million shares of Silver Wheaton common stock at a strike price of $65, with a term of 10 years. In addition, Silver Wheaton will make ongoing payments of the lesser of $400 per ounce of gold or the prevailing market price per ounce of gold delivered.

New Credit Facilities

On February 28, 2013, the Company entered into two new unsecured credit facilities, comprised of (i) a $1 billion revolving credit facility having a 5 year term (the “Revolving Facility”); and (ii) a $1.5 billion bridge financing facility having a 1 year term (the “Bridge Facility”). The Revolving Facility and Bridge Facility replaced the $400 million Revolver Loan and the Term Loan, with the latter being repaid in full on February 22, 2013. Silver Wheaton has committed to use 100% of the net proceeds from the issuance of equity securities or debt securities to repay the Bridge Facility. The Bridge Facility is available for up to two drawdowns until May 31, 2013, after which the amount available under the Bridge Facility shall be reduced to the then outstanding balance. The Revolving Facility can be drawn down at any time to finance acquisitions, investments or for general corporate purposes.

Until June 30, 2013, at the Company’s option, amounts drawn under the Bridge Facility incur interest at either (i) LIBOR plus 1.70% or; (ii) the Bank of Nova Scotia’s Base Rate plus 0.70% . After June 30, 2013, at the Company’s option, amounts drawn under the Bridge Facility incur interest based on the Company’s leverage ratio at either (i) LIBOR plus 1.20% to 2.20% or; (ii) the Bank of Nova Scotia’s Base Rate plus 0.20% to 1.20% . The interest rates applicable to any amounts outstanding under the Bridge Facility will increase by 0.25% on each 90 day anniversary of the date of execution of the Bridge Facility. A funding fee of 0.25% is applicable to both the principal amount of either drawdown under the Bridge Facility as well as to any amounts outstanding under the Bridge Facility at April 30, 2013. In addition, any amounts outstanding under the Bridge Facility on May 29, 2013, August 27, 2013 and November 25, 2013 are subject to a duration fee of 0.50%, 0.75% and 1.00%, respectively.

At the Company’s option, amounts drawn under the Revolving Facility incur interest based on the Company’s leverage ratio at either (i) LIBOR plus 1.20% to 2.20% or; (ii) the Bank of Nova Scotia’s Base Rate plus 0.20% to 1.20% . Undrawn amounts under both facilities are subject to a stand-by fee of 0.24% to 0.44% per annum, dependent on the Company’s leverage ratio.

SILVER WHEATON 2012 ANNUAL REPORT [37]


Under the new credit facilities, the Company is required to maintain a leverage ratio less than or equal to 3.5:1 (4.5:1 during the six month period following any acquisition greater than $400 million) and a tangible net worth greater than 80% of the tangible net worth at September 30, 2012 plus 50% of the positive net earnings for each fiscal quarter thereafter.

On March 11, 2013, the Company made a drawdown on the Bridge Facility of $1.09 billion to partially fund the upfront cash payment on the Sudbury and Salobo gold interests.

Controls and Procedures

Disclosure Controls and Procedures

Silver Wheaton’s management, with the participation of its 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, 2012. 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 at the reasonable assurance level as of December 31, 2012.

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 control over financial reporting. Under the supervision of the Chief Financial Officer, the Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. 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 IFRS, 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.

There have been no changes in the Company’s internal control over financial reporting during the year ended December 31, 2012 that would materially affect, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of the Company’s internal control over financial reporting using the framework and criteria established in Internal Control – Integrated Framework, issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this evaluation, management has concluded that the internal control over financial reporting was effective at the reasonable assurance level as of December 31, 2012.

Limitation of Controls and Procedures

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, believe that any disclosure controls and procedures or internal control 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 controls. 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.

SILVER WHEATON 2012 ANNUAL REPORT [38]


Attributable Reserves and Resources (1)

The following tables set forth the estimated Mineral Reserves and Mineral Resources (silver and/or gold only) for the mines relating to which the Company has purchase agreements, adjusted where applicable to reflect the Company’s percentage entitlement to silver and/or gold produced from such mines, as of December 31, 2012, unless otherwise noted. The tables are based on information available to the Company as of the date of this document, and therefore will not reflect updates, if any, after such date. The most current Mineral Reserves and Mineral Resources will be available on the Company’s website.

