Metals price moves de-risk valuation

Wheaton Precious Metals 16 August 2019 Update
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Wheaton Precious Metals

Metals price moves de-risk valuation

Q2 results

Metals & mining

16 August 2019

Price

C$35.49

Market cap

C$15,820m

C$1.3301/US$

Net debt (US$m) at 30 June 2019

1,012.8

Shares in issue

445.2m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

12.6

30.3

47.4

Rel (local)

16.1

32.8

48.6

52-week high/low

C$36.67

C$20.15

Business description

Wheaton Precious Metals is the world’s pre-eminent ostensibly 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 and the US.

Next events

Q319 results

14 November 2019

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

While Wheaton’s production of gold and silver in Q219 was closely in line with – or even above – our expectations, temporary under-sales of both relative to production led to a US$6.3m negative variance in (underlying) net earnings and a 9.1% (or 1 cent) negative variance in EPS relative to our prior expectations. More significantly, given the improved metals price environment, we have upgraded our EPS forecasts for FY19 by 14% to 57c/share, which is now near the top of the range of analysts’ expectations, despite continuing to use gold prices that are 5% below spot, at US$1,416/oz and US$1,418 for Q3 and Q4, respectively. We also expect the quarterly dividend to be increased in Q4, from 9cps to 10cps.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

843.2

277.4

63

33

42.4

1.2

12/18

794.0

203.1

48

36

55.6

1.3

12/19e

890.3

252.9

57

37

46.4

1.4

12/20e

1,197.6

534.8

120

51

22.3

1.9

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

Guidance reiterated; composition changed

Wheaton Precious Metals (WPM) has maintained its production guidance for FY19 of 690,000oz of gold equivalent, although it now estimates that this will be composed of 385,000oz of gold (cf 365,000oz previously), 22.5Moz of silver (cf 24.5Moz previously) and 22,000oz of palladium (unchanged). For the five-year period ending in FY23, the company continues to estimate that average annual gold equivalent production will be in the region of 750,000oz per year.

Hudbay to appeal Rosemont decision

On 31 July, a federal judge in Arizona issued a ruling in the lawsuits challenging the US Forest Service’s approval of the Rosemont mine. The ruling effectively blocks construction of the project, as a result of which we have removed it from our forecasts (NB this has no effect on our valuation, which is based on a multiple of FY20 earnings). However, the operator, Hudbay, has stated that it will appeal the decision. In the meantime, WPM has made no payments towards the project.

Valuation: C$45.37 in FY20

Assuming no material purchases of additional streams (which we think unlikely), we forecast a value per share for WPM of US$34.11, or C$45.37 in FY20 (cf US$33.41 or C$45.03 previously) at (unchanged) average precious metals prices of US$25.95/oz Ag and US$1,482/oz Au. This valuation excludes the value of 20.9m shares in First Majestic held by WPM, with an immediate value of C$285.9m, or US$0.48 per WPM share. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than those of its royalty/streaming ‘peers’ in at least 91% of financial measures considered in Exhibit 7, and the miners themselves in at least 41% (but perhaps as much as 51%) of the same measures, despite being associated with materially less operating and cost risk.

Q219 results

While Wheaton’s production of gold and silver in Q219 was closely in line with – or even above – our expectations, temporary under-sales of both relative to production led to a negative variance in sales of US$9.6m (or 4.8%) relative to our quarterly forecast, which, despite being partially offset by direct costs and taxes in particular, resulted in a US$6.3m negative variance in (underlying) net earnings and a 9.1% (or 1 cent) negative variance in EPS. This contrasted with Q119 results, in which a large oversale of gold relative to production (resulting from a drawdown in inventory – see ‘Ounces produced but not yet delivered – aka inventory’ on page 3) broadly offset a large under-sale of silver, resulting in a US$5.4m positive variance in revenues relative to our expectations. The other feature of the Q219 results was a US$165.9m impairment charge relating to the company’s Voisey’s Bay cobalt purchase agreement (which is not shown in the table below, but is considered in more detail on page 3, overleaf, and shown in our FY19 forecasts in Exhibit 8 on page 10). A full analysis of WPM’s underlying Q2 results relative to our prior forecasts and Q119 results is provided in the table below:

