Palladium ex machina

Wheaton Precious Metals 24 July 2018 Update
Download PDF

Wheaton Precious Metals

Palladium ex machina

Stillwater stream purchase

Metals & mining

24 July 2018

Price

C$28.96

Market cap

C$12,823m

C$1.3179/US$

Net debt* (US$m) at 31 March 2018
*Cum-dividend of US$39.9m

547.4

Shares in issue

442.8m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(3.9)

3.0

11.1

Rel (local)

(4.0)

(2.9)

3.2

52-week high/low

C$29.7

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

Q218 results

14 August 2018

Third quarterly dividend announced

14 August 2018

Q318 results

November 2018

Fourth quarterly dividend announced

November 2018

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

On 16 July, Wheaton Precious Metals (WPM) announced it had entered into an agreement with Sibanye to acquire 100% of the gold production plus a percentage of the palladium production from the Stillwater and East Boulder mines for an upfront cash consideration of US$500m. On an underlying basis, we expect the transaction to add 4.0c (or c 5.0%) to WPM’s basic EPS per year over the 10 years from FY21 to FY30.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

891.6

269.8

62

21

35.2

1.0

12/17

843.2

277.4

63

33

34.6

1.5

12/18e

810.8

252.3

57

35

38.6

1.6

12/19e

1,004.7

377.5

85

42

25.6

1.9

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

Equivalent to a stream of 34koz AuE or 1.9Moz AgE

Effective 1 July 2018, WPM will be immediately entitled to receive an amount of gold equal to 100% of Stillwater’s gold production plus 4.5% of its palladium production for ongoing payments of 18% of the spot price of gold and palladium. At the top line, this stream is approximately equivalent to a gold stream of c 34koz pa, falling to c 24koz pa after FY31, or a silver stream of c 1.9Moz pa, falling to c 1.4Moz after FY31 (albeit with a larger margin than is typically the case for gold and silver streams).

Forecasts updated for falling gold and silver prices

In addition to including the Stillwater stream, we have adjusted our FY18 forecasts to reflect recent falls in the prices of precious metals. Where before we were expecting H218 prices of US$1,320/oz and US$16.67/oz for gold and silver, respectively, we have now reduced these expectations to US$1,225/oz and US$15.49/oz, representing top-line declines of 7.2% and 7.1%, respectively, and resulting in a 10.3% decline in our earnings expectation for FY18 overall.

Valuation: C$45.71 in FY21

Assuming no material purchases of additional streams, we forecast a per-share value for WPM of US$34.68, or C$45.71 in FY21 at average precious metals prices of US$25.19/oz Ag and US$1,437/oz Au. This valuation excludes the value of 20.9m shares in First Majestic currently held by WPM, with an immediate value of C$188.6m, or US$0.32 per WPM share. It also implies a 20.2% pa total internal rate of return for investors in US dollar terms over the next 3.5 years. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than those of its royalty/streaming ‘peers’ in 91% of financial measures considered in Exhibit 10, and the miners themselves in at least 35% of the same measures, despite being associated with materially less operating and cost risk. Additional potential upside still exists in the form of the optionality provided by the development (or further development) of major assets such as Salobo, Navidad etc.

Stillwater palladium stream acquisition

On 16 July, WPM announced it had entered into an agreement with Sibanye (largely the former South African assets of Gold Fields of South Africa and Gengold plus Stillwater in the US) to acquire 100% of the gold production plus a percentage of its palladium production from the Stillwater and East Boulder mines (together called ‘Stillwater’) in Montana for an upfront cash consideration of US$500m. Salient features of the agreement are as follows:

Effective 1 July 2018, WPM will be entitled to receive an amount of gold equal to 100% of the Stillwater gold production for the life of the Stillwater and East Boulder mines.

In addition, it will initially be entitled to an amount of palladium equal to 4.5% of palladium production until 375koz have been delivered to Wheaton, at which point the amount will decrease to 2.25% until 550koz have been delivered, at which point the amount will reduce again, to 1.00%, until the end of the life of the mine.

