Q218 results in line with expectations

Wheaton Precious Metals 21 August 2018 Update
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Wheaton Precious Metals

Q218 results in line with expectations

Q2 results

Metals & mining

21 August 2018

Price

C$24.13

Market cap

C$10.7bn

C$1.3105/US$

Net debt* (US$m) at 30 June 2018
*Cum-dividend of US$39.9m

863.8

Shares in issue

443.2m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(16.5)

(12.7)

0.7

Rel (local)

(15.5)

(13.6)

(7.3)

52-week high/low

C$29.7

C$23.2

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

Q3 dividend payment

13 September 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

Wheaton Precious Metals’ (WPM) Q218 results were closely in line with our forecasts in terms of production, sales, prices and financial results, with better than expected performances at Salobo, in particular, but also San Dimas (gold) and Antamina offsetting weakness at Sudbury, in particular, and also Minto and 777. Somewhat unusually for a second quarter, sales correlated closely with production.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/16

891.6

269.8

62

21

29.4

1.2

12/17

843.2

277.4

63

33

28.9

1.8

12/18e

811.5

240.5

54

35

33.5

1.9

12/19e

1,013.0

361.9

82

42

22.3

2.3

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

US$246m exceptional profit in Q218

In addition to the normal course of its business, WPM booked an exceptional profit in Q218, relating to the evolution of its silver purchase agreement at San Dimas into a precious metals purchase agreement (PMPA), following the takeover of Primero (San Dimas’s erstwhile operator) by First Majestic. While the majority of the gain could be attributed to non-cash accounting entries, WPM nevertheless also received 20.9m near-cash shares in First Majestic, with a value of C$153.5m, or US$120.2m, on 10 May, under the terms of the new PMPA.

Precious metals prices under scrutiny

Our forecasts for WPM for FY18 have been conducted at gold, silver and palladium prices of US$1,225/oz, US$15.49 and US$914/oz, respectively for Q3 and Q418, compared with actual prices at the time of writing of US$1,182/oz (a 3.5% negative variance), US$14.50/oz (a 6.4% negative variance) and US$836/oz (an 8.5% negative variance). In the event that these prices prevail in H218, we estimate that it would reduce our basic EPS forecasts by c 4 US cents per share to US$0.50/share.

Valuation: 26.3% IRR implied over 3.5 years

Assuming no material purchases of additional streams, we forecast a per-share value for WPM of US$33.00, or C$43.25 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 held by WPM, with an immediate value of C$153.5m, or US$0.27 per WPM share. It also implies a 26.3% 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 8, and the miners themselves in at least 37% 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.

Investment summary

WPM’s production, sales and costs were all very close to our prior expectations in Q218. In addition, there was a close correlation between production and sales, with the result that financial results (excluding a US$246m exceptional gain relating to the revised terms of the San Dimas stream) were also very close to our expectations:

Exhibit 1: Wheaton Precious Metals Q218 results cf Q118 and Q218e, by quarter*

US$000s
(unless otherwise stated)

Q117

Q217

Q317

Q417

Q118

Q218e

Q218

Chg**
(%)

Diff***
(%)

Diff***
(units)

Silver production (koz)

6,513

7,192

7,595

7,211

7,428

6,059

6,091

-18.0

0.5

32

Gold production (oz)

84,863

78,127

95,897

96,474

79,657

85,413

85,292

7.1

-0.1

-121

Palladium production (koz)

0

0

0

0

0

0

0

N/A

N/A

0

Silver sales (koz)

5,225

6,369

5,758

7,292

6,343

6,059

5,972

-5.8

-1.4

-87

Gold sales (oz)

88,397

71,965

82,548

94,295

69,973

85,413

87,140

24.5

2.0

1,727

Palladium sales (koz)

0

0

0

0

0

0

0

N/A

N/A

0

Avg realised Ag price (US$/oz)

17.45

17.09

16.87

16.75

16.73

16.53

16.52

-1.3

-0.1

0

Avg realised Au price (US$/oz)

1,208

1,263

1,283

1,277

1,330

1,306

1,305

-1.9

-0.1

-1

Avg realised Pd price (US$/oz)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

Avg Ag cash cost (US$/oz)

4.54

4.51

4.43

4.48

4.49

4.51

4.54

1.1

0.7

0

Avg Au cash cost (US$/oz)

391

393

396

399

399

407

407

2.0

0.0

0

Avg Pd cash cost (US$/oz)

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

N/A

 

 

 

Sales

197,951

199,684

203,034

242,547

199,252

211,693

212,400

6.6

0.3

707

Cost of sales

 

 

 

Cost of sales, excluding depletion

58,291

56,981

58,234

70,295

56,414

62,111

62,580

10.9

0.8

469

Depletion

63,943

59,772

61,852

76,813

57,265

62,937

62,494

9.1

-0.7

-443

Total cost of sales

122,234

116,753

120,086

147,108

113,679

125,048

125,074

10.0

0.0

26

Earnings from operations

75,717

82,931

82,948

95,439

85,573

86,644

87,326

2.0

0.8

682

Expenses and other income

 

 

 

- General and administrative****

7,898

9,069

8,793

8,913

9,757

8,750

11,972

22.7

36.8

3,222

- Foreign exchange (gain)/loss

41

163

66

-170

26

-115.3

N/A

26

- Net interest paid/(received)

6,373

6,482

6,360

5,778

5,591

5,751

5,659

1.2

-1.6

-92

- Other (income)/expense

94

283

1,317

(10,093)

