A solid start

Wheaton Precious Metals 10 May 2021 Update
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Wheaton Precious Metals

A solid start

Q121 results

Metals & mining

10 May 2021

Price

C$53.15

Market cap

C$23,889m

C$1.2184/US$

Gross cash* (US$m) at end-March

191.2

*Excludes US$3.4m in lease liabilities

Shares in issue

449.5m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

LSE, NYSE

Share price performance

%

1m

3m

12m

Abs

3.7

2.5

(13.1)

Rel (local)

1.9

(4.6)

(33.8)

52-week high/low

C$75.14

C$45.11

Business description

Wheaton Precious Metals is the world’s pre-eminent ostensibly precious metals streaming company, with 32 high-quality precious metals streaming and early deposit agreements relating to assets in Mexico, Peru, Canada, Brazil, Chile, the United States, Argentina, Sweden, Greece, Portugal and Colombia.

Next events

Q221 results

12 August 2021

Q321 results

4 November 2021

Q421/FY21 results

March 2022

Q122 results

May 2022

Analyst

Charles Gibson

+44 (0)20 3077 5724

Wheaton Precious Metals is a research client of Edison Investment Research Limited

Wheaton Precious Metals’ (WPM’s) Q121 results were characterised by record quarterly revenue, the repayment of the group’s revolving credit facility and a third successive increase in the quarterly dividend (to US$0.14/share). In a departure from recent trends, it was the silver division that led the way in terms of increased production and sales as the gold division lagged, principally as a result of lingering coronavirus induced disruptions at Salobo. Adjusted EPS of US$0.358 was consistent with our prior forecast and well within the range of analysts’ expectations of US$0.32–0.43/share. In the aftermath of the results, we have upgraded our adjusted EPS forecast for WPM for FY21 by 4.0%, albeit this largely reflects the recent strength in metals prices rather than expectations of production growth. Should our forecasts for the full year be borne out, we calculate that WPM will distribute more in dividends in FY21 than it earned in FY19.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/19

861.3

242.7

54

36

80.7

0.8

12/20

1,096.2

503.2

112

42

38.9

1.0

12/21e

1,405.4

705.3

157

62

27.9

1.4

12/22e

1,631.5

933.5

207

79

21.0

1.8

Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.

Operations returning to normal

Voisey’s Bay successfully made a maiden contribution to WPM’s production and earnings during the quarter (at a higher rate of output than initially expected by Edison). All of the six of WPM’s partners’ mines that were directly affected by shutdowns in 2020 (namely Penasquito, San Dimas, Antamina, Constancia, Yauliyacu and Los Filos) are now operating at, or close to, full capacity. In addition, production and sales at WPM were closely aligned during the quarter and ounces of gold and silver produced but not yet delivered reduced in both cases, providing evidence of a return to more normal operating conditions in the wake of the worst depredations of the COVID-19 pandemic in FY20.

Valuation: US$62.54 or C$76.20 per share

In normal circumstances and assuming no material purchases of additional streams in the foreseeable future (which we think unlikely given WPM’s business strategy), we forecast a value per share for WPM of US$62.54 or C$76.20 in FY23 (cf US$62.07 and C$78.03 previously). In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than the averages of its peers on 86% of nine common valuation measures using our forecasts and 72% of the same measures using consensus forecasts. Similarly, if WPM’s shares were to trade at the same level as the average of its peers, then we estimate that its share price should be US$62.52 (C$76.17), based on Edison’s forward earnings, dividend and cash flow estimates for FY21. If precious metals return to favour, however, we believe that WPM is capable of supporting a premium valuation up to US$84.81 (C$107.16) per share.

Q121 results

WPM’s Q121 results were characterised by record quarterly revenue, the repayment of the group’s revolving credit facility in its entirety and a third successive increase in the quarterly dividend (to US$0.14/share). In a departure from recent trends, it was the silver division that led the way in terms of increased production and sales as the gold division lagged, principally as a result of scheduled and unscheduled maintenance at Salobo that took longer to undertake as COVID-19 limited Vale’s ability to mobilise contractors and that also restricted mine movement. Adjusted EPS of US$0.35 was consistent with our prior expectations and well within the range of analysts’ expectations of US$0.32–0.43/share. In addition, production and sales were closely aligned and ounces of gold and silver produced but not yet delivered to WPM reduced in both cases, providing evidence of a return to more normal operating conditions in the wake of the worst depredations of the COVID-19 pandemic in FY20. A summary of WPM’s financial and operating results in the context of both its results in the preceding quarters and Edison’s prior forecasts is as follows:

Exhibit 1: WPM underlying Q420 results vs Q320 and Q420e, by quarter*

US$000s
(unless otherwise stated)

Q120

Q220

Q320

Q420

Q121e

Q121

Change
**(%)

Variance
***(%)

Variance
***(units)

Silver production (koz)

6,704

3,650

6,028

6,509

6,049

6,754

3.8

11.7

705

Gold production (oz)

94,707

88,631

91,770

93,137

92,925

77,733

-16.5

-16.3

-15,192

Palladium production (koz)

5,312

5,759

5,444

5,672

5,561

5,769

1.7

3.7

208

Cobalt production (klbs)