WPM will make ongoing payments of 18% of the spot price of gold and the spot price of palladium until the balance of the upfront payment has been reduced to zero, at which point it will make ongoing payments of 22% of the spot price of gold and the spot price of palladium.

The stream area of interest is defined as the area inclusive of all patented and unpatented claims at the Stillwater mining operations.

Stillwater

Stillwater is the US’s only platinum group metal (PGM) mine and the largest primary producer of PGMs outside South Africa (predominantly Amplats, Implats and Northam) and Russia (predominantly Norilsk). Located in Montana in the front range of the Beartooth Mountains at elevations exceeding 1,500m above mean sea level, its operations comprise two underground PGM mines (Stillwater and East Boulder), the Blitz project and the Columbus metallurgical complex.

The Stillwater and East Boulder mines have been in operation since 1986 and 2002, respectively, producing from the J-M Reef, which is the world’s highest grade PGM deposit. Each mine has its own milling and concentrator infrastructure on site. In the meantime, the Blitz project – which is part of the Stillwater mine – started ore production in 2017 and is expected to ramp up to full production in 2021. Finally, the Columbus metallurgical complex is a state-of-the-art processing plant to smelt and part-refine mine concentrates to produce a PGM-rich filter cake that is shipped to a third-party for final refining.

Stillwater reserves and resources, attributable to WPM are as follows:

Exhibit 1: Stillwater reserves & resources, attributable to WPM (31 December 2017)

Category

Tonnage
(Mt)

Grade Au

(g/t)

Grade Pd
(g/t)

Contained Au
(Moz)

Contained Pd

(Moz)

Reserves

Gold

Proven

5.0

0.31

0.05

Probable

36.8

0.31

0.36

Proven & Probable

41.8

0.31

0.41

Palladium

Proven

0.2

13.2

0.08

Probable

1.3

12.6

0.53

Proven & Probable

1.5

12.7

0.61

Resources

Gold

Inferred

92.5

0.31

0.92

Resources

Palladium

Inferred

1.0

12.9

0.43

Grand total gold

134.3

0.31

1.33

Grand total palladium

2.5

12.8

1.04

Source: Wheaton Precious Metals

Declared current reserves are sufficient to support mining activities at Stillwater until 2041, but this could be significantly increased if inferred resources are upgraded. Since 2001, the average conversion of resources to reserves has been c 95% at Boulder East and c 87% at Stillwater (the lower conversion being on account of its higher cut-off grade). Note that the Blitz project is expected to have a higher conversion rate than the Stillwater mine as it will similarly utilise a lower cut-off grade owing to an efficient infrastructure set up. In addition, there is significant exploration potential both regionally and at depth below current reserves and resources, including over 12km of undeveloped mineralisation associated with the J-M reef between the two currently producing mines.

As is typical for WPM in entering a new streaming agreement (albeit with a major mining company), there is a completion test relating to the completion of the Blitz project, including the completion of underground development, critical surface infrastructure and concentrator production output.

Effect on WPM

Expected production in H218 is forecast to be c 5.4koz gold and 10.4koz palladium. In the following 10 years, production is forecast to average c 14.5koz gold and 29.0koz palladium per year. We forecast that Stillwater will have delivered 375koz palladium to WPM by the end of FY31, such that WPM’s share of production halves, from 4.5% to 2.25%, and it will then receive c 14.7koz palladium per year thereafter until a further 175koz have been delivered (after a further 12 years, approximately), at which point its share of production will reduce, once again, to 1.00% for the rest of the life of the mine. Payable rates for gold and palladium have been fixed at 99.0% and 99.6%, respectively, with the result that we forecast the following production, sales and pre-tax cash flows attributable to WPM over the next 13.5 years (in real, FY18, dollar terms) at the current spot price of palladium of US$914/oz at the time of writing:

Exhibit 2: Stillwater estimated production, sales and (real) pre-tax cash flows attributable to WPM, H218e-31e

Year

H218e

FY19e

FY20e

FY21e

FY22e

FY23e

FY24e

FY25e

FY26e

FY27e

FY28e

FY29e

FY30e

FY31e

Production (oz Au)

