Honing forecasts

Wheaton Precious Metals 4 August 2021 Update
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Wheaton Precious Metals

Honing forecasts

Q221 results preview

Metals & mining

4 August 2021

Price

C$57.63

Market cap

C$25,922m

C$1.2544/US$, US$1.3916/£

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

191.2

*Excludes US$3.5m in lease liabilities

Shares in issue

449.8m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

LSE, NYSE

Share price performance

%

1m

3m

12m

Abs

5.2

9.7

(20.1)

Rel (local)

4.5

3.5

(36.6)

52-week high/low

C$74.83

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

Q321 results

4 November 2021

Q421/FY21 results

March 2022

Q122 results

May 2022

Q222 results

August 2022

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Ahead of its scheduled Q221 results after the market closes on Thursday 12 August, we have updated our quarterly forecasts for Wheaton Precious Metals (WPM) to reflect a number of recent developments, including 1) a strike a Sudbury since 1 June; 2) quarterly production and sales results from Vale (the operator of Salobo, Sudbury and Voisey’s Bay); 3) quarterly results from Newmont (the operator of Penasquito); 4) an illegal blockade at Los Filos between 22 June and 26 July; and 5) actual compared to previously forecast metals prices.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/19

861.3

242.7

54

36

85.1

0.8

12/20

1,096.2

503.2

112

42

41.0

0.9

12/21e

1,347.9

670.7

149

59

30.9

1.3

12/22e

1,646.0

945.3

210

79

21.9

1.7

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

Coming off a strong start

WPM’s Q121 results were characterised by record revenue, the repayment of all net debt and a third successive increase in the quarterly dividend (to US$0.14 per share). In a departure from recent trends, the silver division led the way in terms of increased production and sales, principally as a result of ongoing, low level coronavirus-induced disruptions at Salobo. Otherwise, production and sales were closely aligned and ounces of both gold and silver produced but not yet delivered reduced, providing evidence of a return to more normal operating conditions.

Sudbury trials and tribulations

In the light of the strike at Sudbury, Edison has reduced its estimate of gold produced and delivered to Wheaton from Sudbury in Q221 by 53.7% to 4,635oz (cf 10,000oz previously). While we are hopeful of a near-term resolution of the strike, we note that a similar one in 2009–10 lasted for a full year and, as a result, we have also reduced our Q321 estimate of deliveries of gold from Sudbury to Wheaton to zero (cf 5,900oz previously), although we are maintaining our forecast of 10,000oz for Q421 (albeit these forecasts are under ongoing review).

Valuation: 37.7% premium to the share price

In normal circumstances and assuming no material purchases of additional streams in the foreseeable future (which we think unlikely), we forecast a value per share for WPM of US$63.28 or C$79.38 or £46.18 in FY23 (cf US$62.54 or C$76.20 previously). In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than the averages of its peers on at least 77% of nine common valuation measures regardless of whether Edison or consensus forecasts are used. Hence, if WPM’s shares were to trade at the same level as the average of its peers, then we calculate that its current year 1 share price should be US$63.85 (C$80.10 or £45.88), based on Edison’s forecasts for FY21. Alternatively, if precious metals return to favour and WPM to a premium rating, we believe that an US$85.82 (C$108.44 or £61.69) per share valuation is achievable (pages 9–10).

Q221 results preview

Q121 results aide memoire

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. Otherwise, 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.

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 the scheduled and unscheduled maintenance disruptions, as detailed above. Antamina benefited from higher grades, while Voisey’s Bay made a maiden contribution of cobalt to WPM. 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 had been completed and that consequently it had full access to the site and had 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. In addition, all 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) were operating at, or close to, full capacity.

FY21 updated forecasts by quarter

Recent developments

Since our last quarterly results note on Wheaton (see A solid start, published on 10 May 2021), there have been a number of developments pertaining to the mines with which it has streaming agreements. A summary of these is as follows:

On 1 June 2021, workers at Sudbury went on strike.