525

1,161

N/A

+121.1

636

Silver sales (koz)

4,928

4,729

4,999

4,576

6,049

6,657

45.5

10.1

608

Gold sales (oz)

100,405

92,804

90,101

86,243

92,892

75,104

-12.9

-19.1

-17,788

Palladium sales (koz)

4,938

4,976

5,546

4,591

5,539

5,131

11.8

-7.4

-408

Cobalt sales (klbs)

0

132.3

N/A

N/A

132.3

Avg realised Ag price (US$/oz)

17.03

16.73

24.69

24.72

26.29

26.12

5.7

-0.6

-0.17

Avg realised Au price (US$/oz)

1,589

1,716

1,906

1,882

1,799

1,798

-4.5

-0.1

-1

Avg realised Pd price (US$/oz)

2,298

1,917

2,182

2,348

2,403

2,392

1.9

-0.5

-11

Avg realised Co price (US$/lb)

22.19

N/A

N/A

N/A

Avg Ag cash cost (US$/oz)

4.50

5.23

5.89

5.51

6.10

6.33

14.9

3.8

0.23

Avg Au cash cost (US$/oz)

436

418

428

433

429

450

3.9

4.9

21

Avg Pd cash cost (US$/oz)

402

353

383

423

432

427

0.9

-1.2

-5

Avg Co cash cost (US$/lb)

4.98

N/A

N/A

N/A

Sales

254,789

247,954

307,268

286,213

339,453

324,119

13.2

-4.5

-15,334

Cost of sales

Cost of sales, excluding depletion

66,908

65,211

70,119

64,524

79,116

78,783

22.1

-0.4

-333

Depletion

64,841

58,661

60,601

59,786

62,089

70,173

17.4

13.0

8,084

Total cost of sales

131,748

123,872

130,720

124,310

141,205

148,956

19.8

5.5

7,751

Earnings from operations

123,040

124,082

176,548

161,902

198,247

175,164

8.2

-11.6

-23,083

Expenses and other income

– General and administrative

13,181

21,799

21,326

9,391

18,329

11,971

27.5

-34.7

-6,358

– Foreign exchange (gain)/loss

0

0

0

0

N/A

N/A

0

– Net interest paid/(received)

7,118

4,636

2,766

2,196

187

1,573

-28.4

741.2

1,386

– Other (income)/expense

-1,861

234

391

850

420

-50.6

N/A

420

Total expenses and other income

18,438

26,669

24,483

12,437

18,516

13,964

12.3

-24.6

-4,552

Earnings before income taxes

104,602

97,413

152,065

149,465

179,731

161,199

7.9

-10.3

-18,532

Income tax expense/(recovery)

8,442

59

58

24

250

67

179.2

-73.2

-183

Marginal tax rate (%)

8.1

0.1

0.0

0.0

0.1

0.0

N/A

-100.0

0

Net earnings

96,160

97,354

152,007

149,441

179,481

161,132

7.8

-10.2

-18,349

Average no. shares in issue (000s)

447,805

448,636

449,125

449,320

449,466

449,509

0.0

0.0

43

Basic EPS (US$)

0.215

0.217

0.338

0.333

0.399

0.358

7.5

-10.3

-0.04

Diluted EPS (US$)

0.214

0.216

0.336

0.331

0.389

0.358

8.2

-8.0

-0.03

DPS (US$)

0.10

0.10

0.10

0.12

0.13

0.13

8.3

0.00

0.00

Source: WPM, Edison Investment Research. Note: *As reported by WPM, excluding exceptional items. **Q121 versus Q420. ***Q121 actual versus Q121 estimate.

From an operational perspective, production from Penasquito and San Dimas was affected by lower grades (in the latter’s case on account of increased ore development activities), while that at Salobo and Sudbury was affected by lower plant throughputs – at Salobo on account of scheduled and unscheduled maintenance that took longer to undertake as the lingering effects of COVID-19 limited Vale’s ability to mobilise contractors and that also restricted mine movement. Antamina benefited from higher grades, while Voisey’s Bay made its maiden contribution of cobalt delivered to WPM (albeit at a rather higher level than Edison had anticipated in Q1). Elsewhere, Constancia continued to be affected by the delay in accessing the high-grade Pampacancha pit. However, on 7 April, its operator Hudbay announced that the final land user agreement for Pampacancha has now been completed and that that it now has full access to the site and has begun pit development activities. The following mines outperformed our expectations during the quarter in terms of production: Penasquito, Antamina, Constancia (silver), Los Filos, Yauliyacu, Neves-Corvo, Aljustrel, Cozamin, Minto and 777. All of the six of WPM’s partners’ mines that were directly affected by shutdowns and suspensions in 2020 (namely Penasquito, San Dimas, Antamina, Constancia, Yauliyacu and Los Filos) are now operating at, or close to, full capacity. Operations at Los Filos also appear to have recovered from an illegal blockade, which caused a temporary suspension of mining activities in Q420, after operations were restarted on 23 December 2020.

In the meantime, according to Vale’s most recent performance report, physical completion of the Salobo III mine expansion was 73% at end-Q121 (cf 68% at end-Q420, 62% at end-Q3, 54% at end-Q2, 47% at end-Q1, 40% at end-Q419 and 27% at end-Q319) and remains on schedule for start-up in H122.