5,400

14,500

14,500

14,500

14,500

14,500

14,500

14,500

14,500

14,500

14,500

14,900

14,900

14,900

Production (koz Pd)

10.4

27

27

27

27

30

30

30

30

30

30

30

30

30

Sales (oz Au)

5,346

14,355

14,355

14,355

14,355

14,355

14,355

14,355

14,355

14,355

14,355

14,751

14,751

14,751

Sales (koz Pd)

10.4

27

27

27

27

30

30

30

30

30

30

30

30

30

Pre-tax cash flows to WPM (US$m)

13.5

35.0

37.6

37.1

35.5

38.0

37.5

37.2

38.2

39.5

40.3

41.7

39.6

37.7

Source: Edison Investment Research, Wheaton Precious Metals. Note: Gold price forecast as per Edison’s long-term price forecasts, as set out in our note, Mining overview: Unlocking the price to NPV discount, published in November 2017; palladium price as at the current spot price of US$914/oz.

Within the context of an initial, upfront payment of US$500m in FY18, these cash flows imply a real internal rate of return to WPM of 4.3% in FY18 US dollar terms from FY18 to FY41.

On the basis of these forecasts, we also estimate that the balance of Wheaton’s upfront payment will have declined to nil by the end of FY31. At that point, therefore, it will also be liable to make ongoing payments of 22% of the spot prices of gold and palladium (cf 18% previously).

With due deference to the different detailed terms of each transaction, at the top line, the above gold and palladium stream is therefore approximately equivalent to a gold stream of c 34koz pa, falling to c 24koz pa after FY31, or a silver stream of c 1.9Moz pa, falling to c 1.4Moz after FY13. As such, it may be compared to recent deals concluded by WPM of a similar size, as follows:

Exhibit 3: Recent comparable WPM transactions

Heading Left

Salobo II

Antamina

Salobo III

Voisey’s Bay

Stillwater

Date

Q215

Q415

Q316

Q218

Q318

Counterparty

Vale

Glencore

Vale

Vale

Sibanye-Stillwater

Consideration

US$900m

US$900m

c US$818.4m*

US$390m

US$500m

Approximate metal attributable to WPM pa

70koz Au

5.1Moz Ag for 2yrs then 4.7Moz pa Ag

70koz Au

2.4Mlbs Co pa, equivalent to c 75-80koz Au or 5.7-6.2Moz Ag pa

14.5koz Au plus 29koz Pd pa initially, equivalent to c 34koz Au or 1.9Moz

Source: Edison Investment Research. Note: *See our report, Going for gold, published on 30 August 2016.

Investors should note that, whereas WPM makes ongoing payments of US$400/oz at Salobo at the current time, which equates to approximately 33% of the price of gold at the time of writing, its ongoing payments to Stillwater are approximately half this level at 18% of the spot prices of gold and palladium. Although the Stillwater stream is thus approximately half the size of the Salobo streams in terms of revenue therefore, its ongoing payments are also approximately just over half as large.

Medium term

Compared to our prior forecasts, we estimate that the Stillwater transaction will add an average of 1.9Moz (or c 4.2%) of silver equivalent to WPM’s production profile over the four years from FY19-22 (inclusive):

Exhibit 4: Edison forecast WPM precious metals production

FY18e

FY19e

FY20e

FY21e

FY22e

Updated WPM guidance

Previous

Silver production (Moz)

24.0

22.3

23.0

23.9

23.7

Gold production (koz)

345

370

337

333

339

Cobalt production (klbs)

0

0

0

2,100

2,100

Palladium production (koz)

0

0

0

0

0

Current

Silver production (Moz)

24.0

22.3

23.0

23.9

23.7

25.0

Gold production (koz)

351

385

352

348

353

385

Cobalt production (klbs)

0

0

0

2,100

2,100

2,100 from FY21

Palladium production (koz)