Exhibit 1: Wheaton Precious Metals Q219 results vs Q119 and Q219e, by quarter*

US$000s
(unless otherwise stated)

Q118

Q218

Q318

Q418 (underlying)

Q119

Q219e

Q219

***Change
(%)

****Variance
(%)

****Variance
(units)

Silver production (koz)

7,428

6,091

5,701

5,499

5,614

4,874

4,834

-13.9

-0.8

-40

Gold production (oz)

79,657

85,292

101,552

107,567

93,585

93,011

100,577

7.5

8.1

7,566

Palladium production (koz)

0

0

8,817

5,869

4,729

5,500

5,736

21.3

4.3

236

Silver sales (koz)

6,343

5,972

5,018

4,400

4,294

4,874

4,241

-1.2

-13.0

-633

Gold sales (oz)

69,973

87,140

89,242

102,813

115,020

92,975

90,077

-21.7

-3.1

-2,898

Palladium sales (koz)

0

0

3,668

5,049

5,189

5,478

5,273

1.6

-3.7

-205

Avg realised Ag price (US$/oz)

16.73

16.52

14.80

14.66

15.64

14.90

14.93

-4.5

0.2

0

Avg realised Au price (US$/oz)

1,330

1,305

1,210

1,229

1,308

1,281

1,320

0.9

3.0

39

Avg realised Pd price (US$/oz)

N/A

N/A

955

1,137

1,443

1,349

1,381

-4.3

2.4

32

Avg Ag cash cost (US$/oz)

4.49

4.54

5.04

4.66

4.64

4.87

5.14

10.8

5.5

0

Avg Au cash cost (US$/oz)

399

407

418

409

417

420

420

0.7

0.0

0

Avg Pd cash cost (US$/oz)

N/A

N/A

169

205

254

243

247

-2.8

1.6

4

Sales

199,252

212,400

185,769

196,591

225,049

199,114

189,466

-15.8

-4.8

-9,648

Cost of sales

Cost of sales, excluding depletion

56,414

62,580

63,202

63,598

69,214

64,087

60,957

-11.9

-4.9

-3,130

Depletion

57,265

62,494

64,684

67,844

68,381

62,946

61,404

-10.2

-2.4

-1,542

Total cost of sales

113,679

125,074

127,886

131,442

137,595

127,033

122,361

-11.1

-3.7

-4,672

Earnings from operations

85,573

87,326

57,883

65,149

87,454

72,081

67,105

-23.3

-6.9

-4,976

Expenses and other income

– General and administrative**

9,757

11,972

8,779

16,597

16,535

9,250

12,249

-25.9

32.4

2,999

– Foreign exchange (gain)/loss

(170)

26

0

144

0

– Net interest paid/(received)

5,591

5,659

12,877

12,743

13,946

11,363

13,306

-4.6

17.1

1,943

– Other (income)/expense

2,757

466

1,301

581

(266)

1,149

88.0

N/A

-500

Total expenses and other income

17,935

18,123

22,957

30,065

30,215

20,613

26,704

-17.1

21.5

4,442

Earnings before income taxes

67,638

69,203

34,926

35,084

57,239

51,468

40,401

-26.5

-18.3

-9,418

Income tax expense/(recovery)

(485)

(3,224)

905

(1,662)

(110)

370

(2,758)

2,407.3

-845.4

-3,128

Marginal tax rate (%)

(0.7)

(4.7)

2.6

(4.7)

(0.2)

0.7

(6.8)

3,179.4

-1,037.0

-7

Net earnings

68,123

72,427

34,021

36,745

57,349

51,098

43,159

-21.9

-12.3

-6,290

Avg no. shares in issue (000s)

442,728

443,191

443,634

444,057

444,389

445,219

445,769

0.3

0.1

550

Basic EPS (US$)

0.15

0.16

0.08

0.08

0.13

0.11

0.10

-23.1

-9.1

-0.01

Diluted EPS (US$)

0.15

0.16

0.08

0.08

0.13

0.11

0.10

-23.1

-9.1

-0.01

DPS (US$)

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.0

0.0

0.00

Source: Wheaton Precious Metals, Edison Investment Research. Note: *As reported by WPM, excluding exceptional items. **Quarterly forecasts exclude stock-based compensation costs. ***Q219 vs Q119. ****Q219a vs Q219e.

