Majestic

Silver Wheaton 15 February 2018 Update
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Wheaton Precious Metals

Majestic

San Dimas SPA adjustment

Metals & mining

 

15 February 2018

Price

C$24.93

Market cap

C$11,029m

C$1.2446/US$

Net debt* (US$m) at 30 September 2017 *Ex-dividend

784.1

Shares in issue

442.4m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(8.8)

(4.6)

(14.2)

Rel (local)

(3.0)

(0.9)

(11.7)

52-week high/low

C$29.3

C$23.4

Business description

Wheaton Precious Metals is the world’s pre-eminent pure precious metals streaming company, with c 30 high-quality, precious metals streaming and early deposit agreements relating to assets in Mexico, Peru, Canada, Brazil, Chile, Argentina, Sweden, Greece, Portugal, the US and Guyana.

Next events

Q417/FY17 results

March 2018

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

On 12 January, First Majestic (FR, C$8.65) announced that it is to buy Primero Mining (the operator of the San Dimas mine, over which WPM holds a silver stream). As a result, the existing silver purchase agreement covering 100% (effectively) of the silver produced by the mine will be replaced by one covering 25% of gold production plus an additional amount of gold equal to 25% of silver production converted into gold at a fixed gold:silver ratio of 70:1. This has caused us to revise our FY18 EPS forecast from 67c to 63c on a like-for-like basis (vs a consensus of 64.5c, within a range 49-80c). In lieu of this, First Majestic will also issue to WPM 20.9m FR common shares with an aggregate value at the time of writing of US$145m (equivalent to US$0.33 per WPM share).

Year end

Revenue (US$m)

PBT* (US$m)

EPS* (c)

DPS (c)

P/E (x)

Yield (%)

12/15

648.7

223.6

53

20

47.0

0.8

12/16

891.6

269.8

62

21

40.2

0.8

12/17e

827.2

274.7

62

33

40.2

1.3

12/18e

795.5

277.6

63

37

39.6

1.5

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

WPM to become majority gold streaming

For each ounce of gold delivered, Wheaton will pay a production payment equal to the lesser of US$600/oz (subject to a 1% annual inflationary adjustment) and the prevailing market price. Discounted at Edison’s standard 10% discount rate for mining companies, we value the cash flows to WPM from San Dimas for the period FY18-33 at US$252.9, or US$0.57 per WPM share, on the basis of Edison’s long-term gold price assumptions. On the basis of the current spot price of gold (US$1,320/oz at the time of writing), we value them at US$238.7m, or US$0.54 per WPM share. As a result of the conversion of the stream from a silver one to (effectively) a gold one, we expect WPM to become a majority gold streaming company from the date of the conclusion of the FR-PMO transaction (albeit there will inevitably be some quarterly fluctuations depending upon the balance of production, sales etc).

Valuation: Investors in line for 37.6% IRR over 3 years

Assuming no material purchases of additional streams (which is unlikely), we forecast a per share value for WPM of US$37.90, or C$47.18 in FY20 (at average precious metals prices of US$25.95/oz Ag and US$1,482/oz Au), implying a 37.6% pa total internal rate of return (IRR) for investors in US dollar terms over the next three years. These valuations rise by 9.6% to US$41.53, C$51.69 and 41.7% in the event that Vale decides to increase Salobo’s processing capacity by 50% to 36Mpa. In the meantime, WPM’s shares are trading on near-term financial ratios that are lower than those of its royalty/streaming ‘peers’ on 96% of financial measures considered in Exhibit 6, and the miners themselves in at least 43% of the same measures, despite being associated with materially less operating and cost risk. Additional potential upside still then exists in the form of the optionality provided by the development of major assets such as Pascua-Lama etc.

San Dimas

On 12 January, First Majestic (FR, C$8.65) announced that it is to buy Primero Mining (the operator of the San Dimas mine in Mexico, over which WPM holds a silver purchase agreement). As a part of the terms of the (friendly) takeover, WPM has agreed to terminate the existing silver purchase agreement (SPA) and to then enter into a precious metals purchase agreement (PMPA) with the new operator on the following terms, including:

25% of gold production plus an additional amount of gold equal to 25% of silver production converted into to gold at a fixed gold:silver ratio of 70:1 (subject to certain adjustments which could render it 50:1 or 90:1 depending on market conditions) from San Dimas cf 6.0Moz plus 50% of any excess previously (to all intents and purposes 100% of silver production in recent quarters).

For each ounce of gold delivered, Wheaton will pay a production payment equal to the lesser of US$600/oz, subject to a 1% annual inflationary adjustment and the prevailing market price cf US$4.32/oz Ag in Q317 similarly subject to a 1% annual inflationary adjustment.

First Majestic will provide a corporate guarantee over the PMPA; security for such will be limited to the San Dimas assets (similar to the guarantee over its SPA with Primero).