ATTRIBUTABLE PROVEN AND PROBABLE RESERVES(1,2,3,8,17)
AS OF DECEMBER 31, 2012 UNLESS OTHERWISE NOTED(6)

    Proven     Probable     Proven & Probable        
                                                             
                                                          Process  
    Tonnage     Grade     Contained     Tonnage     Grade     Contained     Tonnage     Grade     Contained     Recovery %  
SILVER   Mt     g/t     Moz     Mt     g/t     Moz     Mt     g/t     Moz     (7)
Peñasquito (25%)(14)                                                            
   Mill   144.5     29.4     136.4     121.2     20.8     80.9     265.7     25.5     217.4     53-65%  
   Heap Leach   8.1     14.6     3.8     21.9     9.7     6.8     29.9     11.0     10.6     24%  
San Dimas(10, 14)   -     -     -     3.8     289.5     35.2     3.8     289.5     35.2     94%  
Pascua-Lama (25%)(14)   9.9     59.5     18.9     86.3     54.1     150.2     96.2     54.7     169.1     82%  
Lagunas Norte(11)   3.4     3.2     0.4     38.6     3.2     4.0     42.1     3.2     4.3     22%  
Pierina(11)   2.8     9.0     0.8     20.6     9.0     6.0     23.3     9.0     6.8     37%  
Veladero(11)   4.7     10.6     1.6     62.4     10.6     21.2     67.1     10.6     22.8     6%  
Yauliyacu(11, 12)   1.1     96.0     3.3     2.9     100.0     9.4     4.0     98.9     12.7     85%  
777 (13, 14)   4.9     26.8     4.2     7.5     27.9     6.7     12.4     27.4     10.9     64%  
Neves-Corvo                                                            
   Copper   6.1     40.0     7.8     18.0     40.0     23.2     24.1     40.0     31.0     35%  
   Zinc   11.5     72.0     26.7     11.2     67.0     24.0     22.7     69.5     50.7     20%  
Rosemont(15)   279.5     4.1     37.0     325.8     4.1     43.1     605.3     4.1     80.1     80%  
Constancia   359.0     3.3     38.3     91.0     3.6     10.6     450.0     3.4     48.8     72%  
Mineral Park(15)   293.9     2.7     25.7     74.5     2.9     7.0     368.4     2.8     32.6     49%  
Zinkgruvan                                                            
   Zinc   8.4     95.0     25.8     2.4     54.0     4.2     10.9     85.9     30.0     70%  
   Copper   3.9     32.0     4.0     0.1     34.0     0.1     4.0     32.0     4.1     78%  
Aljustrel                                                            
   Copper   2.2     19.2     1.3     8.4     15.3     4.1     10.6     16.1     5.5     30%  
Campo Morado (75%)   0.8     158.2     4.0     0.2     133.3     0.6     0.9     154.3     4.7     55%  
Stratoni   1.7     174.0     9.3     0.1     225.0     0.7     1.8     177.0     10.0     84%  
Minto   5.5     5.4     1.0     5.9     4.6     0.9     11.4     5.0     1.8     78%  
Cozamin(11)                                                            
   Copper   0.9     63.0     1.7     4.9     50.7     8.0     5.8     52.5     9.8     74%  
Los Filos   72.6     5.3     12.3     224.1     5.6     40.2     296.7     5.5     52.5     5%  
                                                             
Total Silver               364.2                 487.1                 851.4        
GOLD                                                            
Salobo (25%)(16)   159.2     0.42     2.15     121.5     0.32     1.25     280.6     0.38     3.40     66%  
Sudbury (70%)(11)   34.8     0.29     0.33     26.5     0.49     0.42     61.3     0.38     0.75     81%  
777 (13, 14)   3.9     1.90     0.24     5.9     1.90     0.36     9.8     1.90     0.60     73%  
Minto   5.5     0.69     0.12     5.9     0.51     0.10     11.4     0.60     0.22     74%  
TOTAL GOLD               2.84                 2.13                 4.96        

SILVER WHEATON 2012 ANNUAL REPORT [39]


ATTRIBUTABLE MEASURED & INDICATED RESOURCES(1,2,3,4,5,9,17)
AS OF DECEMBER 31, 2012 UNLESS OTHERWISE NOTED(6)