Ounces produced but not yet delivered, aka inventory

For the first time in more than a year, sales of both silver and gold closely approximated production. Gold sales were 3.4% less than production (cf a long-term historical average of 7.2%), while silver sales were 1.4% less (cf a long-term, historical average of 11.9%).

Exhibit 2: Over/(under) sale of silver and gold as a percentage of production, Q112–Q121

Source: Edison Investment Research, WPM. Note: As reported.

As at 31 March, payable ounces attributable to WPM produced but not yet delivered to WPM amounted to 3.7Moz silver and 69,328oz gold (cf 4.5Moz silver and 71,590oz gold as at end-December and 3.4Moz silver and 75,750oz gold as at end-September). This ‘inventory’ currently equates to 1.79 and 2.32 months of Edison’s forecast FY21 silver and gold production, respectively (cf 2.35 and 2.33 months as at end-Q420 and 1.80 and 2.51 months as at end-Q320) and compares with WPM’s target level of two months of silver and two to three months of gold and palladium production, respectively:

Exhibit 3: WPM ounces produced but not yet delivered, Q316–Q121 (months of production)

Source: Edison Investment Research, WPM. Note: As reported.

Note that, for these purposes, the use of the term ‘inventory’ reflects ounces produced by WPM’s operating counterparties at the mines over which it has streaming agreements, but which have not yet been delivered to WPM. It in no way reflects the other use of the term in the mining industry, where it typically refers to metal in circuit and ore on stockpiles, etc.

FY21 and five-year and 10-year guidance

At the time of its Q420/FY20 results, WPM provided production guidance of 720–780koz AuE for FY21 and well as five-year production guidance of 810,000oz AuE per annum and maiden 10-year guidance of 830,000oz AuE per annum. This compares with Edison’s updated forecasts in the wake of Q121 results as follows:

Exhibit 4: WPM precious metals production – Edison forecasts cf guidance

FY20

FY21e

**FY22–25

FY26–30

Previous Edison forecast

Silver production (Moz)

24.3

Gold production (koz)

374.6

Cobalt production (klb)

2,100

Palladium production (koz)

22.2

Gold equivalent (koz)

761

788

778

Current Edison forecast

Silver production (Moz)

*22.9

25.0

Gold production (koz)

*367.4

359.4

Cobalt production (klb)

*0

2,736

Palladium production (koz)

*22.2

22.5

Gold equivalent (koz)

*671.7

762

787

778

WPM guidance

Silver production (Moz)

21.5–22.5

22.5–24.0

Gold production (koz)

365–385

370–400

Cobalt & palladium production (koz AuE)

0

40–45

Palladium production (koz)

23.0–24.5

N/A

Gold equivalent (koz)

655–685

720–780

810

830

Source: WPM, Edison Investment Research forecasts. Note: *Actual; **Edison forecasts include a contribution from Salobo III from FY23e and Rosemont from FY25e.

WPM’s updated five-year guidance and its 10-year guidance are now based on standardised pricing assumptions of US$1,800/oz gold (Au), US$25.00/oz silver (Ag), US$2,300/oz palladium (Pd) and US$17.75/lb cobalt (Co). Of note in this context is an implied gold/silver ratio of 72.0x, which compares with its current ratio of 66.9x and a long-term average of 61.5x (as implied by silver’s correlation with gold since the latter was demonetised in 1971).

Readers will note that Edison’s FY21 silver production forecast is now above the top end of WPM’s guidance range. After producing 6.8Moz Ag in Q121 however, WPM’s mines will only be required to produce at a rate of 5.7Moz Ag per quarter for the remainder of the year in order to achieve the top end of WPM’s guidance range of 22.5–24.0Moz Ag for FY21. This compares with a long-term average quarterly production rate of 6.6Moz per quarter since Q112. Conversely, Edison’s gold production forecast is now below the bottom end of WPM’s guidance range. After producing 77.7koz Au in Q121, WPM’s mines would have to produce at a rate of 97.4koz Au per quarter for the remainder of the year in order to achieve the bottom end of WPM’s guidance range of 370–400koz Au for FY21. While this is certainly possible (WPM’s gold mines produced at an average rate of 102.4koz per quarter in the period Q318–Q419), we think that it may prove demanding, given the delays that Hudbay has experienced in accessing the high-grade Pampacancha pit at Constancia and in the event of any lingering coronavirus induced disruptions at Salobo in Brazil in particular. In this respect, Edison’s financial forecasts for FY21 may prove conservative. Self-evidently, at the standardised prices indicated, Edison’s gold equivalent production forecast of 762koz gold equivalent (AuE) remains little changed relative to our prior forecast of 761koz AuE and well within WPM’s guidance of 720–780koz AuE.

Otherwise, readers will note that Edison’s (updated) production forecasts are 2.8% below WPM’s guidance for FY22–25 and 6.2% below its guidance for FY26–30. However, this difference is largely negated in its translation into financial results by the fact that sales have historically been recorded at a level c 8.5% below production (at prevailing prices) whereas Edison’s financial forecasts typically assume that the two are closely aligned. Moreover, our forecasts exclude (for the moment) any contribution from Santo Domingo (see our note Q121 results preview, published on 31 March 2021), which we expect to be in the order of 42,350oz Au per annum on average in the period FY24–25 and 25,520oz Au per annum on average in the period FY26–30.