To the extent that ore from certain areas outside the current area of interest is processed through the San Dimas mill, such ore will be subject to the stream.

WPM has the right of first refusal on certain areas outside the current area of interest.

In addition to the new stream, First Majestic will also issue to WPM 20.9m FR common shares with an aggregate value at the time of the announcement of US$151m (US$145m at the time of writing).

The termination of the existing SPA and the effectiveness of the First Majestic PMPA remain subject to a number of conditions, including completion of the arrangement. In addition, at the time of closing, WPM has agreed to release the guarantee previously provided by Goldcorp under the existing SPA in consideration of a payment of US$10m from the latter. It will also extinguish the US$0.50/oz penalty for each ounce less than 215Moz delivered by 2031.

Note that, for the purposes of the analysis below, we have assumed that First Majestic’s acquisition of Primero completes on 31 March and that Q118 of WPM’s financial year will therefore be governed by the existing SPA and that the new PMPA will then become effective thereafter.

Background

The San Dimas mine consists of three underground gold-silver operations, using primarily mechanised cut-and-fill and long-hole stoping mining methods, located in Mexico’s San Dimas district, on the border of the Durango and Sinaloa states. With over 100 epithermal bonanza-type mineralised gold-silver veins, the San Dimas gold-silver deposit is one of the most significant precious metal deposits in Mexico. The veins vary in width from <1cm to over 15m, but typically average c 2m, and in strike from a few metres to more than 2km. It was first mined in 1757, with historical production from the district since then being estimated at 11Moz gold and 582Moz silver, affirming it as a world class epithermal mining district.

Goldcorp acquired San Dimas in 2002 for US$75m and, on 15 October 2004, entered into a silver purchase agreement with WPM, whereby the latter would purchase 100% of the silver produced by Goldcorp’s Luismin mining operations (primarily the San Dimas and Los Filos mines) for a period of 25 years, for an upfront payment of C$46m in cash and 108m WPM shares (then trading at C$4.00/share), and an ongoing payment equal to the lesser of US$3.90/oz silver (subject to an annual inflationary price adjustment) and the then prevailing market price of silver. On 30 March 2006, the two parties amended the Luismin silver purchase agreement, eliminating any capital expenditure contributions previously required to be paid by WPM, in consideration of which it issued 18m further shares to Goldcorp and a US$20m one-year, non-interest bearing promissory note, which was paid in full on 29 March 2007.

In August 2010, Primero (formerly known as Mala Noche Resources) acquired San Dimas from Goldcorp for US$510m in cash, shares and debt, leaving Goldcorp with a 36% share of the company. As part of the acquisition, WPM also agreed to an amended silver purchase agreement such that the term of the agreement was extended to the life of mine, in return for which Primero would deliver to WPM only the first 3.5Moz of payable silver produced at San Dimas per annum plus 50% of any excess for four years. With the agreement of both parties, this then increased to the first 6.0Moz plus 50% of any excess from the fifth year onwards.

Between 2010, when it acquired the mine and 2014, Primero increased mill capacity from 1,500tpd to 2,500tpd and had plans to increase it further to 3,000tpd thereafter. In Q116 however, output at San Dimas fell by 60.2%, quarter-on-quarter, to 0.9Moz attributable silver (vs 2.3Moz in Q415) which Primero attributed to the implementation of new safety standards at the mine. As a result, mill throughput was said to be limited to 1,639tpd. This recovered to above 2,500tpd in April. However, the addition of ground support was reported to have resulted in a modified mine plan for the remainder of 2016, with the company targeting higher-grade stopes at lower tonnages, with the result that a long-planned mill expansion to 3,000tpd was deferred. After recovering to something close to normal operating conditions in Q216, production at San Dimas was affected by high unplanned worker absences and a failure to achieve mine plans in Q316, which resulted in reduced development rates and also a number of delayed ventilation improvement projects. This, in turn, limited access to certain high-grade areas of the mine and caused Primero to revise its silver production guidance to 5.5-6.0Moz for FY16. This implied output of 1.7Moz in Q4. In the event, only 1.4Moz was produced, after which workers called a strike in mid-February 2017.

FY17 trials and tribulations

After two months of strike action, operations at San Dimas resumed on 18 April and a phased restart of the mine began on 22 April. Subsequently, a 13-day suspension of milling activities in mid-June followed the failure of an anchor block affixed to one of eight cables supporting the tailing suspension bridge. However, mining operations continued uninterrupted during that time with ore being stockpiled at the mill site. Full plant operations resumed on 24 June and the ore stockpile was fully processed in mid-July. Since mid-July however, Primero has reported a material deterioration in employer-employee relations to the point that productivity was materially, adversely affected.