10.4

27

27

27

27

27 from FY19

Source: Edison Investment Research

On an underlying basis (ie before any changes in precious metal price assumptions – see below), we expect the Stillwater palladium stream acquisition to add 4.0c (or c 5.0%) to WPM’s basic EPS per year (simple average) over the 10 years of production from FY21 to FY30 inclusive:

Exhibit 5: Voisey’s Bay estimated EPS enhancement, 2021-30e

Year

FY18e

FY19e

FY20e

FY21e

FY22e

FY23e

FY24e

FY25e

FY26e

FY27e

FY28e

FY29e

FY30e

EPS enhancement (US$)

0.01

-0.01

-0.01

0.03

0.03

0.04

0.04

0.03

0.04

0.04

0.04

0.05

0.04

EPS enhancement (%)

1.0

-1.7

-0.6

2.8

3.1

4.4

4.3

4.4

4.4

5.8

5.7

7.2

8.2

Source: Edison Investment Research, Wheaton Precious Metals

Potential future growth

WPM is a pure precious metals streaming company. 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 is produced as a by-product of either gold or base metal mines (ie approximately 305Moz silver per year cf WPM’s production of 28.5Moz Ag in FY17). Inevitably, WPM’s investible universe would 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 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 perhaps one more transaction over the next year with a value up to US$600m and/or up to six deals with a value in the range US$100-300m, and thus fully financeable via the c US$0.78bn we have estimated to be available to WPM under its revolving credit facility as at end Q318.

While it is difficult, or impossible, to predict potential future stream acquisition targets with any degree of certainty, it is perhaps possible to highlight three 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;

the 75% of the silver output at Pascua-Lama that is currently not subject to any streaming arrangement (subject to permitting and development); and

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

The main source of potential organic production growth for WPM is Salobo (which accounted for 77% of WPM’s gold division’s output in Q118). The operator, Vale, is studying expansion scenarios and is deploying four drill rigs to test the deposit at depth. Given the open-ended nature of the deposit, and depending on the work that Vale carries out and the decision that it makes, any expansion could add as much as 100% to gold output attributable to WPM from Salobo per year – albeit at the cost of an additional payment from WPM. Mill throughput at the Salobo mine was reported to be running at 98% of its 24Mtpa nameplate capacity in Q118. If throughput capacity is expanded within a predetermined period and depending on the grade of material processed, WPM will be required to make an additional payment to Vale regarding its 75% gold stream. The additional payments range in size from US$113m if throughput is expanded beyond 28Mtpa by 1 January 2036, to (effectively) c US$900m if throughput were to be expanded beyond 40Mtpa by 2022. If Salobo were to be expanded from 24Mtpa to 36Mtpa by the addition of a further 12Mtpa processing line by 1 January 2023, for example – thereby attracting an estimated c US$603m incremental payment from WPM to Vale – we estimate it would increase our estimate of WPM’s earnings by a material c US$0.11 per share from the date of the expansion.

One further, major project moving closer to fruition is the Rosemont copper project in Arizona, after Coronado National Forest Supervisor Kerwin Dewberry signed the final Record of Decision (ROD) for the Rosemont copper project earlier this month. The ROD outlines the supervisor’s decision to select the Barrel Alternative and approve the mine plan of operations once amended, and to amend the 1986 Coronado National Forest Plan by creating a new management area around the mine site. This advance follows a preliminary green light provided by the US Forest Service when the latter announced the release of a draft record of decision earlier this year, saying that the project, as it now stands, meets current law which, in turn, allowed other federal agencies to proceed with permitting requests. The proposed mine, which is owned by Hudbay Minerals, is located near a number of large porphyry-type producing copper mines and is expected to be one of the largest 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, or c 3.9Moz silver equivalent pa, and we estimate it will contribute an average c US$0.11 per share to WPM’s basic EPS in its first 10 years of operations for an upfront payment of US$230m (equivalent to US$0.52/sh) spread over three years.