Short-term organic growth opportunities

In the short term, First Majestic has announced plans to increase production at San Dimas by restarting mining operations at the past-producing Tayoltita mine and expects to ramp up production to add another 300tpd (12%) to throughput. In addition, it intends to install a new 3,000tpd high-intensity grinding mill circuit and an autogenous grinding mill in Q221 to further improve recoveries and reduce operating costs. Production of palladium and gold at Stillwater (operated by Sibanye-Stillwater) will similarly increase under the influence of the Fill-the-Mill project at East Boulder (although the Blitz project has now been delayed by two years, until 2024, following the suspension of growth capital activities owing to COVID-19).

Similarly, Hudbay expects gold production from its Constancia mine in Peru to increase by 263.0% in FY21 and silver production to increase by 22.3% (of which, WPM is entitled to 50% and 100%, respectively). Notwithstanding these increases, we expect production to remain at lower levels than would otherwise have been the case had the Pampacancha satellite deposit (which hosts significantly higher gold grades than those mined hitherto) been in operation for the entire 12-month period. Nevertheless, Hudbay reports that the final land user agreement for Pampacancha has now been completed and that Hudbay now has full access to the site and has commenced pit development activities such as pre-stripping. Consequently, it expects to start mining at Pampacancha ‘later in 2021.’ Note that until Pampacancha is in production, WPM continues to be entitled to receive an additional 2,005oz gold per quarter from Hudbay relative to its precious metals purchase agreement (PMPA). However, readers should note that Hudbay and WPM are reported to be in discussions about, among other things, ‘alternatives to defer the additional gold deliveries over the Pampacancha mine life’.

Longer-term outlook

Salobo

On 24 October 2018, Vale announced the approval of the Salobo III brownfields mine expansion, intended to increase processing capacity at Salobo from 24Mtpa to 36Mtpa, with start-up scheduled for H122 and an estimated ramp-up time of 15 months. According to its agreement with Vale, depending on the grade of the material processed, WPM will be required to make a payment to Vale in respect of this expansion, which WPM estimates will be US$570–670m in FY23, in return for which it will be entitled to its full 75% attributable share of expanded gold production. This compares to its purchase of a 25% stream in August 2016 for a consideration of US$800m (see our note Going for gold, published on 30 August 2016), the US$900m it paid for a similar stream in March 2015 (when the gold price averaged US$1,179/oz) and the US$1.33bn that it paid for its original 25% stream in February 2013.

According to Vale’s Q121 performance report, the Salobo III mine expansion is now 73% complete (cf 68% at the end of Q420, 62% at the end of Q320, 54% at the end of Q220, 47% at the end of Q120, 40% at the end of Q419 and 27% at the end of Q319) and remains on schedule for start-up in H122.

Once Salobo III has been completed however, WPM now believes that reserves and resources could support a further 33% capacity increase at Salobo, from 90ktpd to 120ktpd (denoted Salobo IV). In addition to its long-term underground mining potential, WPM believes that such an expansion could nevertheless still be supported by output from the open pit. Under the terms of its agreement with Vale, there would be no additional payment due from WPM in respect of this expansion, although Vale could exercise a right to alter the timing of the incremental payment due in respect of Salobo III.

Pascua-Lama

WPM’s contract with Barrick provides for a completion test that, if unfulfilled by 30 June 2020, resulted in WPM being entitled to the return of its upfront cash consideration of US$625m less a credit for any silver delivered up to that date from three other Barrick mines (at which point it would have no further streaming interest in the mine). Given the test was unfulfilled, we calculate that WPM had the right to an estimated US$252.3m (the carrying value of Pascua-Lama in WPM’s accounts) repayment from Barrick in FY20. Given the long-term optionality provided by the Pascua-Lama project, however, WPM instead opted not to enforce the repayment of its entitlement and to instead maintain its streaming interest in the project (which was originally expected to deliver an attributable 1.7–12.0Moz silver pa, averaging 5.2Moz Ag pa, to WPM at a cost of US$3.90/oz (inflating at 1% per year).

Rosemont

Another major project with which WPM has a streaming agreement for attributable gold and silver production is Rosemont copper in Arizona.

The proposed Rosemont development is near a number of large porphyry-type producing copper mines and would be one of the largest three copper mines in the US, with output of c 112,000t copper in concentrate per year and accounting for c 10% of total US copper production. Total by-product production of silver and gold attributable to WPM is estimated to be c 2.7Moz Ag pa and c 16,100oz Au pa.

Rosemont’s operator, Hudbay, has received both a Mine Plan of Operations from the US Forest Service and a Section 404 Water Permit from the US Army Corps of Engineers (in March 2019), which was effectively the final material administrative step before the mine could start development. Subsequently, Hudbay indicated it would seek board approval to start construction work by the end of CY19, which would have enabled first production ‘by the end of 2022’. In the meantime, it started early works to run concurrently with financing activities (including a potential joint venture partner).