In the aftermath of the strike, Primero’s production guidance for FY17 was 4.5-5.5Moz Ag. In the first three quarters of the year, it produced 2,639koz silver attributable to WPM (an average of 880koz per quarter). In September, it revised its guidance to 4.5-5.0Moz and has maintained this range to date, albeit it is now erring towards the lower end. This compares to WPM’s guidance at the time of its FY16 results in March 2017 (see our update note published on 29 March 2017) of 4.0Moz after an assumed three-month strike (vs two months actual) and Edison’s current, relatively conservative, expectation of 4.2Moz, which assumes a return to San Dimas’s long-term average quarterly production rate of 1.5Moz per quarter in Q417 (and then again in Q118).

Exhibit 1: San Dimas silver production attributable to WPM, Q112-Q118e (koz)

Source: Edison Investment Research, Wheaton Precious Metals

As such, we are forecasting that the San Dimas stream will have accounted for 14.7% of total silver production attributable to WPM in FY17 and 7.8% of silver equivalent production.

Politics

Fundamentally, Primero’s exploration at San Dimas failed to identify any replacement for the depleting Roberta and Robertita veins, with the result that mining rates above 1,800tpd (vs nameplate capacity of 2,500tpd) became increasingly difficult to maintain and Primero was in danger of failing to comply with its financial obligations to lenders and consequently cut back on exploration activities, thereby further compromising the mine’s potential future life.

In addition, in February 2016, Primero announced that its Mexican subsidiary had received a legal claim from the Mexican tax authorities, Servicio de Administración Tributaria (SAT), seeking to nullify the Advance Pricing Agreement issued by SAT in 2012, which confirmed Primero’s ability to pay taxes in Mexico on the sale of silver at actual prices realised by its Mexican subsidiary in connection with silver sales under Primero’s silver purchase agreement (SPA) with WPM for the tax years 2010-14. In the event that SAT is retroactively successful in nullifying the deal, it may seek to audit and reassess Primero’s Mexican subsidiary in respect of sales of silver in connection with the Primero SPA for the tax years 2010-14 and tax Primero on such sales at higher than realised prices, as opposed to the actual prices realised under the Primero SPA. In response, Primero notified the Mexican government that the measures taken against it by the SAT breached several provisions of Chapter 11 of the North American Free Trade Agreement (NAFTA) and that it has the option to commence international arbitration proceedings pursuant to Article 1119 of NAFTA. Nevertheless, at present, the dispute remains unresolved.

Material exceptionality

San Dimas was the fourth largest unique contributor to WPM’s sales in Q317 and, arguably, should have been the third largest and could have been the second largest under more normal circumstances. Prior to Q217, we forecast that San Dimas could sustainably produce 6.8Moz silver per annum attributable to WPM, which would ordinarily equate to c 24% of WPM’s silver production in a typical year, or c 15% of silver equivalent (AgE) production. While such a contribution to WPM is therefore not immaterial, in the historical context, it is worth noting that the San Dimas stream was specifically put into WPM by Goldcorp in 2004 and WPM floated as a means of showcasing the streaming business model, and that otherwise WPM would not, in the ordinary course of business, expose itself to such a material stream from an asset with such a comparatively junior operator.

Otherwise, all terms were entered into freely by both parties and these initially left Primero in a cash flow-positive position. WPM also highlights a number of Primero's strategic decisions, such as apparently giving precedence to gold over silver exploration and pursuing corporate expansion (eg via the Black Fox acquisition) while simultaneously reining in development expenditure at San Dimas as being material contributory factors in aggravating Primero's tribulations. In any event, it was certainly not in WPM's interest to risk a corporate bankruptcy at Primero, which was part of the reason for the corporate loan guarantees provided by it to Primero last year. As a result, with multiple mines, a single union, a pre-expanded mill and the status as Durango's largest taxpayer, WPM believes there is a tangible opportunity for First Majestic to turn around the fortunes of the San Dimas complex, including the possibility of some relatively near-term success in previously relatively neglected silver exploration.

Economics

Edison’s assumption that First Majestic’s acquisition of Primero completes on 31 March 2018 means that our FY17 forecasts will be unaffected by the transaction. We have nevertheless updated our FY17 forecasts to reflect slightly different average silver and gold prices to those estimated at the time of WPM’s Q3 results after the market close on 9 November (see Exhibit 2).

Q4 & FY17

WPM’s Q317 results were characterised by improvements in production relative to the previous quarter, but a 24.2% under-sale of silver relative to production (which was attributed to Penasquito, Zinkgruvan, Yauliyacu and Antamina) and a 13.9% under-sale of gold (which was attributed to Sudbury and Salobo). Note that, during the course of a year, WPM almost invariably experiences a period of inventory build, which is then, typically, ‘flushed through’ in the final quarter of the year. As always, Edison’s forecasts are made on the basis that what is produced is sold and that there is therefore no inventory change between quarters over the period under review.