From an operational perspective, the standout performer within WPM’s portfolio of streams was once again Salobo, at which production remained at high levels, with lower throughput and recoveries almost completely offset by higher grades. A similarly positive performance was also reported at San Dimas, which benefited from higher grades in the Jessica and Victoria veins during the quarter. By contrast, Penasquito was adversely affected by a two-month stoppage in production as a result of an illegal blockade at the mine (although this was known about by Edison and taken into account in its prior Q219 forecasts). Moreover, this situation has now remedied itself and production is reported to have been ramping up since mid-June. In the meantime, production remains at lower levels at Constancia, owing to delays in mining the Pampacancha satellite deposit (which hosts significantly higher gold grades than those mined hitherto), in lieu of which WPM is entitled to receive an additional 2,005oz gold per quarter during FY19 and FY20 relative to its precious metals purchase agreement.

Voisey’s Bay

Wheaton entered into a precious metals purchase agreement (PMPA) with Vale in June 2018 to acquire from Voisey’s Bay an amount of cobalt equal to 42.4% of its output until the delivery of 31 million pounds and 21.2% of cobalt production thereafter for the life of mine for a total upfront cash payment of US$390m. At the same time, Vale also entered into a streaming agreement with Cobalt 27 Capital Corp on substantially the same terms as WPM’s Voisey's Bay PMPA.

On 18 June 2019, Cobalt 27 announced that it had entered into an agreement to be taken over by Pala Investments at a price that implied a significantly lower value for the former’s streaming agreement with Voisey's Bay than the original upfront cash payment. As a result, Wheaton made the decision to impair the value of its own asset by US$165.9m, from US$393m to US$227m (although this is, self-evidently, a non-cash charge to the income statement).

Ounces produced but not yet delivered – aka inventory

After diverging sharply in Q119, in Q219 sales of silver and gold relative to production reverted to close to their long-term average rates of 87.7% (vs a long-term average rate of 88.8%) and 89.6% (vs a long-term average rate of 92.3%), respectively.

Exhibit 2: Over(/under) sale of silver and gold as a % of production, Q112–Q219

Source: Edison Investment Research, Wheaton Precious Metals

As at 30 June, payable ounces attributable to WPM produced but not yet delivered amounted to 3.3Moz silver and 80,740oz gold (vs 3.5Moz silver and 51,515oz gold in March). This ‘inventory’ equates to 1.81 months and 2.52 months of forecast FY19 silver and gold production, respectively (vs 1.92 months and 1.66 months of forecast FY19 silver and gold production in Q119 and 1.59 months and 2.49 months of FY18 production in Q418), and compares with WPM’s target level of two months of annualised production for silver, and two to three months of annualised gold and palladium production.

Exhibit 3: WPM ounces produced but not yet delivered, Q316–Q219 (months of production)

Source: Edison Investment Research, Wheaton Precious Metals

Note that, for these purposes, the use of the term ‘inventory’ reflects ounces produced by WPM’s operating counterparties at the mines over which it has streaming agreements, but which have not yet been delivered to WPM. It in no way reflects the other use of the term in the mining industry itself, where it typically refers to metal in circuit (among other things) and may therefore be considered to be a consequence of metallurgical recoveries in the plant.

Medium-term outlook

WPM has maintained its production guidance for FY19 of 690,000oz of gold equivalent, although it now estimates that this will be composed of 385,000oz of gold (cf 365,000oz previously), 22.5Moz of silver (cf 24.5Moz previously) and 22,000oz of palladium (unchanged). For the five-year period ending in FY23, the company continues to estimate that average annual gold equivalent production will amount to 750,000 ounces per year. This compares with Edison’s (updated) longer-term forecasts, as follows:

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

FY19e

FY20e

FY21e

FY22e

FY23e*

Previous Edison forecast

Silver production (Moz)

22.1

23.0

21.3

23.0

21.1

Gold production (koz)

372

347

325

344

356

Cobalt production (klbs)

0

0

2,100

2,100

2,100

Palladium production (koz)

21

27

27

27

30

Gold equivalent (koz)

655

770

754

812

793

Current Edison forecast

Silver production (Moz)

22.1

22.8

21.6

21.2

18.0

Gold production (koz)

385

388

386

356

369

Cobalt production (klbs)

0

0

2,100

2,100

2,100

Palladium production (koz)

22

27

27

27

30

Gold equivalent (koz)

666

808

822

793

752

Company guidance

Silver production (Moz)

22.5

Gold production (koz)

385

Cobalt production (klbs)

0

Palladium production (koz)

22

Gold equivalent (koz)

690

750

750

750

750

Source: Company guidance, Edison Investment Research forecasts. Note: *Edison forecast includes a contribution from Salobo III in FY23e.