On 31 July 2019, however, the US District Court for the District of Arizona issued a ruling relating to a number of lawsuits challenging the US Forest Service’s issuance of the Final Record of Decision effectively halting construction, saying that:

the US Forest Service ‘abdicated its duty to protect the Coronado National Forest’ when it failed to consider whether the mining company held valid unpatented mining claims; and

the Forest Service had ‘no factual basis to determine that Rosemont had valid unpatented mining claims’ on 2,447 acres and the claims were invalid under the Mining Law of 1872.

In response, Hudbay said that it believed the ruling to be without precedent and that the court had misinterpreted federal mining laws and Forest Service regulations as they apply to Rosemont. It pointed out that the Forest Service issued its decision in 2017 after a ‘thorough process of 10 years involving 17 co-operating agencies at various levels of government, 16 hearings, over 1,000 studies, and 245 days of public comment resulting in more than 36,000 comments’ and with a long list of studies that have examined the potential effects of the proposed mine on the environment. Hudbay also pointed out that various agencies had accepted that the company could operate the mine in compliance with environmental laws. As a result, Hudbay is appealing the ruling to the Ninth Circuit Court of Appeals, which it expects to be successful, not least as a result of there being legal precedents for its waste disposal plan. As an alternative, however, it is also able to adapt its plan to accommodate its waste dumps on privately owned, patented land alone, if necessary.

Once in production, we estimate Rosemont will contribute c 16,750oz gold and 2.7Moz silver to WPM’s production profile in return for an upfront payment of US$230m in two instalments of US$50m and US$180m (neither of which has yet been paid). Note that, whereas before, we had not included Rosemont in our longer-term forecasts, we are now including it from FY25. In the meantime however, Hudbay has continued exploration at Rosemont and, on 29 March 2021, announced the intersection of high-grade copper sulphide and oxide mineralisation at shallow depth on its wholly-owned patented mining claims, located within 7km of the proposed Rosemont mine. As a result of the discovery, Hudbay has initiated a second phase of exploration drilling with a 70,000ft (21,336m) follow-up drill programme and has doubled the number of drill rigs operating at site from three to six. Note that the discovery is contained within WPM’s ‘area of interest’ as defined under the PMPA between it and Hudbay.

Other potential future growth opportunities

WPM reports that its corporate development team remains ‘exceptionally busy’. Whereas potential deals in FY19 were generally reported to be with development companies in the US$100–350m range, more recent overtures are reported to include producing companies, especially within the base metals sub-sector, looking to strengthen their balance sheets with mooted transactions in the >US$1bn range. In the first instance, WPM would fund any such transactions via the US$2bn available under its revolving credit facility, plus US$191.2m in cash (as at end-Q121) and, potentially, its US$300m at-the-market equity programme.

While it is difficult, or impossible, to predict potential future stream acquisition targets with any degree of certainty, it is possible to highlight two that may be of interest to WPM in due course for which it already has strong, existing counterparty relationships:

the platinum group metal (PGM) by-product stream at Sudbury (operated by Vale); and

the 50% of the gold output at Constancia that is currently not subject to any streaming arrangement.

Otherwise, WPM also has streaming agreements with other potential producing mines, including Navidad and Cotabambas, and a recently acquired 2.0% net smelter return royalty interest with the Brewery Creek mine in the Yukon in Canada.

General and administrative expenses

WPM provided guidance for non-stock general and administrative (G&A) expenses of US$42–45m (or US$10.5–11.25m per quarter) in FY21, compared to a guided range of US$40–43m in FY20 and an actual outcome of US$38.7m (ie 3.1% below the bottom of the range), including all employee-related expenses, charitable contributions, etc, but excluding performance share units (PSUs) and equity settled stock-based compensation. In the event, G&A expenses in Q121 were below the pro-rata quarterly rate implied by WPM’s full-year guidance, while total G&A costs were well below Edison’s forecast for the quarter (see Exhibit 1) on account of relatively small PSU accrual and equity settled stock-based compensation expenses:

Exhibit 5: WPM Q419–FY21 general and administrative expense (US$000s)

Item

FY21e

Q121

FY20

Q420

Q320

Q220

Q120

FY19

Q419

G&A excluding PSU* and equity settled stock-based compensation

4,709

16,733

4,466

4,037

4,095

4,135

13,840

7,434

Other (inc. depreciation, donations and professional fees)

5,632

22,013

5,957

5,488

6,302

4,266

17,802

Sub-total

10,341

38,746

10,423

9,525

10,397

8,401

31,642

7,434

Guidance

42,000–45,000

10,500–11,250

40,000–43,000

33,000–36,000

PSU* accrual

305

21,520

(2,336)

10,482

10,097

3,277

17,174

2,830

Equity settled stock-based compensation

1,325

5,432

1,305

1,319

1,305

1,503

5,691

1,432

Total general & administrative

11,971

65,698

9,392

21,326

21,799

13,181

54,507

11,696

Total/sub-total (%)

+15.8

+69.6

-9.9

+123.9

+109.7

+56.9

+72.3

+57.3

Source: WPM, Edison Investment Research. Note: *Performance share units.