Overall, WPM has maintained its production guidance for FY17 at 28Moz Ag and 340koz Au, compared with Edison’s forecast of 28.5Moz Ag and 343koz Au. We perceive that there is risk to our estimates from San Dimas, but regard this as being offset by upside risk (opportunity) at Penasquito. Otherwise, we have honed our Q417 silver price forecast from US$16.91/oz to US$16.72/oz (-1.1%) and our gold price forecast from US$1,272/oz to US$1,276/oz (+0.3%).

Exhibit 2: Wheaton Precious Metals’ FY17e by quarter and FY18e*

US$000s (unless otherwise stated)

Q117

Q217

Q317

Q417e

(previous)

Q417e

(current)

FY17e

(previous)

FY17e

(current)

Silver production (koz)

6,513

7,192

7,595

7,156

7,156

28,456

28,456

Gold production (oz)

84,863

78,127

95,897

83,765

83,765

342,652

342,652

AgE production (koz)

12,454

12,898

14,874

13,457

13,549

53,701

53,793

Silver sales (koz)

5,225

6,369

5,758

7,156

7,156

24,508

24,508

Gold sales (oz)

88,397

71,965

82,548

83,765

83,765

326,675

326,675

AgE sales (koz)

11,412

11,625

12,024

13,457

13,549

48,527

48,619

Avg realised Ag price (US$/oz)

17.45

17.09

16.87

16.91

16.72

17.06

17.00

Avg realised Au price (US$/oz)

1,208

1,263

1,283

1,272

1,276

1,248

1,256

Avg realised AgE price (US$/oz)

17.35

17.18

16.89

16.91

16.72

17.07

17.01

Avg Ag cash cost (US$/oz)

4.54

4.51

4.43

4.52

4.51

4.50

4.50

Avg Au cash cost (US$/oz)

391

393

396

368

395

359

394

Avg AgE cash cost (US$/oz)

5.11

4.90

4.84

4.86

4.82

4.92

4.91

Sales

197,951

199,684

203,034

227,565

226,540

828,233

827,209

Cost of sales

Cost of sales, excl. depletion

58,291

56,981

58,234

65,422

65,365

238,928

238,871

Depletion

63,943

59,772

61,852

68,924

68,924

254,491

254,491

Total cost of sales

122,234

116,753

120,086

134,346

134,289

493,419

493,362

Earnings from operations

75,717

82,931

82,948

93,219

92,251

334,814

333,846

Expenses and other income

– General and administrative**

7,898

9,069

8,793

8,500

8,500

34,260

34,260

– Foreign exchange (gain)/loss

41

163

204

204

– Net interest paid/(received)

6,373

6,482

6,360

5,686

5,686

24,901

24,901

– Other (income)/expense

94

283

1,317

0

0

1,694

1,694

Total expenses and other income

14,365

15,875

16,633

14,186

14,186

61,059

61,059

Earnings before income taxes

61,352

67,056

66,315

79,033

78,065

273,755

272,788

Income tax expense/(recovery)

128

(556)

(263)

-691

-691

Marginal tax rate (%)

0.2

(0.8)

(0.4)

0.0

0.0

-0.3

-0.3

Net earnings

61,224

67,612

66,578

79,033

78,065

274,446

273,479

Avg no. shares in issue (000s)

441,484

441,784

442,094

442,094

442,094

441,864

441,864

Basic EPS (US$)

0.14

0.15

0.15

0.18

0.18

0.62

0.62

Diluted EPS (US$)

0.14

0.15

0.15

0.18

0.18

0.62

0.62

Source: Wheaton Precious Metals, Edison Investment Research. Note: *Excluding impairments. **Quarterly forecasts exclude stock-based compensation costs.

In the aftermath of these revisions, our updated basic EPS estimate for FY17 is barely changed at 62c, which compares to a (rising) average consensus estimate (source: Bloomberg, 22 January 2018) of 60.4c, within a range of 57-66c (cf an average of 60.2c within a range of 57-64c in November and 59.5c within a range of 51-67c in August).

FY18e

Under the First Majestic PMPA, San Dimas is expected to contribute, on average, approximately 40-50koz of gold production (equivalent to 2.80-3.15Moz Ag at an Au:Ag ratio of 70:1) annually to WPM over the next five years (company estimate).