On 22 June, Equinox Gold (the operator of Los Filos) announced that mining activities at its Los Filos Mine in Mexico had been temporarily suspended as a result of illegal blockades by a group of unionised employees and members of the local community. Subsequently, on 26 July, it announced that the union blockade had been removed and that access to the mine and mining operations had been restored.

On 19 July, Vale (the operator of Salobo, Sudbury and Voisey’s Bay, among others) announced its Q221 production and sales results, followed by its Q221 financial results on 28 July.

On 22 July, Newmont (the operator of Penasquito) announced its results for Q221.

Each of these developments and Edison’s treatment of them is considered below, in order of priority. In addition, we have adjusted our Q221 forecasts for actual, rather than forecast, metals prices, as shown below:

Exhibit 1: Forecast Q221 metal price changes

Metal

Previous Q221 forecast

Actual Q221 average price

Change (%)

Gold (US$/oz)

1,781

1,814

+1.9%

Silver (US$/oz)

28.62

26.68

-6.8

Palladium (US$/oz)

2,884

2,788

-3.3

Cobalt (US$/lb)

21.08

20.76

-1.5

Simple average

-2.4

Source: Edison Investment Research, Bloomberg.

Sudbury

On 1 June, a union representing approximately 2,500 maintenance and production workers at Sudbury went on strike after rejecting a pay offer. Talks have resumed between the union and company after a second offer was also rejected later in June, with Vale saying that it needs changes to the contract to justify future investment at Sudbury. However, the union has responded by saying that Vale’s contract offers contain concessions that are not needed since the Sudbury operation is so profitable.

On 19 July, Vale announced that production of nickel and copper at Sudbury were 9.0kt and 13.0kt respectively – consistent with an approximately one-third cut in output relative to prior quarters:

Exhibit 2: Sudbury output of nickel and copper, Q221 cf Q220 and Q121

Metal

Q220

Q121

Q221

Q221 cf Q220
(%)

Q221 cf Q121
(%)

Nickel (kt)

13.5

12.0

9.0

-33.3

-25.0

Copper (kt)

21.9

19.4

13.0

-40.6

-33.0

Source: Vale, Edison Investment Research.

The average of the four declines in Exhibit 2 is 33.0%, which is close to the pro rata decline expected for production over two, rather than three, months. While these comparative figures are not definitive proof of a similar decline in the output of gold, they are strongly indicative of it. Gold produced at Sudbury attributable to Wheaton has averaged 6,953oz per quarter over the past eight quarters (albeit within a wide range from 3,798–9,360oz per quarter). A one-third decline in Q221 would imply production of c 4,635oz in Q221. However, this may be tested against two further pieces of Vale information:

In its Q221 results statement, Vale announced that it had sold 11,000oz of gold as a by-product of its nickel operations. While this aggregates all of the gold from all of its nickel mines, a comparison of gold delivered to Wheaton from Sudbury in recent quarters suggests that between 82.7% and 88.7% (average 85.7%) of the gold produced as a by-product from Vale’s nickel division is produced at Sudbury. That being the case, it suggests that 9,427oz of the 11,000oz sold as a by-product of its nickel producing operations in Q221 could similarly be attributed to production at Sudbury, of which 6,599oz would be attributable to Wheaton under the terms of their streaming agreement. This compares with our prior forecast of 10,000oz attributable to Wheaton, but might prove to be an overestimate given that it is likely that there was a disproportionate decline in output at Sudbury relative to the total.

An alternative method is to note Vale’s observation that the cash effect of the US$400/oz that Wheaton pays for 70% of Sudbury’s gold is to increase the EBITDA break-even of its nickel operations by US$207/t, from US$8,070/t to US$8,277/t. Given that Vale reported that it sold 47.4kt of nickel during the quarter and that the revenue foregone by it as a consequence of its gold streaming agreement with Wheaton will have been in the order of US$1,414/oz, we may calculate that the number of ounces of gold delivered to Wheaton under the streaming agreement between the two was 6,939oz (ie within 5.2% of the 6,599oz calculated above).