Investors are reminded that stock-based compensation costs and PSUs are now included in our financial forecasts in Exhibits 6 and 10 notwithstanding their inherently unpredictable nature.

FY21 updated forecasts by quarter

Edison’s updated forecasts for WPM for FY21 are as shown in Exhibit 6, below. The forecasts assume that operations will continue throughout the remainder of the year without major interruptions. Apart from precious metals prices, the principal remaining risk to our forecasts relates to the extent to which sales differ from production and therefore the extent to which inventory (in the form of ounces produced but not yet delivered to WPM – see Exhibits 2 and 3) either increases or decreases during the year.

Exhibit 6: WPM FY20 forecast, by quarter*

US$000s
(unless otherwise stated)

FY20

Q121

Q221e

Q321e

Q421e

FY21e

(current)

FY21e

(prior)

Silver production (koz)

22,892

6,754

6,061

6,086

6,086

24,987

24,281

Gold production (oz)

367,419

77,733

93,925

91,830

95,930

359,418

374,610

Palladium production (koz)

22,187

5,769

5,561

5,561

5,561

22,452

22,244

Cobalt production (klb)

1,161

525

525

525

2,736

Silver sales (koz)

19,232

6,657

6,061

6,086

6,086

24,890

24,281

Gold sales (oz)

369,553

75,104

93,892

91,797

95,897

356,690

374,478

Palladium sales (oz)

20,051

5,131

5,539

5,539

5,539

21,747

22,155

Cobalt sales (klb)

132.3

525

525

525

1,707

Avg realised Ag price (US$/oz)

20.78

26.12

28.62

26.80

26.80

27.06

25.03

Avg realised Au price (US$/oz)

1,767

1,798

1,781

1,793

1,793

1,791

1,738

Avg realised Pd price (US$/oz)

2,183

2,392

2,884

2,931

2,353

2,645

2,411

Avg realised Co price (US$/lb)

20.90

21.08

20.49

20.49

20.80

Avg Ag cash cost (US$/oz)

5.28

6.33

6.77

6.71

6.71

6.63

6.06

Avg Au cash cost (US$/oz)

426

450

427

429

428

433

428

Avg Pd cash cost (US$/oz)

389

427

519

528

424

475

434

Avg Co cash cost (US$/lb)

4.98

3.79

3.69

3.69

3.82

Sales

1,096,224

324,119

367,761

354,692

358,842

1,405,415

1,312,043

Cost of sales

Cost of sales, excluding depletion

266,763

78,783

86,027

85,085

86,189

336,085

316,976

Depletion

243,889

70,173

79,120

75,714

79,913

304,920

247,105

Total cost of sales

510,652

148,956

165,147

160,799

166,102

641,005

564,081

Earnings from operations

585,572

175,164

202,614

193,893

192,740

764,410

747,962

Expenses and other income

– General and administrative**

65,698

11,971

18,329

18,329

18,329

66,958

73,316

– Foreign exchange (gain)/loss

0

0

– Net interest paid/(received)

16,715

1,573

-1,465

-3,163

-4,780

-7,836

(5,312)

– Other (income)/expense

(387)

420

420

0

Total expenses and other income

82,026

13,964

16,864

15,166

13,549

59,542

68,004

Earnings before income taxes

503,546

161,199

185,749

178,728

179,192

704,867

679,958

Income tax expense/(recovery)

211

67

250

250

250

817

1,000

Marginal tax rate (%)

0.0

0.0

0.1

0.1

0.1

0.1

0.1

Net earnings

503,335

161,132

185,499

178,478

178,942

704,050

678,958

Average no. shares in issue (000s)

448,964

449,509

449,509

449,509

449,509

449,509

449,466

Basic EPS (US$)

1.12

0.358

0.413

0.397

0.398

1.57

1.51

Diluted EPS (US$)

1.12

0.358

0.413

0.397

0.398

1.53

1.47

DPS (US$)

0.42

0.13

0.14

0.18

0.17

0.62

0.59

Source: WPM, Edison Investment Research. Note: *Excluding impairments and exceptional items. **Forecasts now include stock-based compensation costs. Totals may not add up owing to rounding.

Readers should note that, consistent with past practice, for the purposes of FY21 we are assuming production and sales are closely aligned and that there is little or no change in the level of ounces produced but not yet delivered. Within this context, our basic EPS forecast of US$1.57/share for FY21 is closely in line with the consensus forecast of US$1.52/share (source: Refinitiv, 6 May 2021) and towards the middle of the range of analysts’ expectations of US$1.25–1.79 per share for the period:

Exhibit 7: WPM FY21e consensus EPS forecasts (US$/share), by quarter

Q121

Q221e

Q321e

Q421e

Sum Q1–Q421e

FY21e

Edison forecasts

0.358

0.413

0.397

0.398

1.566

1.57

Mean consensus

0.358

0.38

0.40

0.41

1.56

1.52

High consensus

0.358

0.47

0.49

0.53

1.92

1.79

Low consensus

0.358

0.33

0.34

0.33

1.32

1.25

Source: Refinitiv, Edison Investment Research. Note: As at 6 May 2021.