          Measured                 Indicated           Measured & Indicated  
    Tonnage     Grade     Contained     Tonnage     Grade     Contained     Tonnage     Grade     Contained  
SILVER   Mt     g/t     Moz     Mt     g/t     Moz     Mt     g/t     Moz  
Peñasquito (25%)(14)                                                      
   Mill   31.4     14.4     14.6     112.9     13.1     47.6     144.2     13.4     62.2  
   Heap Leach   0.9     5.0     0.1     5.4     4.2     0.7     6.4     4.3     0.9  
Pascua-Lama (25%)(14)   5.3     24.5     4.2     55.9     23.4     42.1     61.2     23.5     46.3  
Yauliyacu(11, 12)   0.7     115.6     2.5     5.1     227.1     37.2     5.8     214.2     39.7  
Neves-Corvo                                                      
   Copper   4.1     49.3     6.4     23.1     50.7     37.6     27.1     50.5     44.1  
   Zinc   13.0     59.7     25.0     51.6     55.4     92.0     64.6     56.3     117.0  
Rosemont(15)   38.5     3.0     3.7     197.7     2.7     17.1     236.2     2.7     20.8  
Constancia   119.0     2.3     8.6     344.0     2.0     21.9     463.0     2.1     30.5  
Mineral Park(15)   101.0     2.6     8.4     175.6     2.7     15.2     276.6     2.7     23.6  
Zinkgruvan                                                      
   Zinc   1.0     88.8     2.7     3.7     124.6     14.7     4.6     117.2     17.4  
   Copper   1.5     21.2     1.0     0.5     33.8     0.6     2.0     24.3     1.6  
Aljustrel                                                      
   Zinc   1.3     65.6     2.7     20.5     60.3     39.7     21.8     60.7     42.4  
   Copper   -     -     -     0.1     11.7     0.04     0.1     11.7     0.04  
Campo Morado (75%)   5.0     128.9     20.6     2.4     123.5     9.7     7.4     127.1     30.2  
Loma de La Plata (12.5%)   -     -     -     3.6     169.0     19.8     3.6     169.0     19.8  
Minto   9.4     3.9     1.2     27.2     3.2     2.8     36.5     3.3     3.9  
Keno Hill (25%)                                                      
   Underground   -     -     -     0.6     506.0     10.4     0.6     506.0     10.4  
   Elsa Tailings   -     -     -     0.6     119.0     2.4     0.6     119.0     2.4  
Los Filos   9.6     8.5     2.6     61.4     6.8     13.4     71.0     7.0     16.0  
                                                       
Total Silver               104.3                 424.8                 529.1  
GOLD                                                      
Salobo (25%)(16)   12.3     0.47     0.19     48.8     0.37     0.58     61.1     0.39     0.77  
Sudbury (70%)(11)   -     -     -     23.3     0.33     0.25     23.3     0.33     0.25  
Minto   9.4     0.44     0.13     27.2     0.28     0.24     36.5     0.32     0.38  
TOTAL GOLD               0.32                 1.07                 1.39  

SILVER WHEATON 2012 ANNUAL REPORT [40]


ATTRIBUTABLE INFERRED RESOURCES (1,2,3,4,5,9,17)
AS OF DECEMBER 31, 2012 UNLESS OTHERWISE NOTED (6)

          Inferred        
    Tonnage     Grade     Contained  
SILVER   Mt     g/t     Moz  
Peñasquito (25%)(14)                  
   Mill   31.7     9.1     9.3  
   Heap Leach   12.7     1.6     0.7  
San Dimas(10, 14)   6.9     300.4     66.3  
Pascua-Lama (25%)(14)   8.1     15.5     4.0  
777 (13, 14)   1.2     39.2     1.5  
Neves-Corvo                  
   Copper   25.4     47.2     38.6  
   Zinc   22.1     51.0     36.2  
Rosemont(15)   104.5     3.3     11.1  
Constancia   223.0     1.9     13.4  
Mineral Park(15)   320.1     2.3     23.9  
Zinkgruvan                  
   Zinc   4.6     78.0     11.4  
   Copper   0.6     31.0     0.6  
Aljustrel                  
   Zinc   8.7     50.4     14.0  
   Copper   4.7     16.0     2.4  
Campo Morado (75%)   1.7     128.9     7.1  
Stratoni   0.7     217.0     4.7  
Loma de La Plata (12.5%)   0.2     76.0     0.4  
Minto   8.5     2.9     0.8  
Keno Hill (25%)                  
   Underground   0.2     340.8     1.9  
Los Filos   239.2     6.0     46.5  
                   
TOTAL SILVER               294.7  
GOLD                  
Salobo (25%)(16)   37.0     0.31     0.37  
Sudbury (70%)(11)   18.9     0.67     0.40  
777 (13, 14)   0.6     1.96     0.04  
Minto   8.5     0.24     0.07  
TOTAL GOLD               0.88  

SILVER WHEATON 2012 ANNUAL REPORT [41]


Notes:

1.