Hitherto, Edison’s FY18 EPS forecast were made on the basis of assumed precious metals prices of US$21.54/oz Ag and US$1,220/oz Au – as much to demonstrate WPM’s operational gearing to a normalisation of the gold:silver ratio as an expression of our expectations. At the time of our Q317 results update, published on 10 November, this resulted in an initial EPS forecast of US$0.89/share for FY18, although we noted that this moderated to 67c in the event that precious metals’ prices remained at the then level of spot prices, namely US$17.12/oz and US$1,287/oz for silver and gold, respectively. We have now formally updated these forecasts further, to reflect both updated precious metals’ prices and our assumption that the First Majestic-Primero deal will close on 31 March 2018, by quarter, as follows:

Exhibit 3: Wheaton Precious Metals’ FY18e by quarter*

US$000s (unless otherwise stated)

Q118

Q218

Q318

Q418

FY18

Silver production (koz)

6,789

5,246

5,246

5,246

22,528

Gold production (oz)

70,161

80,786

80,786

80,786

312,517

AgE production (koz)

12,237

11,519

11,519

11,519

46,794

Silver sales (koz)

6,789

5,246

5,246

5,246

22,528

Gold sales (oz)

70,161

80,786

80,786

80,786

312,517

AgE sales (koz)

12,237

11,519

11,519

11,519

46,794

Avg realised Ag price (US$/oz)

17.00

17.00

17.00

17.00

17.00

Avg realised Au price (US$/oz)

1,320

1,320

1,320

1,320

1,320

Avg realised AgE price (US$/oz)

17.00

17.00

17.00

17.00

17.00

Avg Ag cash cost (US$/oz)

4.50

4.56

4.56

4.56

4.54

Avg Au cash cost (US$/oz)

395

422

422

422

416

Avg AgE cash cost (US$/oz)

4.76

5.03

5.03

5.03

4.96

Sales

208,030

195,823

195,823

195,823

795,500

Cost of sales

Cost of sales, excl. depletion

58,289

57,998

57,998

57,998

232,283

Depletion

59,531

58,675

58,675

58,675

235,556

Total cost of sales

117,820

116,673

116,673

116,673

467,840

Earnings from operations

90,210

79,150

79,150

79,150

327,660

Expenses and other income

– General and administrative**

8,500

8,500

8,500

8,500

34,000

– Foreign exchange (gain)/loss

0

– Net interest paid/(received)

4,020

4,020

4,020

4,020

16,079

– Other (income)/expense

0

Total expenses and other income

12,520

12,520

12,520

12,520

50,079

Earnings before income taxes

77,690

66,630

66,630

66,630

277,581

Income tax expense/(recovery)

0

Marginal tax rate (%)

0.0

0.0

0.0

0.0

0.0

Net earnings

77,690

66,630

66,630

66,630

277,581

Avg no. shares in issue (000s)

442,094

442,094

442,094

442,094

442,094

Basic EPS (US$)

0.18

0.15

0.15

0.15

0.63

Diluted EPS (US$)

0.18

0.15

0.15

0.15

0.63

Source: Edison Investment Research. Note: *Excluding impairments. **Forecast excluded stock-based compensation costs.

Note that, as a result of the conversion of the San Dimas stream from a silver one to (effectively) a gold one, we expect Wheaton Precious Metals to become a majority gold streaming company from 31 March onwards on an annual basis (albeit there will inevitably be some quarterly fluctuations depending upon the balance of production, sales etc).

As such, Edison’s EPS forecasts for FY18 are ostensibly flat compared to FY17 and compare to a consensus estimate of 64.5c, within a range 49-80c (cf a consensus of 65.3c, within the range 42-81c, excluding Edison, at the time of WPM’s Q317 results in November 2017).

Accounting and discounting

Edison has recently updated its long-term gold and silver price expectations (see Mining overview: Unlocking the price to NPV discount, published in November 2017). On the basis of our revised production and sales expectations in the light of the new First Majestic PMPA, our updated forecasts for the cash-flows derived by WPM from the San Dimas stream are as follows:

Exhibit 4: San Dimas cash flows to WPM, 2012-26e (US$m, unless otherwise indicated)

Historical

Forecast

2012

2013

2014

2015

2016

2017

2018

2019

2020

2021

2022

2023

2024

2025

2026

Production (koz Ag)

5,905

6,542

5,760

7,449

5,212

4,182

1,543

6,828

6,828

6,828

6,828

6,828

6,828

6,828

6,828

Production (koz AuE)

31,875

42,500

42,500

42,500

42,500

42,500

42,500

42,500

42,500

Cash flow at LT prices

158.0

129.4

80.8

82.5

68.9

52.4

42.5

27.9

37.0

34.8

28.9

28.6

26.7

25.1

28.4

Cash flow at spot prices

158.0

129.4

80.8

82.5

68.9

52.4

42.5

30.3

30.1

29.8

29.6

29.3

29.0

28.8

28.5

Source: Edison Investment Research, Wheaton Precious Metals

Discounted at Edison’s standard 10% discount rate for mining companies, we value the cash-flows to WPM from San Dimas for the period FY18-33 at US$252.9, or US$0.57 per WPM share, on the basis of Edison’s long-term gold price assumptions or US$238.7m, or US$0.54 per WPM share, on the basis of the current spot price of gold (US$1,320/oz at the time of writing).