Palladium as a diversifier

Nickel, palladium and platinum all occur in the same (transition) group in the periodic table of the elements. As a result, they exhibit similar chemical characteristics and are often associated with one another in mineral deposits, albeit platinum and palladium have crustal abundances that classify them as precious metals. Historically, therefore, palladium has typically been mined as a by-product of either nickel (in Russia) or platinum (in South Africa). Both platinum and palladium are effective in hydrocarbon scrubbing and are used in industry as auto-catalysts. Whereas platinum is particularly effective in scrubbing diesel engine emissions, palladium is more effective in scrubbing petrol/gasoline engine emissions. As a result, since the start of the VW (diesel) emissions scandal in September 2016, the palladium price has outperformed the platinum price by 62.7%, as a series of government announcements around the world have been perceived to favour petrol/gasoline-based engines gaining market share at the expense of diesel-based engines.

Exhibit 6: Metals price performances since end-September 2016

Source: Thomson Reuters Datastream. Note: Order of metals and minerals in the legend on the left corresponds to the finishing position of the lines in the chart on the right.

While there is no need for PGMs in pure electric vehicles, hybrids and plug-in hybrids both use them and are likely to drive demand for palladium in conjunction with tightening emissions targets around the world that are typically met, in the first instance, by higher loadings of palladium per vehicle in auto-catalysts. Thus, while the internal combustion engine (ICE) may be destined to lose market share to electric vehicles over the coming years, as far as palladium demand is concerned, this is anticipated to be at least offset by an increasing overall market for cars (driven by growth in China and India, in particular) coupled with a greater intensity of use in the palladium using ICE and hybrid segment of the market.

FY18 forecasts

In addition to including the Stillwater stream, we have adjusted our forecasts to reflect recent falls in the prices of both gold and silver for the remainder of the year.

Exhibit 7: Wheaton Precious Metals FY18 forecast, by quarter*

US$000s
(unless otherwise stated)

Q118

Q218e

Q318e

Q418e

FY18e
(current)

FY18e
(previous)

Silver production (koz)

7,428

6,059

5,261

5,261

24,009

24,009

Gold production (oz)

79,657

85,413

92,856

92,856

350,781

345,381

Palladium production (oz)

0

0

5,200

5,200

10,400

0

Silver sales (koz)

6,343

6,059

5,261

5,261

22,924

22,924

Gold sales (oz)

69,973

85,413

92,829

92,829

341,043

335,697

Palladium sales (oz)

0

0

5,179

5,179

10,358

0

Avg realised Ag price (US$/oz)

16.73

16.53

15.49

15.49

16.11

16.68

Avg realised Au price (US$/oz)

1,330

1,306

1,225

1,225

1,267

1,323

Avg realised Pd price (US$/oz)

N/A

N/A

914

914

914

N/A

Avg Ag cash cost (US$/oz)

4.49

4.51

4.49

4.49

4.50

4.52

Avg Au cash cost (US$/oz)

399

407

412

412

408

411

Avg Pd cash cost (US$/oz)

N/A

N/A

165

165

165

N/A

Sales

199,252

211,693

199,943

199,943

810,831

826,503

Cost of sales

Cost of sales, excluding depletion

56,414

62,111

62,687

62,687

243,900

241,646

Depletion

57,265

62,937

67,790

67,790

255,781

244,912

Total cost of sales

113,679

125,048

130,477

130,477

499,681

486,558

Earnings from operations

85,573

86,644

69,466

69,466

311,150

339,945

Expenses and other income

- General and administrative**

9,757

8,750

8,750

8,750

36,007

36,007

- Foreign exchange (gain)/loss

(170)

(170)

(170)

- Net interest paid/(received)

5,591

5,751

5,751

5,751

22,844

22,844

- Other (income)/expense

2,757

2,757

2,757

Total expenses and other income

17,935

14,501

14,501

14,501

61,438

61,438

Earnings before income taxes

67,638

72,143

54,965

54,965

249,712

278,507

Income tax expense/(recovery)

(485)

(485)

(485)

Marginal tax rate (%)

(0.7)

0.0

0.0

0.0

(0.2)

(0.2)

Net earnings

68,123

72,143

54,965

54,965

250,197

278,992

Ave. no. shares in issue (000s)