In the meantime, our basic EPS forecast of US$2.07/share for FY22 (see Exhibit 10) compares with a consensus of US$1.60/share within a range of US$1.20–2.13/share (source: Refinitiv, 6 May 2021). In this case, our estimate is, once again, predicated on an average gold price during the year of US$1,892/oz and an average silver price of US$30.78/oz, which assumes, among other things, the silver price will revert to the long-term correlation that it has exhibited with gold since the latter was demonetised in 1971. If both metals instead remain at current levels, however (US$26.80/oz Ag and US$1,793/oz Au at the time of writing), our forecast for WPM’s EPS in FY22 then moderates to US$1.78 per share and our forecast for its DPS to US$0.73/share.

Valuation

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.0x current year basic underlying EPS, excluding impairments (cf 27.9x Edison or 27.9x Refinitiv consensus FY21e, currently – see Exhibit 9).

Exhibit 8: WPM’s historical current year P/E multiples, 2005–20

Source: Edison Investment Research

Applying this 30.0x multiple to our EPS forecast of US$2.07 in FY23 (previously US$2.05) would ordinarily imply a potential value per share for WPM of US$62.54 in FY21 or C$76.20 in that year. However, the graph above suggests that the current year multiple has been on a broadly upward trend between FY12 and FY19, on which basis we would argue that a multiple in excess of 40x (as evidenced by FY18 and FY19) could be supported, not least given the fact that these years were not subject to the extraordinary trials and tribulations experienced in FY20. In this case, applying a 40.7x earnings multiple (the average of FY18, FY19 and FY20) to our updated EPS forecast of US$2.07 in FY23 implies a potential value per share for WPM of US$84.81 in FY21 or C$107.16 in that year and/or for as long as precious metals prices remain at higher levels and/or the current coronavirus crisis persists. Even at such share price levels, however, a multiple of over 40.7x would still leave WPM’s shares at a 4.7% valuation discount compared to Franco-Nevada (see Exhibit 9).

In the meantime, from a relative perspective, it is notable that WPM has a lower valuation than the average of its royalty/streaming ‘peers’ on all of nine valuation measures regardless of whether Edison or consensus forecasts are used. On an individual basis, it is cheaper than its peers on 86% (31 out of 36) of the valuation measures used in Exhibit 9 if our estimates are adopted or 72% (26 out of 36) of the same valuation measures if consensus forecasts are adopted. Among other things, this could possibly indicate the market has more conservative precious metal pricing expectations than we do (especially in FY22 and FY23).

Exhibit 9: WPM comparative valuation vs a sample of operating and royalty/streaming companies

P/E (x)

Yield (%)

P/CF (x)

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Royalty companies

Franco-Nevada

42.7

39.4

40.7

0.8

0.8

0.9

28.8

27.0

27.9

Royal Gold

34.3

31.7

30.8

1.0

1.1

1.0

18.0

17.0

17.1

Sandstorm Gold

45.3

40.8

39.6

0.0

0.0

0.0

18.7

18.2

20.9

Osisko

34.6

26.9

24.5

1.3

1.3

1.3

17.1

14.1

13.1

Average

39.2

34.7

33.9

0.8

0.8

0.8

20.6

19.1

19.7

WPM (Edison forecasts)

27.9

21.0

20.9

1.4

1.8

1.9

19.0

15.8

15.6

WPM (consensus)

27.9

26.5

27.3

1.3

1.5

1.6

19.5

18.7

18.8

Implied WPM share price (US$)*

61.41

71.97

70.57

78.75

99.27

104.56

47.39

52.47

55.05

Source: Refinitiv, Edison Investment Research. Note: Peers priced on 6 May 2021. *Derived using Edison forecasts and average consensus multiples.

Financials: Solid

As at 31 March, WPM had US$191.2m in cash (cf US$192.7m in Q420) and no debt outstanding (cf US$195.0m in Q420) under its US$2bn revolving credit facility (which attracts an interest rate of Libor plus 120–220bp and now matures in February 2025), such that (including a modest US$3.5m in leases) it had US$187.7m in net cash overall (cf US$6.0m in Q420) after US$232.2m of cash generated by operating activities during the quarter (cf US$208.0m in Q420).

Exhibit 10: Financial summary

US$000s

2016

2017

2018

2019

2020

2021e

2022e

2023e

Dec

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

891,557

843,215

794,012

861,332

1,096,224

1,405,415

1,631,538

1,654,160

Cost of Sales

(254,434)

(243,801)

(245,794)

(258,559)

(266,763)

(336,085)

(324,858)

(336,469)

Gross Profit

637,123

599,414

548,218

602,773

829,461

1,069,330

1,306,680

1,317,691

EBITDA

 

 

602,684

564,741

496,568

548,266

763,763

1,002,372

1,239,722

1,250,733

Operating Profit (before amort. and except.)