Stated alternatively, we estimate that the entire San Dimas stream will henceforward contribute c US$0.04-0.08 per annum to WPM’s EPS, compared with an estimated US$0.11 in FY17 (the last full year of the existing silver purchase agreement). In recognition of this, First Majestic is also issuing WPM 20.9m FR common shares with an aggregate value of US$151m at the time of the announcement, or US$145m at the time of writing – equivalent to US$0.33 per WPM share. These values compare with an adjusted purchase price of the San Dimas stream of US$190m and a carrying value, for accounting purposes, of US$136.8m, which suggests the possibility of an exceptional profit once the FR-PMO transaction concludes.

Valuation

Excluding FY04 (part year), WPM’s shares have historically traded on an average P/E multiple of 27.1x current year basic underlying EPS, ie excluding impairments (cf 35.0x Edison or 33.6x consensus FY18e, currently – see Exhibit 6).

Exhibit 5: WPM’s historic current year P/E multiples

Source: Edison Investment Research.

Applying this multiple to our long-term EPS forecast of US$1.40 in FY20 (at Edison’s updated average long-term precious metals prices) implies a potential share value for WPM shares of US$37.90, or C$47.18 in that year (excluding the US$0.33/share value of its equity interest in First Majestic).

In the meantime, from a relative perspective, it is notable that WPM is cheaper than its royalty/streaming ‘peers’ in 96% (ie 23 out of 24) of the valuation measures used in Exhibit 6 and on multiples that are cheaper than the miners themselves in at least 43% (ie 39 out of 90) of the same valuation measures, despite being associated with materially less operational and cost risk.

Exhibit 6: Wheaton Precious Metals’ valuation cf a sample of major operating and royalty/streaming companies

P/E (x)

Yield (%)

P/CF (x)

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

Royalty companies

Franco-Nevada

69.9

66.4

1.2

1.2

28.2

27.5

Royal Gold

49.1

40.5

1.1

1.2

19.3

17.7

Sandstorm Gold

91.4

65.6

0.0

0.0

19.6

19.3

Osisko Gold Royalties

58.1

48.3

1.1

1.3

33.4

22.3

Average

67.1

55.2

0.9

0.9

25.1

21.7

Wheaton Precious (Edison forecasts)

35.5

35.0

1.5

1.7

18.2

18.3

WPM (consensus)

35.9

33.6

1.4

1.5

18.1

17.3

Gold producers

Barrick

19.6

17.5

0.8

0.8

6.3

6.1

Newmont

27.2

29.8

0.7

0.9

9.1

9.6

Goldcorp

32.9

29.5

0.6

0.6

10.7

8.7

Newcrest

32.9

20.3

1.0

1.4

11.4

9.5

Kinross

26.5

32.4

0.0

0.0

5.5

5.1

Agnico-Eagle

45.7

49.8

0.9

0.9

13.3

13.4

Eldorado

70.5

26.3

1.3

0.5

13.5

7.3

Yamana

77.0

29.0

0.6

0.6

6.9

5.0

Randgold Resources

32.4

25.7

1.8

2.6

17.3

15.1

Average

40.5

28.9

0.9

0.9

10.4

8.8

Silver producers

Hecla

54.1

27.6

0.2

0.2

12.0

8.3

Pan American

28.4

19.7

0.6

0.7

11.9

8.9

Coeur Mining

187.3

36.5

0.0

0.0

9.8

8.0

First Majestic

634.0

51.3

0.0

0.0

15.2

10.4

Hocschild

50.1

38.9

1.2

1.1

7.3

7.1

Fresnillo

29.3

26.3

1.6

1.7

19.1

15.5

Average

163.9

33.4

0.6

0.6

12.5

9.7

Source: Bloomberg, Edison Investment Research. Note: Priced on 22 January 2018.

Sensitivities

Currently, we make no provision for either future expansion at Salobo or related expansion payments in our long-term forecasts. However, in the event that Salobo were to be expanded from 24Mtpa to 36Mtpa by the addition of a further 12Mtpa processing lines by 1 January 2023 – thereby attracting an estimated c US$603m incremental payment from WPM to Vale – we estimate that it would increase our estimate of WPM’s earnings by a material US$0.08-0.13/share. This, in turn, would increase our forecast value per share for the company to US$41.53, or C$51.69 at prevailing FX rates (excluding the US$0.33/share value of its equity interest in First Majestic), implying an internal rate of return to investors buying WPM shares currently at C$27.33, equivalent to 41.7% pa in US dollar terms.