The major changes to Edison’s immediate gold production forecasts arise from alterations to assumed Salobo production over the period in order to align our assumptions more closely to Vale’s latest technical report. Otherwise, the major differences between Edison’s gold equivalent production forecasts and Wheaton’s may be explained by the ratio of the gold price to the silver price. Whereas Wheaton assumes an 81.3x ratio, which roughly approximates current conditions in the market, Edison assumes that the ratio will revert to closer to 57x from FY20 onwards, which roughly approximates its long-term average since 1971. In addition, Edison is also anticipating a production contribution from Salobo III in FY23. However, in the light of recent events (see ‘Rosemont’, below), it has removed any contribution from Rosemont until there is more clarity regarding the legal situation.

In the medium term, silver output from Penasquito attributable to WPM is expected to recover back to its steady-state level of 7Moz as the Chile Colorado pit contributes to mill feed and grades improve once again at the main Penasco pit with mine sequencing. It will also benefit from the development of the Pyrite Leach Project, which will add an additional 1.0–1.5Moz of silver attributable to WPM per year by recovering 48% of the silver that previously reported to tailings. Production of palladium and gold at that Stillwater mine is also anticipated to increase as the Blitz project ramps up to full capacity in FY21.

Longer-term outlook

Salobo

On 24 October 2018, Vale announced the approval of the Salobo III brownfields mine expansion, intended to increase processing capacity at Salobo from 24Mtpa to 36Mtpa, with start-up scheduled for H122 and an estimated ramp-up time of 15 months. According to its agreement with Vale, depending on the grade of the material processed, WPM will be required to make a payment to Vale in respect of this expansion, which WPM estimates will be in the range US$550–650m in FY23, in return for which it will be entitled to its full 75% attributable share of gold production. Note: this compares to its purchase of a 25% stream in August 2017 for an estimated consideration of US$820.8m (including renegotiated warrants and cost inflation terms) and the US$900m it paid in March 2015 (when the gold price averaged US$1,179/oz) for another 25% gold stream from Salobo (see our note, Silver Wheaton: Going for gold, published on 30 August 2016).

Potential future growth

WPM is ostensibly a precious metals streaming company (plus one cobalt stream). Considering only the silver component of its investible universe, WPM estimates the size of the potential market open to it to be the lower half of the cost curve of the 70% of global silver production of c 870Moz in FY17 that was produced as a by-product of either gold or base metal mines (ie approximately 305Moz pa silver vs WPM’s production of 28.5Moz Ag in FY17). Inevitably, WPM’s investible universe may be further refined by the requirement for the operations to be located in good mining jurisdictions, with relatively low political risk. Nevertheless, such figures serve to illustrate the fact that WPM’s marketplace is far from saturated or mature.

As a consequence, WPM reports that it is busy on the corporate development front. It has the potential for up to six deals with a value in the range US$100–300m, thus fully financeable via the c US$0.99bn available to WPM in cash and under its US$2bn revolving credit facility as at end-Q219.

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

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

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

Rosemont

One further, major project that had been moving closer to development is the Rosemont copper project in Arizona, after its operator, Hudbay, announced that it had received both a Section 404 Water Permit from the US Army Corps of Engineers and its Mine Plan of Operations (MPO) from the US Forest Service. The Section 404 permit regulates the discharge of fill material into waterways according to the Clean Water Act and was effectively the final material administrative step before the mine could be developed. Subsequently, Hudbay indicated it would seek board approval to commence construction work by the end of the year, which ‘should enable first production by the end of 2022’. In the meantime, it commenced an early works programme to run concurrently with financing activities (including a potential joint venture partner) for the remainder of the year.