442,728

442,728

442,728

442,728

442,728

442,728

Basic EPS (US$)

0.15

0.16

0.12

0.12

0.57

0.63

Diluted EPS (US$)

0.15

0.16

0.12

0.12

0.56

0.63

DPS (US$)

0.09

0.09

0.09

0.08

0.35

0.36

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

This revised FY18 forecast compares to our observation in our note in June (see Kobold ex machina) that if gold and silver prices remain at US$1,278/oz and US$16.47/oz for the rest of the year, it would reduce our EPS forecast by 3c, to US$0.60/share. As it stands, our forecast of basic EPS of US$0.57/sh compares with a consensus forecast of US$0.58/sh (source: Bloomberg 18 July), within a range of US$0.48-0.63 per share.

In the meantime, our FY19 EPS forecast remains based on assumed precious metals prices of US$22.21/oz Ag and US$1,263/oz Au (see Mining overview, Unlocking the price to NPV discount, published in November 2017) – as much to demonstrate WPM’s operational gearing to a normalisation of the gold:silver ratio from its current, (almost) unprecedented, level of 79.1x.

Exhibit 8: Gold price as a multiple of silver price, 1792–2017

Source: Edison Investment Research (underlying data South African Chamber of Mines, Bloomberg and www.kitco.com)

Valuation

Excluding FY04 (part-year), WPM’s shares have historically traded on a contemporary average P/E multiple of 27.6x current year basic underlying EPS, ie excluding impairments (cf 38.6x Edison or 37.6x Bloomberg consensus FY18e, currently – see Exhibit 10).

Exhibit 9: WPM’s historic current year P/E multiples

Source: Edison Investment Research

Applying this multiple to our updated EPS forecast in the wake of the Stillwater transaction of US$1.26 in FY21 (cf US$1.24 in FY20 previously) implies a potential share value for WPM of US$34.68, or C$45.71 in that year (cf US$34.11, or C$45.14 in FY20 previously). Note that this valuation excludes the value of 20.9m shares in First Majestic currently held by WPM, with an immediate value of C$188.6m, or US$0.32 per WPM share.

In the meantime, from a relative perspective, it is notable that WPM is cheaper than its royalty/streaming ‘peers’ in 91% (22 out of 24) of the valuation measures used in Exhibit 10 and on multiples that are cheaper than the miners themselves in at least 35% (32 out of 90) of the same valuation measures (effectively irrespective of whether Edison or consensus forecasts are used), despite being associated with materially less operational and cost risk (as WPM’s costs are contractually predetermined).

Exhibit 10: 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

61.2

56.6

1.3

1.3

27.4

24.9

Royal Gold

52.1

42.3

1.1

1.1

21.0

18.9

Sandstorm Gold

65.2

51.5

0.0

0.0

17.3

13.5

Osisko

82.2

53.2

1.5

1.6

24.4

19.6

Average

65.2

50.9

1.0

1.0

22.5

19.2

WPM (Edison forecasts)

38.6

25.6

1.6

1.9

18.6

15.0

WPM (consensus)

37.6

31.0

1.7

1.7

18.8

16.6

Gold producers

Barrick

17.3

17.5

1.0

0.9

5.8

5.9

Newmont

26.3

23.1

1.5

1.5

9.4

8.6

Goldcorp

35.5

19.3

0.6

0.6

8.6

6.6

Newcrest

36.9

16.8

1.1

1.7

9.9

7.9

Kinross

19.9

23.8

0.0

3.3

4.5

4.6

Agnico-Eagle

101.9

52.0

1.0

1.0

15.5

13.0

Eldorado

77.0

359.1

0.0

0.4

7.8

5.8

Yamana

23.8

18.3

0.7

0.7

4.5

4.3

Randgold Resources

22.6

19.9

4.3

5.2

12.1

11.2

Average

40.1

61.1

1.1

1.7

8.7

7.5

Silver producers

Hecla

85.7

28.6

0.2

0.2

10.7

6.8

Pan American

22.7

20.7

0.7

1.0

10.6

9.3

Coeur Mining

308.7

25.1

0.0

0.0

14.0

7.1

First Majestic

100.0

32.2

0.0

0.0

16.6

8.3

Hocschild

52.5

18.0

1.4

1.8

5.0

4.1

Fresnillo

23.2

20.3

2.1

2.4

12.5

11.3

Average

98.8

24.1

0.7

0.9

11.6

7.8

Source: Bloomberg, Edison Investment Research. Note: Peers priced on 18 July 2018.