Financials

As at 30 September 2017, WPM had US$69.9m in cash (ex-dividend) and US$854.0m of debt outstanding under its US$2bn revolving credit facility (which attracts an interest rate of Libor plus 120-220bp and matures in February 2022), such that it had net debt of US$784.1m overall, after US$129.1m (US$0.29/share) of cash inflows from operating activities during the quarter. Relative to the company’s equity, this level of net debt equated to a financial gearing (net debt/equity) ratio of 15.5% and a leverage (net debt/[net debt+equity]) ratio of 13.4%. It also compares with a net debt position of US$876.4m as at 30 June, US$980.2m as at 31 March, US$1,068.7m as at the end of December 2016, US$1,219.5m as at the end of September 2016 and US$1,362.7m as at the end of December 2015 and is consistent with WPM continuing to generate c US$100-150m per quarter from operating activities before financing and investing activities. Otherwise, assuming the operational performance set out in Exhibits 2 and 3, we estimate that WPM’s net debt position will have declined organically, to US$690.1m by the end of FY17 (equating to gearing of 13.6% and leverage of 12.0%), and that WPM will be net debt free early in FY20 (or in H219 if WPM’s First Majestic shares are treated as cash), all other things being equal and contingent on its making no further major acquisitions (which is unlikely). Self-evidently, such a level of debt is well within the tolerances required by its banking covenants that:

net debt should be no more than 0.75x tangible net worth (which was US$5,067.3m as at end-September 2017 and which we forecast to be US$5,067.6m as at end-December 2017); and

interest should be no less than 3x covered by EBITDA (we estimate that net interest will have been 22.3x covered in FY17).

Note that the C$191.7m letter of guarantee that WPM has posted re 50% of the disputed taxes relating to its dispute with the Canadian Revenue Agency (CRA) (see below) has been determined under a separate agreement and is therefore specifically excluded from calculations regarding WPM’s banking covenants.

CRA

There have been no further substantive developments regarding WPM’s dispute with the CRA since our update note of 15 February 2016.

WPM notes that the CRA’s position is that the transfer pricing provisions of the Income Tax Act (Canada) in relation to income earned by WPM’s foreign subsidiaries should apply “such that the income of Silver Wheaton [sic] subject to tax in Canada should be increased by an amount equal to substantially all of the income earned outside of Canada by the company’s foreign subsidiaries for the 2005-2010 taxation years”. Should this interpretation be upheld, we would expect it to have potentially profound consequences for Canada’s status as a supplier of finance and capital to overseas destinations in general (ie not just for the mining industry).

In 2017, WPM’s CEO, Randy Smallwood, was quoted as saying that the company is willing to settle its tax dispute with the CRA via a payment of C$5-10m “with gritted teeth”, but still believes no payment should be required. As such, the C$5-10m quoted should not be interpreted as an admission of guilt, but rather an appreciation of the costs involved in going to a full trial and also of the effect that the issue is having on WPM’s share price rating relative to its peers (see Exhibit 6).

In the meantime, Wheaton Precious is now nearing the end of the case ‘discovery process’ with the CRA, designed to provide both sides with the opportunity to arrive at an out-of-court settlement before formal proceedings commence. If a ‘principled’ settlement cannot be reached however, the company has stated that it is willing to go to trial, which would be likely to be towards the middle of 2018.

Exhibit 7: Financial summary

US$'000s

2012

2013

2014

2015

2016

2017e

2018e

Dec

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

849,560

706,472

620,176

648,687

891,557

827,209

795,500

Cost of Sales

(117,489)

(139,352)

(151,097)

(190,214)

(254,434)

(238,871)

(232,283)

Gross Profit

732,071

567,120

469,079

458,473

637,123

588,337

563,217

EBITDA

 

 

701,232

531,812

431,219

426,236

602,684

554,077

529,217

Operating Profit (before amort. and except.)

600,003

387,659

271,039

227,655

293,982

299,586

293,660

Intangible Amortisation

0

0

0

0

0

0

0

Exceptionals

0

0

(68,151)

(384,922)

(71,000)

0

0

Other

788

(11,202)

(1,830)

(4,076)

(4,982)

(1,898)

0

Operating Profit

600,791

376,457

201,058

(161,343)

218,000

297,688

293,660

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,901)

(16,079)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

269,789

274,686

277,581

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

193,807

272,788

277,581

Tax

(14,755)

5,121

1,045

3,391

1,330

691

0

Profit After Tax (norm)

586,036

375,495

267,977

222,880

266,137

273,479

277,581

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

195,137

273,479

277,581

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

430.5

441.9

442.1

EPS - normalised (c)

 

 

166

106

75

53

62

62

63

EPS - normalised and fully diluted (c)

 

165

105

74

53

62

62

63

EPS - (IFRS) (c)

 

 

166

106

56

(-41)

45

62

63

Dividend per share (c)

35

45

26

20

21

33

37

Gross Margin (%)

86.2

80.3

75.6

70.7

71.5

71.1

70.8

EBITDA Margin (%)

82.5

75.3

69.5

65.7

67.6

67.0

66.5

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

70.6

54.9

43.7

35.1

33.0

36.2

36.9

BALANCE SHEET

Fixed Assets

 

 