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

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

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

In its reaction to the ruling, Hudbay said that it believed that the ruling was without precedent and that the court had misinterpreted federal mining laws and Forest Service regulations as they apply to Rosemont. It pointed out that the Forest Service issued its decision in 2017 after a ‘thorough process of ten years involving 17 co-operating agencies at various levels of government, 16 hearings, over 1,000 studies, and 245 days of public comment resulting in more than 36,000 comments’ and with a long list of studies that have examined the potential effects on the environment. Hudbay also pointed out that various agencies had accepted that the company could operate the mine in compliance with environmental laws. In conclusion, it said that it will appeal the ruling to the Ninth Circuit Court of Appeals. Nevertheless, in the light of the uncertainty about the timing and development of the project we have, for the moment, at least, removed it from all of our forecasts.

The proposed Rosemont development is located near a number of large porphyry-type producing copper mines and is expected to be one of the largest three copper mines in the US, with output of c 112,000t copper in concentrate per year and accounting for c 10% of total US copper production. Total by-product production of silver and gold attributable to WPM will be c 2.7Moz Ag pa and c 16,100oz Au pa and we estimate it could contribute an average c US$0.13 per share to WPM’s basic EPS in its first nine years of operations from FY22–30 for an upfront payment of US$230m (equivalent to US$0.52/share) in two instalments of US$50m and US$180m (of which neither has yet been paid).

Other matters

General and administrative expenses

WPM has forecast non-stock general and administrative expenses for FY19 in the range US$36–38m, or US$9.0–9.5m per quarter (vs a comparable forecast of US$34–36m, or US$8.5–9.0m per quarter, for FY18), including all employee-related expenses, charitable contributions, etc. Investors should note, however, that stock-based compensation costs are excluded from our financial forecasts in Exhibits 5 and 8 owing to their inherently unpredictable nature.

FY19 by quarter

Taking into account the aforementioned considerations, plus the improved precious metal pricing environment so far in H219, our updated forecasts for WPM for FY19, by quarter, are now as follows:

Exhibit 5: Wheaton Precious Metals FY19 forecast, by quarter*

US$000s
(unless otherwise stated)

Q218

Q318

Q418

Q119

Q219

Q319

(previous)

Q419

(previous)

Q319

(current)

Q419

(current)

FY19

(current)

FY19

(previous)

Silver production (koz)

6,091

5,701

5,499

5,614

4,834

5,807

5,807

5,807

5,807

22,062

22,102

Gold production (oz)

85,292

101,552

107,567

93,585

100,577

93,011

93,011

95,419

95,419

385,000

372,617

Palladium production (oz)

0

8,817

5,869

4,729

5,736

5,500

5,500

5,500

5,500

21,465

21,229

Silver sales (koz)

5,972

5,018

4,400

4,294

4,241

5,807

5,807

5,594

5,807

19,936

20,782

Gold sales (oz)

87,140

89,242

102,813

115,020

90,077

92,975

92,975

95,383

95,383

395,863

393,944

Palladium sales (oz)

0

3,668

5,049

5,189

5,273

5,478

5,478

5,478

5,478

21,418

21,623

Avg realised Ag price (US$/oz)

16.52

14.80

14.66

15.64

14.93

14.83

14.83

16.55

16.95

16.13

15.01

Avg realised Au price (US$/oz)

1,305

1,210

1,229

1,308

1,320

1,263

1,263

1,416

1,418

1,363

1,280

Avg realised Pd price (US$/oz)

N/A

955

1,137

1,443

1,381

1,320

1,320

1,320

1,320

1,365

1,357

Avg Ag cash cost (US$/oz)

4.54

5.04

4.66

4.64

5.14

4.76

4.76

5.22

5.20

5.07

4.76

Avg Au cash cost (US$/oz)

407

418

409

417

420

420

420

421

421

420

419

Avg Pd cash cost (US$/oz)

N/A

169

205

254

247

238

238

238

2378

244

243

Sales

212,400

185,769

196,591

225,049

189,466

210,750

210,750

234,875

240,914

890,304

845,662

Cost of sales

Cost of sales, excluding depletion

62,580

63,202

63,598

69,214

60,957

67,959

67,959

70,657

71,648

272,476

269,219

Depletion

62,494

64,684

67,844

68,381

61,404

65,801

65,801

69,588

70,240

269,613

262,928

Total cost of sales

125,074

127,886

131,442

137,595

122,361

133,759

133,759

140,245

141,887

542,089

532,147

Earnings from operations

87,326

57,883

65,149

87,454

67,105

76,990

76,990

94,631

99,027

348,216

313,515

Expenses and other income

– General and administrative**

11,972

8,779

21,142

16,535

12,249

9,250

9,250

9,250

9,250

47,284

44,285

– Foreign exchange (gain)/loss

26

0

144

0

0

0

– Net interest paid/(received)