In the light of the strike therefore, Edison has reduced its estimate of gold produced and delivered to Wheaton from Sudbury in Q221 to the most conservative of the above calculations, ie 4,635oz (cf 10,000oz previously). In addition, while we are hopeful of a near-term resolution of the dispute between the Sudbury union and Vale, we note that a similar strike in Canada in 2009–10 lasted for a full year. As a result, we have reduced our Q321 estimate of deliveries of gold from Sudbury to Wheaton to zero (cf 5,900oz previously). For the moment however, we are retaining our forecast of 10,000oz gold for Q421, although we will keep this under review as the situation develops.

Salobo

Operations at Salobo were adversely affected by a backlog of maintenance and repairs in Q221. On 19 July, Vale announced that production of copper at Salobo in Q221 had been 38.7kt, or 13.5% higher than the 34.1kt produced in Q121. Pro rata with the amount of gold delivered to Wheaton in Q121, this increase would imply the delivery of 52,916oz from Salobo to Wheaton in Q221.

Alternatively, Vale announced that it had sold 84,000oz of gold as a by-product of its copper operations in Q221. While this aggregates the gold from both Salobo and Sossego, an analysis of gold delivered to Wheaton from Salobo in recent quarters suggests that between 84.7% and 94.2% (average 89.5%) of the gold sold from the two mines is produced at Salobo. That being the case, it suggests that 75,138oz of the 84,000oz sold from the two mines in Q221 could be attributed to production at Salobo, of which 75%, or 56,353oz, could be attributable to Wheaton under the terms of their streaming agreement. This is within 6.5% of the figure calculated in the paragraph above and compares with our prior forecast of 59,250oz attributable to Wheaton.

As a consequence, Edison has reduced its estimate of gold produced at Salobo attributable to Wheaton from 59,250oz to 52,916oz and its estimate of gold sold from 59,250oz to 56,353oz.

Penasquito

On 22 July, Newmont announced, among other things, that it had produced 7,428koz of silver at Penasquito in Q221 and that it had sold 7,615koz of silver. Pro rata with its 25% streaming interest, these figures imply production attributable to Wheaton of 1,857koz silver (Ag) and sales of 1,904koz Ag during the quarter, which were a modest 206koz and 159koz below our prior forecasts of 2,063koz Ag for production and sales, respectively.

Los Filos

On 22 June, Equinox Gold announced that mining activities at its Los Filos Mine in Mexico had been temporarily suspended as the result of illegal blockades by a group of unionised employees and members of the local community, both of which were demanding payments in excess of their contractual agreements. As such, the blockades appeared to be a carbon copy of the blockade that caused a temporary suspension of mining activities in Q420, but which was raised on 23 December, after which normal operations resumed. Subsequently, on 26 July, Equinox announced that the union blockade had been removed and that access to the mine and mining operations had been restored. However, it also noted that, ‘Certain members of the Xochipala community remain illegally camped near the Guadalupe and Bermejal open pits, disrupting mining activities in this area of the operation only’, and that, ‘Los Filos representatives continue to engage with government and Xochipala representatives to achieve resolution.’

As a result of the blockades, we have reduced our production estimate for Los Filos by one week, or 2koz, in Q221, although we have left our sales forecast unchanged (on the basis that sales tend to lag production chronologically). By contrast, we have reduced our production estimate by one month (or 16koz) in Q321, as well as assuming that the over-sale of silver relative to production in Q221 will be redressed in Q321 (ie silver sales will be reduced by 18koz in Q321 as the inventory of ounces produced but not yet delivered is built back up).

Voisey’s Bay

On 19 and 28 July, Vale announced, among other things, that it had produced 463kt of cobalt at Voisey’s Bay in Q221 and that it had sold 568kt. Pro rata with its 42.4% streaming interest, these figures imply production attributable to Wheaton of 433klb cobalt and sales of 531klbs cobalt during the quarter (cf our prior forecast of 525klb cobalt each).

Other

As noted above, Constancia was adversely affected in Q121 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 this deposit had been completed and that it had full access to the site and had begun pit development activities. Hudbay is scheduled to release its Q221 results on 9 August. In the meantime, while we believe that production of gold and silver attributable to Wheaton from Constancia will increase in Q221, we expect that it will be another quarter before we see this increased production translate meaningfully into sales.