Financials: Solid equity base

WPM’s initial, upfront cash payment of US$500m in consideration of the Stillwater stream purchase will be paid using amounts drawn from its US$2bn revolving credit facility.

As at 31 March 2018, WPM had US$115.6m in cash (before a dividend of US$39.9m payable on or about 7 June) and US$663.0m of debt outstanding under its US$2bn revolving credit facility (which attracts an interest rate of Libor plus 120–220bp and matures in February 2023), such that it had net debt of US$547.4m overall, after US$125.3m (US$0.28/share) of cash inflows from operating activities during the quarter. Relative to the company’s Q1 balance sheet equity of US$4,925.5m, this level of net debt equated to a financial gearing (net debt/equity) ratio of 12.7% and a leverage (net debt/[net debt+equity]) ratio of 10.0%. It also compared with a net debt position of US$671.5m as at 31 December 2017 and is consistent with WPM generating c US$100–150m per quarter from operating activities before financing and investing activities.

In the aftermath of the Stillwater palladium stream acquisition, we now estimate that WPM’s net debt position will be US$1,270.9m by the end of FY18 (cf US$756.3m previously), which will equate to gearing of 25.5% (cf 15.1% previously) and leverage of 20.3% (cf 13.1% previously), and that WPM will be net debt free in late-2020 (cf mid-2020 previously), all other things being equal and contingent on its making no further major acquisitions (which is unlikely, in our view). 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$4,925.5m as at end-Q118 and which we now forecast to be US$4,992.8m as at end-FY18); and

interest should be no less than 3x covered by EBITDA (we estimate that net interest was covered 22.6x in FY17 and that it will be covered 23.2x in FY18).

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

Exhibit 11: Financial summary

US$'000s

2012

2013

2014

2015

2016

2017

2018e

2019e

Dec

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

849,560

706,472

620,176

648,687

891,557

843,215

810,831

1,004,651

Cost of Sales

(117,489)

(139,352)

(151,097)

(190,214)

(254,434)

(243,801)

(243,900)

(275,253)

Gross Profit

732,071

567,120

469,079

458,473

637,123

599,414

566,931

729,399

EBITDA

 

 

701,232

531,812

431,219

426,236

602,684

564,741

530,924

693,392

Operating Profit (before amort. and except.)

600,003

387,659

271,039

227,655

293,982

302,361

275,143

428,864

Intangible Amortisation

0

0

0

0

0

0

0

0

Exceptionals

0

0

(68,151)

(384,922)

(71,000)

(228,680)

0

0

Other

788

(11,202)

(1,830)

(4,076)

(4,982)

8,129

(2,587)

0

Operating Profit

600,791

376,457

201,058

(161,343)

218,000

81,810

272,556

428,864

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(22,844)

(51,376)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

269,789

277,368

252,299

377,488

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

193,807

56,817

249,712

377,488

Tax

(14,755)

5,121

1,045

3,391

1,330

886

485

0

Profit After Tax (norm)

586,036

375,495

267,977

222,880

266,137

286,383

250,197

377,488

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

195,137

57,703

250,197

377,488

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

430.5

442.0

442.7

442.7

EPS - normalised (c)

 

 

166

106

75

53

62

63

57

85.3

EPS - normalised and fully diluted (c)

 

165

105

74

53

62

63

56

85

EPS - (IFRS) (c)

 

 

166

106

56

(-41)

45

13

57

85

Dividend per share (c)

35

45

26

20

21

33

35

42

Gross Margin (%)