5,659

12,877

17,060

13,946

13,306

11,363

11,363

10,391

10,391

48,034

48,034

– Other (income)/expense

466

1,301

1,302

(266)

3,090

(766)

(266)

Total expenses and other income

18,123

22,957

39,648

30,215

28,645

20,613

20,613

19,641

19,641

94,552

92,053

Earnings before income taxes

69,203

34,926

25,501

57,239

38,460

56,377

56,377

74,990

79,386

253,663

221,462

Income tax expense/(recovery)

(3,224)

905

18,672

(110)

(2,758)

370

370

250

250

(2,368)

1,000

Marginal tax rate (%)

(4.7)

2.6

73.2

(0.2)

(7.2)

0.7

0.7

0.3

0.3

-0.9

0.5

Net earnings

72,427

34,021

6,828

57,349

41,218

56,007

56,007

74,740

79,136

256,031

220,462

Ave. no. shares in issue (000s)

443,191

443,634

444,057

444,389

445,769

445,219

445,219

445,219

445,219

445,424

445,012

Basic EPS (US$)

0.16

0.08

0.02

0.13

0.10

0.13

0.13

0.17

0.18

0.57

0.50

Diluted EPS (US$)

0.16

0.08

0.02

0.13

0.10

0.13

0.13

0.17

0.18

0.57

0.50

DPS (US$)

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.10

0.37

0.36

Source: Wheaton Precious Metals, Edison Investment Research. Note: *Excluding impairments and exceptional gains. **Forecasts exclude stock-based compensation costs. Totals may not add up owing to rounding.

Our basic EPS forecast of US$0.57/share (vs US$0.50/share previously) for FY19 compares with a consensus forecast of US$0.53/share (source: Refinitiv, 16 August 2019), within a range of US$0.49–0.64 per share. Note however that, within the context of current spot prices, our forecasts for the gold price for Q3 and Q4 are relatively conservative. Should gold, in particular, remain at current levels, we estimate that WPM would instead report US$0.60 in EPS.

Our US$1.20 basic EPS forecast for FY20 (see Exhibit 8) compares with a consensus of US$0.70 (source: Refinitiv, 16 August), within an erstwhile range of US$0.52–1.17. This estimate is predicated on an average gold price during the year of US$1,482/oz (which we have maintained consistently since November 2017) and an average silver price of US$25.95/oz, which, in the latter case, is 53.1% above the current spot price. One of the central assumptions behind our silver price forecast is that it will, at some point, revert to the long-term correlation that it has exhibited with gold since the latter was demonetised in 1971. In the event that it remains at current levels instead (US$16.95/oz at the time of writing), we forecast that WPM would instead earn US$0.76 per share in FY20.

Valuation

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 28.5x current year basic underlying EPS, excluding impairments (vs 46.4x Edison or 50.4x Refinitiv consensus FY19e, currently – see Exhibit 7).

Exhibit 6: WPM’s historical current year P/E multiples, 2005–18

Source: Edison Investment Research

Applying this 28.5x multiple to our updated EPS forecast of US$1.20 in FY20 (vs US$1.17 previously) implies a potential value per share for WPM of US$34.11, or C$45.37 in that year (vs US$33.41, or C$45.03 previously). Note that this valuation excludes the value of 20.9m shares in First Majestic currently held by WPM, with an immediate value, 9 August, of C$285.9m (cf C$165.9m previously), or US$0.48 per WPM share (cf US$0.28 previously).

In the meantime, from a relative perspective, it is notable that WPM is cheaper than its royalty/streaming ‘peers’ in at least 91% (22 out of 24) of the valuation measures used in Exhibit 7 and on multiples that are cheaper even than the miners themselves in at least 41% (32 out of 78), but perhaps as many as 51% (if Edison forecasts are used), of the same valuation measures, despite being associated with materially less operational and cost risk (since WPM’s costs are contractually predetermined).