2,403,958

4,288,557

4,309,270

5,526,335

6,025,227

5,779,736

5,597,754

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

5,948,443

5,702,952

5,520,970

Tangible Assets

1,347

5,670

5,427

12,315

12,163

12,163

12,163

Investments

121,377

40,801

32,872

19,776

64,621

64,621

64,621

Current Assets

 

 

785,379

101,287

338,493

105,876

128,092

506,657

800,448

Stocks

966

845

26,263

1,455

1,481

1,485

1,428

Debtors

6,197

4,619

4,132

1,124

2,316

2,266

2,179

Cash

778,216

95,823

308,098

103,297

124,295

502,905

796,840

Other

0

0

0

0

0

0

0

Current Liabilities

 

 

(49,458)

(21,134)

(16,171)

(12,568)

(19,057)

(23,788)

(23,138)

Creditors

(20,898)

(21,134)

(16,171)

(12,568)

(19,057)

(23,788)

(23,138)

Short term borrowings

(28,560)

0

0

0

0

0

0

Long Term Liabilities

 

 

(32,805)

(1,002,164)

(1,002,856)

(1,468,908)

(1,194,274)

(1,194,965)

(1,194,965)

Long term borrowings

(21,500)

(998,136)

(998,518)

(1,466,000)

(1,193,000)

(1,193,000)

(1,193,000)

Other long term liabilities

(11,305)

(4,028)

(4,338)

(2,908)

(1,274)

(1,965)

(1,965)

Net Assets

 

 

3,107,074

3,366,546

3,628,736

4,150,735

4,939,988

5,067,640

5,180,098

CASH FLOW

Operating Cash Flow

 

 

720,209

540,597

434,582

435,783

608,503

556,956

547,137

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,901)

(16,079)

Tax

(725)

(154)

(204)

(208)

28

1,382

0

Capex

(641,976)

(2,050,681)

(146,249)

(1,791,275)

(805,472)

(9,000)

(72,000)

Acquisitions/disposals

0

0

0

0

0

0

0

Financing

12,919

58,004

6,819

761,824

595,140

0

0

Dividends

(123,852)

(160,013)

(79,775)

(68,593)

(78,708)

(145,827)

(165,123)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

295,298

378,610

293,935

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

1,068,705

690,095

HP finance leases initiated

0

0

0

0

0

0

0

Other

0

(12,139)

(1,003)

(5,724)

(1,300)

0

0

Closing net debt/(cash)

 

 

(728,156)

902,313

690,420

1,362,703

1,068,705

690,095

396,160

Source: Company sources, Edison Investment Research

Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Wheaton Precious Metals and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. 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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

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280 High Holborn

London, WC1V 7EE

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Edison is an investment research and advisory company, with offices in North America, Europe, the Middle East and AsiaPac. The heart of Edison is our world-renowned equity research platform and deep multi-sector expertise. At Edison Investment Research, our research is widely read by international investors, advisers and stakeholders. Edison Advisors leverages our core research platform to provide differentiated services including investor relations and strategic consulting. Edison is authorised and regulated by the Financial Conduct Authority. Edison Investment Research (NZ) Limited (Edison NZ) is the New Zealand subsidiary of Edison. Edison NZ is registered on the New Zealand Financial Service Providers Register (FSP number 247505) and is registered to provide wholesale and/or generic financial adviser services only. Edison Investment Research Inc (Edison US) is the US subsidiary of Edison and is regulated by the Securities and Exchange Commission. Edison Investment Research Pty Limited (Edison Aus) [46085869] is the Australian subsidiary of Edison. Edison Germany is a branch entity of Edison Investment Research Limited [4794244]. www.edisongroup.com

DISCLAIMER Copyright 2018 Edison Investment Research Limited. All rights reserved. This report has been commissioned by Wheaton Precious Metals and prepared and issued by Edison for publication globally. 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. Opinions contained in this report represent those of the research department of Edison at the time of publication. The securities described in the Investment Research may not be eligible for sale in all jurisdictions or to certain categories of investors. This research is issued in Australia by Edison Investment Research Pty Ltd (Corporate Authorised Representative (1252501) of Myonlineadvisers Pty Ltd (AFSL: 427484)) and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. The Investment Research is distributed in the United States by Edison US to major US institutional investors only. Edison US is registered as an investment adviser with the Securities and Exchange Commission. Edison US 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. As such, Edison does not offer or provide personalised advice. We publish information about companies in which we believe our readers may be interested and this information reflects our sincere opinions. The information that we provide or that is derived from our website is not intended to be, and should not be construed in any manner whatsoever as, personalised advice. Also, our website and 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 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. This document is provided 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. 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United Kingdom

New York +1 646 653 7026

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, 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

295 Madison Avenue, 18th Floor

10017, New York

US

Sydney +61 (0)2 8249 8342

Level 12, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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