Updated forecasts

In the light of these recent developments, Edison’s updated forecasts for WPM for FY21 are as shown in Exhibit 3, below. The forecasts assume that operations will continue throughout the remainder of the year without major COVID-19 induced 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) either increases or decreases during the course of the year.

Exhibit 3: WPM FY21 forecast, by quarter*

US$000s
(unless otherwise stated)

FY20

Q121

Q221e
(prior)

Q221e
(current)

Q321e
(prior)

Q321e
(current)

Q421e
(prior)

Q421e
(current)

FY21e
(current)

FY21e
(prior)

Silver production (koz)

22,892

6,754

6,061

5,853

6,086

5,939

6,086

5,955

24,502

24,987

Gold production (oz)

367,419

77,733

93,925

82,226

91,830

85,930

95,930

95,930

341,819

359,418

Palladium production (koz)

22,187

5,769

5,561

5,561

5,561

5,561

5,561

5,561

22,452

22,452

Cobalt production (klb)

1,161

525

433

525

525

525

525

2,644

2,736

Silver sales (koz)

19,232

6,657

6,061

5,902

6,086

5,937

6,086

5,955

24,451

24,890

Gold sales (oz)

369,553

75,104

93,892

84,056

91,797

85,897

95,897

95,897

340,954

356,690

Palladium sales (oz)

20,051

5,131

5,539

5,539

5,539

5,539

5,539

5,539

21,747

21,747

Cobalt sales (klb)

132.3

525

531

525

525

525

525

1,713

1,707

Avg realised Ag price (US$/oz)

20.78

26.12

28.62

26.68

26.80

25.60

26.80

25.54

25.99

27.06

Avg realised Au price (US$/oz)

1,767

1,798

1,781

1,814

1,793

1,808

1,793

1,810

1,808

1,791

Avg realised Pd price (US$/oz)

2,183

2,392

2,884

2,788

2,931

2,678

2,353

2,652

2,632

2,645

Avg realised Co price (US$/lb)

20.90

21.08

20.76

20.49

23.64

20.49

23.77

22.67

20.80

Avg Ag cash cost (US$/oz)

5.28

6.33

6.77

6.76

6.71

6.71

6.71

6.72

6.62

6.63

Avg Au cash cost (US$/oz)

426

450

427

430

429

431

428

428

434

433

Avg Pd cash cost (US$/oz)

389

427

519

502

528

482

424

477

473

475

Avg Co cash cost (US$/lb)

4.98

3.79

3.74

3.69

4.26

3.69

4.28

4.16

3.82

Sales

1,096,224

324,119

367,761

336,406

354,692

334,567

358,842

352,843

1,347,935

1,405,415

Cost of sales

Cost of sales, excluding depletion

266,763

78,783

86,027

80,829

85,085

81,767

86,189

85,953

327,333

336,085

Depletion

243,889

70,173

79,120

71,533

75,714

69,093

79,913

79,449

290,249

304,920

Total cost of sales

510,652

148,956

165,147

152,363

160,799

150,861

166,102

165,402

617,582

641,005

Earnings from operations

585,572

175,164

202,614

184,044

193,893

183,706

192,740

187,440

730,353

764,410

Expenses and other income

– General and administrative**

65,698

11,971

18,329

18,329

18,329

18,329

18,329

18,329

66,958

66,958

– Foreign exchange (gain)/loss

0

0

– Net interest paid/(received)

16,715

1,573

(1,465)

(1,465)

(3,163)

(2,959)

(4,780)

(4,443)

(7,294)

(7,836)

– Other (income)/expense

(387)

420

420

420

Total expenses and other income

82,026

13,964

16,864

16,864

15,166

15,370

13,549

13,886

60,084

59,542

Earnings before income taxes

503,546

161,199

185,749

167,180

178,728

168,337

179,192

173,555

670,270

704,867

Income tax expense/(recovery)

211

67

250

250

250

250

250

250

817

817

Marginal tax rate (%)