All Mineral Reserves and Mineral Resources have been calculated in accordance with the CIM Standards and NI 43-101, or the AusIMM JORC equivalent.

2.

Mineral Reserves and Mineral Resources are reported above in millions of metric tonnes (“Mt”), grams per metric tonne (“g/t”) and millions of ounces (“Moz”).

3.

Individual qualified persons (“QPs”), as defined by the NI 43-101, for the technical information contained in this document (including the Mineral Reserve and Mineral Resource estimates) for the following operations are as follows:

  a.

Salobo – Christopher Jacobs, CEng MIMMM (Vice President and Mining Economist), James Turner, CEng MIMMM (Senior Mineral Process Engineer), Barnard Foo, P. Eng., MBA (Senior Mining Engineer) and Jason Ché Osmond, FGS, C.Geol, EurGeol (Senior Geologist) all of whom are employees of Micon International Ltd.

  b.

All other operations and development projects: the Company’s QPs Neil Burns, M.Sc., P.Geo. (Vice President, Technical Services); Samuel Mah, M.A.Sc., P.Eng. (Senior Director, Project Evaluations), both employees of the Company (the “Company’s QPs”).

4.

The Mineral Resources reported in the above tables are exclusive of Mineral Reserves. The Minto, Campo Morado, Neves-Corvo, Zinkgruvan and Aljustrel mines report Mineral Resources inclusive of Mineral Reserves. The Company’s QPs have made the exclusive Mineral Resource estimates for these mines based on average mine recoveries and dilution.

5.

Mineral Resources which are not Mineral Reserves do not have demonstrated economic viability.

6.

Other than as detailed below, Mineral Reserves and Mineral Resources are reported as of December 31, 2012 based on information available to the Company as of the date of this document, and therefore will not reflect updates, if any, after such date.

  a.

Resources and Reserves for 777, Sudbury, Cozamin and Minto are reported as of December 31, 2011.

  b.

Resources and Reserves for San Dimas, Neves-Corvo and Zinkgruvan are reported as of June 30, 2012.

  c.

Resources and Reserves for Rosemont are reported as of August 28, 2012.

  d.

Resources for the Constancia and Pampacancha deposits are reported as of August 23, 2011 and April 2, 2012, respectively. Reserves for both Constancia and Pampacancha deposits are reported as of August 8, 2012.

  e.

Resources for Mineral Park are reported as of December 29, 2006 and Reserves as of December 31, 2011.

  f.

Resources and Reserves for Aljustrel’s Feitais and Moinho deposits are reported as of November 30, 2010, Resources for the Estaçao deposit are reported as of December 31, 2007.

  g.

Resources for Campo Morado’s El Rey, Naranjo and Reforma deposits are reported as of October 13, 2005.

  h.

Resources and Reserves for Stratoni are reported as of August 10, 2010.

  i.

Resources for Keno Hill’s Elsa Tailings are reported as of April 22, 2010, Lucky Queen and Onek deposits as of July 27, 2011, Bermingham as of June 27, 2012 and Flame and Moth as of January 30, 2013.

  j.

Resources for Loma de La Plata are reported as of May 20, 2009.

7.

Process recoveries are the average percentage of silver or gold in a saleable product (doré or concentrate) recovered from mined ore at the applicable site process plants as reported by the operators.

8.

Mineral Reserves are estimated using appropriate process recovery rates and the following commodity prices:

  a.

Peñasquito and Los Filos -$24.00 per ounce silver.

  b.

San Dimas, Rosemont and Cozamin - $20.00 per ounce silver.

  c.

Pascua-Lama - $22.00 per ounce silver.

  d.

Lagunas Norte, Veladero, Pierina – $28.00 per ounce silver.

  e.

Yauliyacu - $30.00 per ounce silver.

  f.

777 – $22.00 per ounce silver and $1,100 per ounce gold.

  g.

Neves-Corvo – 1.4% Cu cut-off for the copper Reserve and 5.0% Zn cut-off for all the zinc Reserves except for Lombador which was reported above a cut-off of 6.0% Zn.

  h.

Constancia - $23.00 per ounce silver.

  i.

Mineral Park – $7.50 per ounce silver.

  j.

Zinkgruvan – 3.7% Zn equivalent cut-off for the zinc Reserve and 1.8% Cu cut-off for the copper Reserve.

  k.

Aljustrel – 1.5% Cu cut-off for all copper Reserves, 4.5% Zn cut-off for all zinc Reserves.

  l.

Campo Morado - $18.92 per ounce silver.

  m.