Exhibit 7: WPM comparative valuation vs a sample of 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

63.7

54.3

1.0

1.0

30.5

26.6

Royal Gold

51.6

51.7

0.8

0.8

24.9

24.6

Sandstorm Gold

84.9

64.8

0.0

0.0

20.9

17.8

Osisko

92.9

57.8

1.3

1.3

26.3

21.0

Average

73.3

57.1

0.8

0.8

25.7

22.5

WPM (Edison forecasts)

46.4

22.3

1.4

1.9

22.3

14.3

WPM (consensus)

50.4

38.4

1.3

1.5

23.4

20.6

Gold producers

Barrick

41.4

31.0

0.9

0.9

11.7

10.2

Newmont

30.6

20.6

1.5

1.4

9.6

7.8

Newcrest

22.6

25.9

1.0

0.9

12.0

13.0

Kinross

19.1

18.6

0.0

0.0

5.7

5.2

Agnico-Eagle

75.9

42.9

0.8

0.8

17.5

12.9

Eldorado

69.5

12.6

0.0

0.4

8.5

4.6

Yamana

59.4

30.8

0.8

1.1

7.3

5.9

Average

45.5

26.0

0.7

0.8

10.3

8.5

Silver producers

Hecla

N/A

N/A

0.7

0.7

7.2

5.5

Pan American

49.3

24.6

1.0

0.9

12.1

7.8

Coeur Mining

N/A

111.9

0.0

0.0

10.0

5.5

First Majestic

N/A

190.2

0.0

0.0

23.6

15.2

Hochschild

26.4

19.5

1.5

1.7

5.7

5.0

Fresnillo

36.5

27.0

1.6

2.1

10.4

9.3

Average

37.4

74.7

0.8

0.9

11.5

8.0

Source: Refinitiv, Edison Investment Research. Note: Peers priced on 16 August 2019.

Financials: Solid equity base

As at 30 June 2019, WPM had US$87.2m in cash and US$1,100.0m of debt outstanding, 99.6% of which is under its US$2bn revolving credit facility (which attracts an interest rate of Libor plus 120–220bp and matures in February 2024), such that it had net debt of US$1,012.8m overall, after US$107.4m (US$0.24/share) of pre-financing cash inflows during the quarter. Relative to the company’s Q1 balance sheet equity of US$5,111.9m, this level of net debt equates to a financial gearing (net debt/equity) ratio of 19.8% and a leverage (net debt/[net debt+equity]) ratio of 16.5%. It also compares with a net debt position of US$1,057.7m as at end-March, US$1,188.2m as at end-December and US$1,261.1m as at end-September 2018. 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; and

interest should be no less than 3x covered by EBITDA (we estimate that it will be covered 11.9x in FY19).

All other things being equal and subject to it making no further major acquisitions (which is unlikely in our view), on our current cash flow projections WPM will be net debt free late in FY20.

Exhibit 8: Financial summary

US$000s

2012

2013

2014

2015

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

849,560

706,472

620,176

648,687

891,557

843,215

794,012

890,304

1,197,642

Cost of Sales

(117,489)

(139,352)

(151,097)

(190,214)

(254,434)

(243,801)

(245,794)

(272,476)

(283,579)

Gross Profit

732,071

567,120

469,079

458,473

637,123

599,414

548,218

617,828

914,063

EBITDA

 

 

701,232

531,812

431,219

426,236

602,684

564,741

496,568

570,544

866,779

Operating Profit (before amort. and except.)

600,003

387,659

271,039

227,655

293,982

302,361

244,281

300,932

568,032

Intangible Amortisation

0

0

0

0

0

0

0

0

0

Exceptionals

0

0

(68,151)

(384,922)

(71,000)

(228,680)

245,715

(169,502)

0

Other

788

(11,202)

(1,830)

(4,076)

(4,982)

8,129

(5,826)

766

0

Operating Profit

600,791

376,457

201,058

(161,343)

218,000

81,810

484,170

132,196

568,032

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(41,187)

(48,034)

(33,198)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

269,789

277,368

203,094

252,897

534,834

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

193,807

56,817

442,983

84,161

534,834

Tax

(14,755)

5,121

1,045

3,391

1,330

886

(15,868)