0.0

0.0

0.1

0.1

0.1

0.1

0.1

0.1

0.1

0.1

Net earnings

503,335

161,132

185,499

166,930

178,478

168,087

178,942

173,305

669,453

704,050

Average no. shares in issue (000s)

448,964

449,509

449,509

449,659

449,509

449,809

449,509

449,809

449,697

449,509

Basic EPS (US$)

1.12

0.358

0.413

0.371

0.397

0.374

0.398

0.385

1.49

1.57

Diluted EPS (US$)

1.12

0.358

0.413

0.371

0.397

0.374

0.398

0.385

1.49

1.53

DPS (US$)

0.42

0.13

0.14

0.14

0.18

0.16

0.17

0.16

0.59

0.62

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$1.49/share for FY21 is closely in line with the consensus forecast of US$1.51/share (source: Refinitiv, 30 July 2021) and towards the middle of the range of analysts’ expectations of US$1.36–1.66 per share for the period:

Exhibit 4: WPM FY21e consensus EPS forecasts (US$/share), by quarter

Q121

Q221e

Q321e

Q421e

Sum Q1–Q421e

FY21e

Edison forecasts

0.358

0.371

0.374

0.385

1.488

1.49

Mean consensus

0.358

0.38

0.39

0.40

1.528

1.51

High consensus

0.358

0.41

0.45

0.45

1.668

1.66

Low consensus

0.358

0.33

0.34

0.34

1.368

1.36

Source: Refinitiv, Edison Investment Research. Note: As at 30 July 2021.

Our basic EPS forecast of US$2.10/share for FY22 (see Exhibit 10) compares with a consensus of US$1.62/share within a range of US$1.17–2.10/share (source: Refinitiv, 30 July 2021). In this case, our estimate is, once again, predicated on an average (nominal) 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$25.54/oz Ag and US$1,810/oz gold (Au) at the time of writing), our forecast for WPM’s EPS in FY22 would then moderate to US$1.75 per share and our forecast for its DPS to US$0.71/share.

FY21 and five-year and 10-year guidance

At the time of its Q420/FY20 results, WPM provided production guidance of 720–780koz gold equivalent (AuE) for FY21 as 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 as follows:

Exhibit 5: WPM precious metals production – Edison forecasts cf guidance

FY21e

FY22–25*

FY26–30

Previous Edison forecast

Silver production (Moz)

25.0

Gold production (koz)

359.4

Cobalt production (klb)

2,736

Palladium production (koz)

22.5

Gold equivalent (koz)

762

787

778

Current Edison forecast

Silver production (Moz)

24.5

Gold production (koz)

341.8

Cobalt production (klb)

2,644

Palladium production (koz)

22.5

Gold equivalent (koz)

737

786

778

WPM guidance

Silver production (Moz)

22.5–24.0

Gold production (koz)

370–400

Cobalt & palladium production (koz AuE)

40–45

Palladium production (koz)

N/A

Gold equivalent (koz)

720–780

810

830

Source: WPM, Edison Investment Research forecasts. Note: *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 Au, US$25.00/oz 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 is actually very close to the current ratio of 70.9x, but slightly at odds with the 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 remains just 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 remains slightly 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 recent developments at Salobo and Sudbury 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 737koz AuE remains within the range of Wheaton’s guidance of 720–780koz, albeit fractionally towards the bottom end of the range.

Otherwise, readers will note that Edison’s (updated) production forecasts for FY22–25 and for FY26–30 remain, to all intents and purposes, unchanged and slightly conservative when compared with Wheaton’s guidance. However, this difference is largely negated in its translation into financial results by the fact that sales have historically been recorded at a level (on average) 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.

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, non-stock 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 on account of relatively small PSU accrual and equity settled stock-based compensation expenses:

Exhibit 6: 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 & 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

10,000–10,750

10,000–10,750

10,000–10,750

10,000–10,750

33,000–36,000

8,250–9,000

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.