Stratoni - $15.00 per ounce silver.

  n.

Minto – $3.90 per ounce silver and $300 per ounce gold.

  o.

Salobo - $1,150 per ounce gold.

  p.

Sudbury - $975 per ounce gold.

9.

Mineral Resources are estimated using appropriate recovery rates and the following commodity prices:

  a.

Peñasquito and Los Filos - $27.00 per ounce silver.

  b.

San Dimas - $25.00 per ounce silver.

  c.

Pascua-Lama, Lagunas Norte, Veladero and Pierina – $28.00 per ounce silver.

  d.

Yauliyacu – $30.00 per ounce silver.

  e.

777 – $22.00 per ounce silver and $1,100 per ounce gold.

  f.

Neves-Corvo – 1.0% Cu cut-off for the copper Resource and 3.0% Zn cut-off for the zinc Resource.

  g.

Rosemont and Cozamin – $20.00 per ounce silver.

  h.

Constancia - $22.00 per ounce silver.

  i.

Mineral Park – $7.50 per ounce silver.


SILVER WHEATON 2012 ANNUAL REPORT [42]



  j.

Zinkgruvan – 3.1% Zn equivalent cut-off for the zinc Resource and 1.5% Cu cut-off for the copper Resource.

  k.

Aljustrel – 1.5% Cu cut-off for all copper Resources, 4.5% Zn cut-off for Feitais and Moinho zinc Resources and 4.0% for Estação zinc Resources.

  l.

Campo Morado – $18.92 per ounce silver for the G-9 zones and 5% Zn cut-off for the El Rey, Naranjo and Reforma deposits.

  m.

Stratoni - $15.00 per ounce silver.

  n.

Minto – 0.5% Cu cut-off.

  o.

Loma de La Plata – $12.50 per ounce silver.

  p.

Keno Hill – $15.25 per ounce silver for the Southwest and 99 Zones, $14.50 per ounce silver for the East Zone, $17.00 per ounce silver for the Elsa Tailings, $18.50 per ounce silver for the Lucky Queen and Onek deposits, $23.00 per ounce silver for Bermingham and $24.00 per ounce silver for Flame and Moth.

  q.

Salobo - $1,150 per ounce gold.

  r.

Sudbury - $975 per ounce gold.

10.

The San Dimas silver purchase agreement provides that from August 6, 2010 until August 5, 2014, Primero Mining Corp. (“Primero”) will deliver to the Company a per annum amount equal to the first 3.5 million ounces of payable silver produced at San Dimas and 50% of any excess, plus the Company will receive an additional 1.5 million ounces of silver per annum to be delivered by Goldcorp Inc. (“Goldcorp”). Beginning August 6, 2014, Primero will deliver to the Company a per annum amount equal to the first 6.0 million ounces of payable silver produced at San Dimas and 50% of any excess, for the life of the mine.

11.

The Company’s attributable Resources and Reserves for Pierina, Lagunas Norte, Veladero, Cozamin and Yauliyacu silver interests in addition to the Sudbury and 777 gold interests have been constrained to the production expected for the various contracts.

12.

The Company’s Yauliyacu silver purchase agreement (March 2006) with Glencore International AG provides for the delivery of up to 4.75 million ounces of silver per year for 20 years. In the event that silver sold and delivered to Silver Wheaton in any year totals less than 4.75 million ounces, the amount sold and delivered to Silver Wheaton in subsequent years will be increased to make up for any cumulative shortfall, to the extent production permits. Depending upon production levels it is possible that the Company’s current attributable tonnage may not be mined before the agreement expires.

13.

The 777 purchase agreement provides that Hudbay Minerals Inc. (“Hudbay”) will deliver 100% of the payable silver for the life of the mine and 100% of the payable gold until completion of the Constancia project, after which the gold stream will reduce to 50%. The gold figures in this table represent the attributable 777 Resources and Reserves constrained to the production expected for the 777 contract. .

14.

In reliance upon Section 9.2 of NI 43-101, all technical information in this document regarding Peñasquito, San Dimas, Pascua-Lama and 777 was sourced by the Company from the following SEDAR (www.sedar.com) filed documents:

  a.

Peñasquito - Goldcorp Annual Information Form filed on March 1, 2013;

  b.

San Dimas - Primero MD&A filed on February 21, 2013;

  c.

Pascua-Lama - Barrick Gold Corp. Fourth Quarter and Year-End Report - 2012 filed on February 14, 2013; and

  d.

777 - Hudbay Annual Information Form filed on March 30, 2012.