86.2

80.3

75.6

70.7

71.5

71.1

69.9

72.6

EBITDA Margin (%)

82.5

75.3

69.5

65.7

67.6

67.0

65.5

69.0

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

70.6

54.9

43.7

35.1

33.0

35.9

33.9

42.7

BALANCE SHEET

Fixed Assets

 

 

2,403,958

4,288,557

4,309,270

5,526,335

6,025,227

5,579,898

6,286,117

6,093,589

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

5,948,443

5,454,106

6,160,325

5,967,797

Tangible Assets

1,347

5,670

5,427

12,315

12,163

30,060

30,060

30,060

Investments

121,377

40,801

32,872

19,776

64,621

95,732

95,732

95,732

Current Assets

 

 

785,379

101,287

338,493

105,876

128,092

103,415

3,677

4,556

Stocks

966

845

26,263

1,455

1,481

1,700

1,456

1,804

Debtors

6,197

4,619

4,132

1,124

2,316

3,194

2,221

2,752

Cash

778,216

95,823

308,098

103,297

124,295

98,521

0

0

Other

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(49,458)

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(524,984)

(139,770)

Creditors

(20,898)

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(24,081)

(27,173)

Short term borrowings

(28,560)

0

0

0

0

0

(500,903)

(112,597)

Long Term Liabilities

 

 

(32,805)

(1,002,164)

(1,002,856)

(1,468,908)

(1,194,274)

(771,506)

(771,991)

(771,991)

Long term borrowings

(21,500)

(998,136)

(998,518)

(1,466,000)

(1,193,000)

(770,000)

(770,000)

(770,000)

Other long term liabilities

(11,305)

(4,028)

(4,338)

(2,908)

(1,274)

(1,506)

(1,991)

(1,991)

Net Assets

 

 

3,107,074

3,366,546

3,628,736

4,150,735

4,939,988

4,899,664

4,992,819

5,186,385

CASH FLOW

Operating Cash Flow

 

 

720,209

540,597

434,582

435,783

608,503

564,187

541,492

695,605

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(22,844)

(51,376)

Tax

(725)

(154)

(204)

(208)

28

(326)

970

0

Capex

(641,976)

(2,050,681)

(146,249)

(1,791,275)

(805,472)

(19,633)

(962,000)

(72,000)

Acquisitions/disposals

0

0

0

0

0

0

0

0

Financing

12,919

58,004

6,819

761,824

595,140

1,236

0

0

Dividends

(123,852)

(160,013)

(79,775)

(68,593)

(78,708)

(121,934)

(157,042)

(183,923)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

295,298

398,537

(599,424)

388,306

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

1,068,705

671,479

1,270,903

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

0

(12,139)

(1,003)

(5,724)

(1,300)

(1,311)

0

0

Closing net debt/(cash)

 

 

(728,156)

902,313

690,420

1,362,703

1,068,705

671,479

1,270,903

882,597

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 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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 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.
Edison has a restrictive policy relating to personal dealing. 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. Edison or its affiliates may perform services or solicit business from any of the companies mentioned in this report. The value of securities mentioned in this report can fall as well as rise and are subject to large and sudden swings. In addition it may be difficult or not possible to buy, sell or obtain accurate information about the value of securities mentioned in this report. Past performance is not necessarily a guide to future performance. 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. 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 (ie 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. To the maximum extent permitted by law, Edison, its affiliates and contractors, and their respective directors, officers and employees will not be liable for any loss or damage arising as a result of reliance being placed on any of the information contained in this report and do not guarantee the returns on investments in the products discussed in this publication. FTSE International Limited (“FTSE”) © FTSE 2018. “FTSE®” is a trade mark of the London Stock Exchange Group companies and is used by FTSE International Limited under license. All rights in the FTSE indices and/or FTSE ratings vest in FTSE and/or its licensors. Neither FTSE nor its licensors accept any liability for any errors or omissions in the FTSE indices and/or FTSE ratings or underlying data. No further distribution of FTSE Data is permitted without FTSE’s express written consent.

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 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Share this with friends and colleagues