Compared with non-stock G&A expenses, total G&A expenses are relatively difficult to forecast, given their dependence on the price of WPM’s shares. However, a simple analysis of stock-based G&A expenses over the past six quarters against WPM’s share price (also in US dollars) exhibits a relatively close Pearson product moment (correlation) coefficient between the two of 0.79, which is just statistically significant at the 5% level for a directional hypothesis (ie there is less than a 5% probability that this relationship occurred by random chance). The graph relating to the analysis is shown below, including its linear trendline:

Exhibit 7: Graph of historical share price move (US$/share) vs quarterly stock-based G&A expense, Q419–Q121

Source: Edison Investment Research (underlying data: Bloomberg and Wheaton Precious Metals)

From end-March to end-June 2021, WPM’s share price has risen by US$5.86/share. On the basis of the above analysis, we would predict that such a move would give rise to a stock-based G&A expense of US$7,460k to add to guidance for non-stock G&A expenses of US$10,875k to give a total of US$18,335k for the quarter. This is almost exactly the same as our forecast figure of US$18,329k in Exhibit 3, which we are thus leaving unchanged.

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 30.9x Edison or 30.5x 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$2.11 in FY23 (previously US$2.07) would ordinarily imply a potential value per share for WPM of US$63.28 in FY23 or C$79.38 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 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$2.11 in FY23 implies a potential value per share for WPM of US$85.82 in FY23 or C$108.44 in that year and/or for as long as precious metals prices remain strongly supported 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 4.9% 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 in Exhibit 9 if Edison forecasts are used or seven out of nine measures if consensus forecasts are used. On an individual basis, it is cheaper than its peers on 83% (30 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

45.7

43.7

42.8

0.7

0.8

0.8

31.5

29.7

29.1

Royal Gold

34.6

30.6

32.0

1.0

1.0

1.0

18.7

17.2

18.1

Sandstorm Gold

45.2

37.8

41.9

0.0

0.0

0.0

18.0

16.1

18.9

Osisko

40.8

32.2

27.1

1.2

1.2

1.2

19.5

16.1

14.2

Average

41.6

36.1

36.0

0.7

0.7

0.7

21.9

19.8

20.1

WPM (Edison forecasts)

30.9

21.9

21.8

1.3

1.7

1.8

21.0

16.5

16.3

WPM (consensus)

30.5

28.5

29.6

1.2

1.3

1.5

21.4

20.1

20.7

Implied WPM share price (US$)*

61.87

75.73

75.80

81.83

108.09

114.85

47.86

54.96

56.55

Source: Refinitiv, Edison Investment Research. Note: Peers priced on 30 July 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). All other things being equal, we estimate that WPM will have US$257.8m on its balance sheet at the end of Q221 after net cash inflows of US$191.5m during the quarter and after the payment of US$121.4m in combined dividends for Q121 and Q221.

Exhibit 10: Financial summary

US$'000s

2016

2017

2018

2019

2020

2021e

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

891,557

843,215

794,012

861,332

1,096,224

1,347,935

1,645,990

1,668,612

Cost of Sales

(254,434)

(243,801)

(245,794)

(258,559)

(266,763)

(327,333)

(327,459)

(339,071)

Gross Profit

637,123

599,414

548,218

602,773

829,461

1,020,602

1,318,531

1,329,541

EBITDA

 

 

602,684

564,741

496,568

548,266

763,763

953,644

1,251,573

1,262,583

Operating Profit (before amort. and except.)

 

293,982

302,361

244,281

291,440

519,874

663,395

944,347

946,815

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

663,845

944,347

946,815

Net Interest

(24,193)

(24,993)

(41,187)

(48,730)

(16,715)

7,294

943

2,486

Profit Before Tax (norm)

 

 

269,789

277,368

203,094

242,710

503,159

670,690

945,290

949,301

Profit Before Tax (FRS 3)

 

 

193,807

56,817

442,983

86,319

508,015

671,140

945,290

949,301

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

669,453

944,290

948,301

Profit After Tax (FRS 3)

195,137

57,703

427,115

86,138

507,804

670,323

944,290

948,301

Average Number of Shares Outstanding (m)

430.5

442.0

443.4

446.0

448.7

449.7

449.8

449.8

EPS - normalised (c)

 

 

62

63

48

54

112

149

210

211

EPS - normalised and fully diluted (c) 

 