 

The Company QP's have approved the disclosure in this document in reliance on such documents.

15.

The Mineral Park and Rosemont Resources and Reserves do not include the SX/EW leach material since this process does not recover silver.

16.

The Company has filed a technical report for Salobo, which is available on SEDAR.

17.

Silver and gold are produced as by-product metal at all operations with the exception of silver at the Keno Hill mine and Loma de La Plata project; therefore, the economic cut-off applied to the reporting of silver and gold Resources and Reserves will be influenced by changes in the commodity prices of other metals at the time.


SILVER WHEATON 2012 ANNUAL REPORT [43]


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 “forward-looking information” within the meaning of applicable Canadian securities legislation. Forward-looking statements, which are all statements other than statements of historical fact, include, but are not limited to, statements with respect to the future price of silver or gold, 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, reserve conversion rates and statements as to any future dividends. 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 statements 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: fluctuations in the price of silver or gold; the absence of control over mining operations from which Silver Wheaton purchases silver and gold and risks related to these mining operations including risks related to fluctuations in the price of the primary commodities mined at such operations, actual results of mining and exploration activities, economic and political risks of the jurisdictions in which the mining operations are located and changes in project parameters as plans continue to be refined; and differences in the interpretation or application of tax laws and regulations; as well as those factors discussed in the section entitled “Description of the Business - Risk Factors” in Silver Wheaton's Annual Information Form available on SEDAR at www.sedar.com and in Silver Wheaton's Form 40-F on file with the U.S. Securities and Exchange Commission in Washington, D.C. Forward-looking statements are based on assumptions management believes to be reasonable, including but not limited to: the continued operation of the mining operations from which Silver Wheaton purchases silver and gold, no material adverse change in the market price of commodities, that the mining operations will operate and the mining projects will be completed in accordance with their public statements and achieve their stated production outcomes, and such other assumptions and factors as set out herein. 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 forward-looking statements will prove to be accurate. Accordingly, readers should not place undue reliance on forward-looking statements. Silver Wheaton does not undertake to update any forward-looking statements that are included or incorporated by reference herein, except in accordance with applicable securities laws.

Cautionary Language Regarding Reserves And Resources

For further information on Mineral Reserves and Mineral Resources and on Silver Wheaton more generally, readers should refer to Silver Wheaton’s Annual Information Form for the year ended December 31, 2012 and other continuous disclosure documents filed by Silver Wheaton since January 1, 2013, available on SEDAR at www.sedar.com. Silver Wheaton’s Mineral Reserves and Mineral Resources are subject to the qualifications and notes set forth therein. Mineral Resources which are not Mineral Reserves do not have demonstrated economic viability.

Cautionary Note to United States Investors Concerning Estimates of Measured, Indicated and Inferred Resources: The information contained herein uses the terms “Measured”, “Indicated” and “Inferred” Mineral 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 and expressly prohibits U.S. registered companies from including such terms in their filings with the SEC. “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. United States investors are urged to consider closely the disclosure in Silver Wheaton’s Form 40-F, a copy of which may be obtained from Silver Wheaton or from http://www.sec.gov/edgar.shtml.

SILVER WHEATON 2012 ANNUAL REPORT [44]


Management’s Responsibility for Financial Reporting

The accompanying consolidated financial statements of Silver Wheaton Corp. (“Silver Wheaton”) were prepared by management, which is responsible for the integrity and fairness of the information presented, including the many amounts that must of necessity be based on estimates and judgments. These consolidated financial statements were prepared in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. Financial information appearing throughout our Management’s Discussion and Analysis (“MD&A”) is consistent with these consolidated financial statements.

In discharging our responsibility for the integrity and fairness of the consolidated financial statements and for the accounting systems from which they are derived, we maintain and rely on a comprehensive system of internal controls designed to ensure that transactions are authorized, assets are safeguarded and proper records are maintained. These controls include business planning; delegation of authority; careful selection and hiring of staff; accountability for performance within appropriate and well-defined areas of responsibility; and the communication of policies and guidelines of business conduct throughout the company.

The Board of Directors oversees management’s responsibilities for financial reporting through the Audit Committee, which is composed entirely of directors who are neither officers nor employees of Silver Wheaton. The Audit Committee reviews Silver Wheaton’s interim and annual consolidated financial statements and MD&A and recommends them for approval by the Board of Directors. Other key responsibilities of the Audit Committee include monitoring Silver Wheaton’s system of internal controls, monitoring its compliance with legal and regulatory requirements, selecting the external auditors and reviewing the qualifications, independence and performance of the external auditors.