2,368

(1,000)

Profit After Tax (norm)

586,036

375,495

267,977

222,880

266,137

286,383

181,400

256,031

533,834

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

195,137

57,703

427,115

86,529

533,834

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

430.5

442.0

443.4

445.4

445.8

EPS - normalised (c)

 

 

166

106

75

53

62

63

48

57.5

119.8

EPS - normalised and fully diluted (c) 

165

105

74

53

62

63

48

57

120

EPS - (IFRS) (c)

 

 

166

106

56

(41)

45

13

96

19

120

Dividend per share (c)

35

45

26

20

21

33

36

37

51

Gross Margin (%)

86.2

80.3

75.6

70.7

71.5

71.1

69.0

69.4

76.3

EBITDA Margin (%)

82.5

75.3

69.5

65.7

67.6

67.0

62.5

64.1

72.4

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

70.6

54.9

43.7

35.1

33.0

35.9

30.8

33.8

47.4

BALANCE SHEET

Fixed Assets

 

 

2,403,958

4,288,557

4,309,270

5,526,335

6,025,227

5,579,898

6,390,342

6,122,729

5,552,624

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

5,948,443

5,454,106

6,196,187

5,928,574

5,358,469

Tangible Assets

1,347

5,670

5,427

12,315

12,163

30,060

29,402

29,402

29,402

Investments

121,377

40,801

32,872

19,776

64,621

95,732

164,753

164,753

164,753

Current Assets

 

 

785,379

101,287

338,493

105,876

128,092

103,415

79,704

446,808

1,324,638

Stocks

966

845

26,263

1,455

1,481

1,700

1,541

1,598

2,150

Debtors

6,197

4,619

4,132

1,124

2,316

3,194

2,396

2,439

3,281

Cash

778,216

95,823

308,098

103,297

124,295

98,521

75,767

442,770

1,319,207

Other

0

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(49,458)

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(28,841)

(35,832)

(36,927)

Creditors

(20,898)

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(28,841)

(35,832)

(36,927)

Short term borrowings

(28,560)

0

0

0

0

0

0

0

0

Long Term Liabilities

 

 

(32,805)

(1,002,164)

(1,002,856)

(1,468,908)

(1,194,274)

(771,506)

(1,269,289)

(1,269,289)

(1,269,289)

Long term borrowings

(21,500)

(998,136)

(998,518)

(1,466,000)

(1,193,000)

(770,000)

(1,264,000)

(1,264,000)

(1,264,000)

Other long term liabilities

(11,305)

(4,028)

(4,338)

(2,908)

(1,274)

(1,506)

(5,289)

(5,289)

(5,289)

Net Assets

 

 

3,107,074

3,366,546

3,628,736

4,150,735

4,939,988

4,899,664

5,171,916

5,264,416

5,571,046

CASH FLOW

Operating Cash Flow

 

 

720,209

540,597

434,582

435,783

608,503

564,187

518,680

578,201

866,480

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(41,187)

(48,034)

(33,198)

Tax

(725)

(154)

(204)

(208)

28

(326)

0

2,368

(1,000)

Capex

(641,976)

(2,050,681)

(146,249)

(1,791,275)

(805,472)

(19,633)

(861,406)

(2,000)

271,359

Acquisitions/disposals

0

0

0

0

0

0

0

0

0

Financing

12,919

58,004

6,819

761,824

595,140

1,236

1,279

0

0

Dividends

(123,852)

(160,013)

(79,775)

(68,593)

(78,708)

(121,934)

(132,915)

(163,532)

(227,203)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

295,298

398,537

(515,549)

367,003

876,437

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

1,068,705

671,479

1,188,233

821,230

HP finance leases initiated

0

0

0

0

0

0

0

0

0

Other

0

(12,139)

(1,003)

(5,724)

(1,300)

(1,311)

(1,205)

(0)

0

Closing net debt/(cash)

 

 

(728,156)

902,313

690,420

1,362,703

1,068,705

671,479

1,188,233

821,230

(55,207)

Source: Company sources, Edison Investment Research.


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

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

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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

The Investment Research is a publication distributed in the United States by Edison Investment Research, Inc. Edison Investment Research, Inc. is registered as an investment adviser with the Securities and Exchange Commission. 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.

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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

1,185 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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