62

63

48

54

112

149

204

205

EPS - (IFRS) (c)

 

 

45

13

96

19

113

149

210

211

Dividend per share (c)

21

33

36

36

42

59

79

84

Gross Margin (%)

71.5

71.1

69.0

70.0

75.7

75.7

80.1

79.7

EBITDA Margin (%)

67.6

67.0

62.5

63.7

69.7

70.7

76.0

75.7

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

33.0

35.9

30.8

33.8

47.4

49.2

57.4

56.7

BALANCE SHEET

Fixed Assets

 

 

6,025,227

5,579,898

6,390,342

6,123,255

5,755,441

5,653,192

5,383,966

5,723,197

Intangible Assets

5,948,443

5,454,106

6,196,187

5,768,883

5,521,632

5,419,383

5,150,157

5,489,388

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

533,713

1,392,302

1,624,103

Stocks

1,481

1,700

1,541

43,628

3,265

2,420

2,955

2,996

Debtors

2,316

3,194

2,396

7,138

5,883

3,693

4,510

4,572

Cash

124,295

98,521

75,767

103,986

192,683

527,600

1,384,837

1,616,536

Other

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(19,057)

(12,143)

(28,841)

(64,700)

(31,169)

(50,431)

(50,443)

(51,589)

Creditors

(19,057)

(12,143)

(28,841)

(63,976)

(30,396)

(49,658)

(49,670)

(50,816)

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

6,119,942

6,709,292

7,279,180

CASH FLOW

Operating Cash Flow

 

 

608,503

564,187

518,680

548,301

784,843

975,521

1,250,234

1,263,626

Net Interest

(24,193)

(24,993)

(41,187)

(41,242)

(16,715)

7,294

943

2,486

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)

(264,081)

(354,940)

(378,413)

Net Cash Flow

295,298

398,537

(515,549)

419,462

770,274

529,917

857,237

231,699

Opening net debt/(cash)

 

 

1,362,703

1,068,705

671,479

1,188,233

774,766

5,954

(523,963)

(1,381,200)

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

(523,963)

(1,381,200)

(1,612,899)

Source: Company sources, Edison Investment Research


General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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

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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

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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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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

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1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

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Level 4, Office 1205

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General disclaimer and copyright

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.

Accuracy of content: All information used in the publication of this report has been compiled from publicly available sources that are believed to be reliable, however we do not guarantee the accuracy or completeness of this report and have not sought for this information to be independently verified. Opinions contained in this report represent those of the research department of Edison at the time of publication. Forward-looking information or statements in this report contain information that is based on assumptions, forecasts of future results, estimates of amounts not yet determinable, and therefore involve known and unknown risks, uncertainties and other factors which may cause the actual results, performance or achievements of their subject matter to be materially different from current expectations.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

No personalised advice: The information that we provide should not be construed in any manner whatsoever as, personalised advice. Also, the information provided by us should not be construed by any subscriber or prospective subscriber as Edison’s solicitation to effect, or attempt to effect, any transaction in a security. The securities described in the report may not be eligible for sale in all jurisdictions or to certain categories of investors.

Investment in securities mentioned: Edison has a restrictive policy relating to personal dealing and conflicts of interest. Edison Group does not conduct any investment business and, accordingly, does not itself hold any positions in the securities mentioned in this report. However, the respective directors, officers, employees and contractors of Edison may have a position in any or related securities mentioned in this report, subject to Edison's policies on personal dealing and conflicts of interest.

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

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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.

This Communication is being supplied to you solely for your information and may not be reproduced by, further distributed to or published in whole or in part by, any other person.

United States

Edison relies upon the "publishers' exclusion" from the definition of investment adviser under Section 202(a)(11) of the Investment Advisers Act of 1940 and corresponding state securities laws. This report is a bona fide publication of general and regular circulation offering impersonal investment-related advice, not tailored to a specific investment portfolio or the needs of current and/or prospective subscribers. As such, Edison does not offer or provide personal advice and the research provided is for informational purposes only. No mention of a particular security in this report constitutes a recommendation to buy, sell or hold that or any security, or that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person.

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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