Deloitte LLP, Independent Registered Chartered Accountants, appointed by the shareholders of Silver Wheaton upon the recommendation of the Audit Committee and Board, have performed an independent audit of the consolidated financial statements and their report follows. The auditors have full and unrestricted access to the Audit Committee to discuss their audit and related findings.

/s/ Randy Smallwood /s/ Gary Brown
Randy Smallwood Gary Brown
President & Chief Executive Officer Senior Vice President & Chief Financial Officer
   
   
March 21, 2013  

SILVER WHEATON 2012 ANNUAL REPORT [45]


Report of Independent Registered Chartered Accountants

To the Board of Directors and Shareholders of Silver Wheaton Corp.

We have audited the accompanying consolidated financial statements of Silver Wheaton Corp. and subsidiaries (the “Company”), which comprise the consolidated balance sheets as at December 31, 2012 and December 31, 2011, and the consolidated statements of earnings, consolidated statements of comprehensive income, consolidated statements of cash flows and consolidated statements of shareholders’ equity for the years then ended, and a summary of significant accounting policies and other explanatory information.

Management's responsibility for the consolidated financial statements

Management is responsible for the preparation and fair presentation of these consolidated financial statements in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board, and for such internal control as management determines is necessary to enable the preparation of consolidated financial statements that are free from material misstatement, whether due to fraud or error.

Auditor's responsibility

Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we comply with ethical requirements and plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free from material misstatement.

An audit involves performing procedures to obtain audit evidence about the amounts and disclosures in the consolidated financial statements. The procedures selected depend on the auditor's judgment, including the assessment of the risks of material misstatement of the consolidated financial statements, whether due to fraud or error. In making those risk assessments, the auditor considers internal control relevant to the entity's preparation and fair presentation of the consolidated financial statements in order to design audit procedures that are appropriate in the circumstances. An audit also includes evaluating the appropriateness of accounting policies used and the reasonableness of accounting estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements.

We believe that the audit evidence we have obtained in our audits is sufficient and appropriate to provide a basis for our audit opinion.

Opinion

In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of Silver Wheaton Corp. and subsidiaries as at December 31, 2012 and December 31, 2011 and their financial performance and their cash flows for the years then ended in accordance with International Financial Reporting Standards as issued by the International Accounting Standards Board.

Other matter

We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the Company's internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission and our report dated March 21, 2013 expressed an unqualified opinion on the Company’s internal control over financial reporting.

/s/ Deloitte LLP

Independent Registered Chartered Accountants

Vancouver, Canada
March 21, 2013

SILVER WHEATON 2012 ANNUAL REPORT [46]


Management’s Report on Internal Control Over Financial Reporting

Management of Silver Wheaton Corp. (“Silver Wheaton”) is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of the Chief Executive Officer and the Chief Financial Officer and effected by the Board of Directors, management and other personnel to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with International Financial Reporting Standards (“IFRS”) as issued by the International Accounting Standards Board. It includes those policies and procedures that:

  i.

pertain to the maintenance of records that accurately and fairly reflect, in reasonable detail, the transactions related to Silver Wheaton’s assets

     
  ii.

provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with IFRS, and Silver Wheaton receipts and expenditures are made only in accordance with authorizations of management and Silver Wheaton’s directors

     
  iii.

provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of Silver Wheaton’s assets that could have a material effect on Silver Wheaton’s financial statements.

Due to its inherent limitations, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Also, projections of any evaluation of the effectiveness of internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management assessed the effectiveness of Silver Wheaton’s internal control over financial reporting as of December 31, 2012, based on the criteria set forth in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this assessment, management has concluded that, as of December 31, 2012, Silver Wheaton’s internal control over financial reporting was effective.

The effectiveness of Silver Wheaton’s internal control over financial reporting, as of December 31, 2012, has been audited by Deloitte LLP, Independent Registered Chartered Accountants, as stated in their report which appears on the following page.

/s/ Randy Smallwood /s/ Gary Brown
   
Randy Smallwood Gary Brown
President & Chief Executive Officer Senior Vice President & Chief Financial Officer
   
March 21, 2013  

SILVER WHEATON 2012 ANNUAL REPORT [47]


Report of Independent Registered Chartered Accountants

To the Shareholders and Board of Directors of Silver Wheaton Corp.

We have audited the internal control over financial reporting of Silver Wheaton Corp. and subsidiaries (the “Company”) as of December 31, 2012, based on the criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit.