 

293,982

302,361

244,281

291,440

519,874

697,452

932,496

934,964

Intangible Amortisation

0

0

0

0

0

0

0

0

Exceptionals

(71,000)

(228,680)

245,715

(156,608)

4,469

870

0

0

Other

(4,982)

8,129

(5,826)

217

387

(420)

0

0

Operating Profit

218,000

81,810

484,170

135,049

524,730

697,902

932,496

934,964

Net Interest

(24,193)

(24,993)

(41,187)

(48,730)

(16,715)

7,836

1,010

2,528

Profit Before Tax (norm)

 

 

269,789

277,368

203,094

242,710

503,159

705,287

933,506

937,493

Profit Before Tax (FRS 3)

 

 

193,807

56,817

442,983

86,319

508,015

705,737

933,506

937,493

Tax

1,330

886

(15,868)

(181)

(211)

(817)

(1,000)

(1,000)

Profit After Tax (norm)

266,137

286,383

181,400

242,746

503,335

704,050

932,506

936,493

Profit After Tax (FRS 3)

195,137

57,703

427,115

86,138

507,804

704,920

932,506

936,493

Average Number of Shares Outstanding (m)

430.5

442.0

443.4

446.0

448.7

449.5

449.5

449.5

EPS - normalised (c)

 

 

62

63

48

54

112

157

207

208

EPS - normalised and fully diluted (c)

 

 

62

63

48

54

112

157

202

203

EPS - (IFRS) (c)

 

 

45

13

96

19

113

157

207

208

Dividend per share (c)

21

33

36

36

42

62

79

83

Gross Margin (%)

71.5

71.1

69.0

70.0

75.7

76.1

80.1

79.7

EBITDA Margin (%)

67.6

67.0

62.5

63.7

69.7

71.3

76.0

75.6

Operating Margin (before GW and except.) (%)

33.0

35.9

30.8

33.8

47.4

49.6

57.2

56.5

BALANCE SHEET

Fixed Assets

 

 

6,025,227

5,579,898

6,390,342

6,123,255

5,755,441

5,638,521

5,369,295

5,708,526

Intangible Assets

5,948,443

5,454,106

6,196,187

5,768,883

5,521,632

5,404,712

5,135,486

5,474,717

Tangible Assets

12,163

30,060

29,402

44,615

33,931

33,931

33,931

33,931

Investments

64,621

95,732

164,753

309,757

199,878

199,878

199,878

199,878

Current Assets

 

 

128,092

103,415

79,704

154,752

201,831

570,916

1,415,690

1,639,283

Stocks

1,481

1,700

1,541

43,628

3,265

2,523

2,929

2,970

Debtors

2,316

3,194

2,396

7,138

5,883

3,850

4,470

4,532

Cash

124,295

98,521

75,767

103,986

192,683

564,542

1,408,291

1,631,782

Other

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(19,057)

(12,143)

(28,841)

(64,700)

(31,169)

(51,294)

(50,187)

(51,332)

Creditors

(19,057)

(12,143)

(28,841)

(63,976)

(30,396)

(50,521)

(49,414)

(50,559)

Short term borrowings

0

0

0

(724)

(773)

(773)

(773)

(773)

Long Term Liabilities

 

 

(1,194,274)

(771,506)

(1,269,289)

(887,387)

(211,532)

(16,532)

(16,532)

(16,532)

Long term borrowings

(1,193,000)

(770,000)

(1,264,000)

(878,028)

(197,864)

(2,864)

(2,864)

(2,864)

Other long term liabilities

(1,274)

(1,506)

(5,289)

(9,359)

(13,668)

(13,668)

(13,668)

(13,668)

Net Assets

 

 

4,939,988

4,899,664

5,171,916

5,325,920

5,714,571

6,141,610

6,718,266

7,279,945

CASH FLOW

Operating Cash Flow

 

 

608,503

564,187

518,680

548,301

784,843

1,024,851

1,237,590

1,251,775

Net Interest

(24,193)

(24,993)

(41,187)

(41,242)

(16,715)

7,836

1,010

2,528

Tax

28

(326)

0

(5,380)

(2,686)

(817)

(1,000)

(1,000)

Capex

(805,472)

(19,633)

(861,406)

10,571

149,648

(188,000)

(38,000)

(655,000)

Acquisitions/disposals

0

0

0

0

0

0

0

0

Financing

595,140

1,236

1,279

37,198

22,396

0

0

0

Dividends

(78,708)

(121,934)

(132,915)

(129,986)

(167,212)

(277,011)

(355,850)

(374,813)

Net Cash Flow

295,298

398,537

(515,549)

419,462

770,274

566,859

843,749

223,491

Opening net debt/(cash)

 

 

1,362,703

1,068,705

671,479

1,188,233

774,766

5,954

(560,905)

(1,404,654)

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

(1,300)

(1,311)

(1,205)

(5,995)

(1,462)

0

0

(0)

Closing net debt/(cash)

 

 

1,068,705

671,479

1,188,233

774,766

5,954

(560,905)

(1,404,654)

(1,628,145)

Source: Company sources, Edison Investment Research


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This report has been commissioned by Wheaton Precious Metals and prepared and issued by Edison, in consideration of a fee payable by Wheaton Precious Metals. Edison Investment Research standard fees are £49,500 pa for the production and broad dissemination of a detailed note (Outlook) following by regular (typically quarterly) update notes. Fees are paid upfront in cash without recourse. Edison may seek additional fees for the provision of roadshows and related IR services for the client but does not get remunerated for any investment banking services. We never take payment in stock, options or warrants for any of our services.

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Copyright: Copyright 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

New Zealand

The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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United States

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