We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion.

A company's internal control over financial reporting is a process designed by, or under the supervision of, the company's principal executive and principal financial officers, or persons performing similar functions, and effected by the company's board of directors, management, and other personnel 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. A company's internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) 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 financial statements.

Because of the inherent limitations of internal control over financial reporting, including the possibility of collusion or improper management override of controls, material misstatements due to error or fraud may not be prevented or detected on a timely basis. Also, projections of any evaluation of the effectiveness of the internal control over financial reporting to future periods are subject to the risk that the controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2012, based on the criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission.

We have also audited, in accordance with Canadian generally accepted auditing standards and the standards of the Public Company Accounting Oversight Board (United States), the consolidated financial statements as of and for the year ended December 31, 2012 of the Company and our report dated March 21, 2013 expressed an unqualified opinion on those financial statements.

/s/ Deloitte LLP

Independent Registered Chartered Accountants

Vancouver, Canada
March 21, 2013

SILVER WHEATON 2012 ANNUAL REPORT [48]


Consolidated Statements of Earnings

          Years Ended December 31  
                   
(US dollars and shares in thousands, except per share amounts)   Note     2012     2011  
                   
Sales   5   $  849,560   $  729,997  
                   
Cost of sales                  
         Cost of sales, excluding depletion       $  117,489   $  86,266  
         Depletion         101,229     57,457  
                   
Total cost of sales       $  218,718   $  143,723  
                   
Earnings from operations       $  630,842   $  586,274  
                   
Expenses and other income                  
         General and administrative 1   6   $  30,839   $  25,180  
         Foreign exchange loss (gain)         29     (453 )
         Other (income) expense         (817 )   3,182  
        $  30,051   $  27,909  
Earnings before income taxes       $  600,791   $  558,365  
Income tax expense   19     (14,755 )   (8,337 )
                   
Net earnings       $  586,036   $  550,028  
                   
Basic earnings per share       $  1.66   $  1.56  
Diluted earnings per share       $  1.65   $  1.55  
                   
Weighted average number of shares outstanding                  
         Basic   15     353,874     353,249  
         Diluted   15     356,008     355,904  
1)    Equity settled stock based compensation (a non-cash item) 
        included in general and administrative expenses.
    $  6,420   $  6,329  

Consolidated Statements of Comprehensive Income

          Years Ended December 31  
(US dollars in thousands)   Note     2012     2011  
                   
Net earnings       $  586,036   $  550,028  
                   
Other comprehensive income (loss)                  
         Loss on long-term investments - common shares held   8   $  (31,134 ) $  (119,114 )
         Deferred income tax recovery   19     2,479     10,699  
                   
Total other comprehensive loss       $  (28,655 ) $  (108,415 )
                   
Total comprehensive income       $  557,381   $  441,613  

The accompanying notes form an integral part of these consolidated financial statements.

SILVER WHEATON 2012 ANNUAL REPORT [49]


Consolidated Balance Sheets

          December 31     December 31    
(US dollars in thousands)   Note     2012     2011  
                   
Assets                  
                   
Current assets                  
         Cash and cash equivalents       $  778,216   $ 840,201  
         Accounts receivable   7     6,197     3,890  
         Other         966     1,221  
                   
Total current assets       $  785,379   $ 845,312  
                   
Non-current assets                  
         Silver and gold interests   9   $  2,281,234   $ 1,871,726  
         Long-term investments   8     121,377     151,621  
         Deferred income taxes   19     -     2,301  
         Other         1,347     1,375  
                   
Total non-current assets       $  2,403,958   $ 2,027,023  
                   
Total assets       $  3,189,337   $ 2,872,335  
                   
                   
Liabilities                  
                   
Current liabilities                  
         Accounts payable and accrued liabilities       $  20,898   $ 8,345  
         Current portion of bank debt   10     28,560     28,560  
         Current portion of silver interest payments   11     -     130,789  
                   
Total current liabilities       $  49,458   $ 167,694  
                   
Non-current liabilities                
         Long-term portion of bank debt   10   $  21,500   $ 50,060  
         Deferred income taxes   19     9,250     -  
         Performance share units   14.1     2,055     364  
                   
Total non-current liabilities       $  32,805   $ 50,424  
                   
Total liabilities       $  82,263   $ 218,118  
                   
Shareholders' equity                  
                   
Issued capital   12   $  1,811,577   $ 1,793,772  
                   
Reserves   13     (1,710 )   25,422  
                   
Retained earnings         1,297,207     835,023