2,757

466

-83.1

N/A

466

Total expenses and other income

14,365

15,875

16,633

4,664

17,935

14,501

18,123

1.0

25.0

3,622

Earnings before income taxes

61,352

67,056

66,315

90,775

67,638

72,143

69,203

2.3

-4.1

-2,940

Income tax expense/(recovery)

128

(556)

(263)

(195)

-485

-3,224

564.7

N/A

-3,224

Marginal tax rate (%)

0.2

(0.8)

(0.4)

(0.2)

-0.7

0.0

-4.7

571.4

N/A

-4.7

Net earnings

61,224

67,612

66,578

90,970

68,123

72,143

72,427

6.3

0.4

284

Avg no. shares in issue (000s)

441,484

441,784

442,094

442,469

442,728

442,728

443,191

0.1

0.1

463

Basic EPS (US$)

0.14

0.15

0.15

0.21

0.15

0.16

0.16

6.7

0.0

0.00

Diluted EPS (US$)

0.14

0.15

0.15

0.21

0.15

0.16

0.16

6.7

0.0

0.00

DPS (US$)

0.07

0.07

0.10

0.09

0.09

0.09

0.09

0.0

0.0

0.00

Source: Wheaton Precious Metals, Edison Investment Research. Note: *As reported, excluding exceptional items. **Q218 vs Q118. ***Q218 actual vs Q218 estimate. ****Quarterly forecasts exclude stock-based compensation costs.

From an operational perspective, key features of the quarter were stronger production performances than expected by Edison at Salobo, Antamina (notwithstanding mine sequencing) and San Dimas’s gold stream, offset by slightly weaker performances at Sudbury (partly as a result of the unscheduled maintenance shutdown at the Coleman mine from November 2017 to April 2018), Penasquito (as a result of the transition from Phase 5D of the Penasco pit to Phase 6D), 777 and Minto (partially on account of another quarter of lower grades owing to rescheduled mine sequencing as part of an extended mine plan).

In the meantime, construction of the Pyrite Leach Project at Penasquito (which will add c 1Moz gold and 44Moz silver over the current life of the mine, by recovering 40% Au and 48% Ag that currently report to the tailings) is now reported to have been completed (vs 86% at end Q118, 62% at the end of FY17 and 40% at the end of Q317). As a consequence, commissioning has been accelerated into the current (third) quarter – two quarters ahead of the original timeframe – with the result that the operator, Goldcorp, has modified the production plan for the third quarter with lower than planned mill throughput and low mill head grades, exclusively from the surface stockpile, to accommodate the commissioning of the new circuit. However, any production shortfall in Q3 is anticipated to be recouped in Q4 when the mine will re-sequence to higher grades and mill tonnage following the commissioning.

Exceptional gain

On 10 May, First Majestic (FR, C$9.25) announced that it had concluded its deal to buy Primero Mining (the then operator of the San Dimas mine in Mexico, over which WPM held a silver purchase agreement). As part of the terms of the (friendly) takeover, WPM agreed to terminate the existing silver purchase agreement (SPA) and then to enter into a PMPA with the new operator.

In our note, Majestic, published in February 2018, we calculated a net present value of the cash flows to WPM from San Dimas for the period FY18–33 of US$252.9m under the terms of the new PMPA at our long-term precious metals prices and customary 10% discount rate for mining companies (or US$346.9m at a 5% discount rate to reflect the lower risk attached to streaming cash flows compared to mining cash flows). This compared to a carrying value of the San Dimas stream of US$132.9m as at 31 March 2018. In conjunction with the FR shares issued to WPM under the terms of the transaction (20.9m at C$7.34/share for an aggregate value of C$153.5m, or US$120.2m, on 10 May), this suggested an exceptional profit for WPM of US$240.2m on closing the transaction, which compares to an actual gain recorded in WPM’s Q2 accounts of US$245.7m.

General and administrative expenses

WPM is continuing to forecast non-stock general and administrative expenses in the range of US$34–36m for the full year, ie c US$8.5–9.0m per quarter, including all employee-related expenses, charitable contributions and additional legal costs relating to WPM’s dispute with the Canadian Revenue Agency (CRA). Investors should note that our financial forecasts in Exhibits 5 and 9 exclude stock-based compensation costs.

Ounces produced but not yet delivered – aka inventory

Production and sales of both gold and silver were closely correlated in Q118, with only a 2.0% under-sale of silver (cf a long-term average of 10.7%) largely offset by a 2.2% over-sale of gold (cf a long-term average of 9.3%) relative to production:

Exhibit 2: Over/(under) sale of silver and gold as a % of production, Q112–Q218

Source: Edison Investment Research, Wheaton Precious Metals

As at 30 June, payable ounces attributable to WPM produced but not yet delivered amounted to 4.3Moz silver and 75,600oz gold (cf 4.8Moz silver and 84,400oz gold reported in March). This ‘inventory’ equates to 2.12 months and 2.59 months of forecast FY18 silver and gold production, respectively (cf 2.48 months and 2.88 months in Q417) and compares with WPM’s target level of two months of annualised production for silver, and two to three months of annualised gold production.

Exhibit 3: WPM ounces produced but not yet delivered, Q316–Q218 (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 (under certain circumstances) be considered to be a consequence of metallurgical recoveries in the plant.

Medium-term outlook

WPM has reconfirmed its estimated attributable production forecast for 2018 of c 355koz of gold, 22.5Moz of silver and 10,400oz of palladium. Estimated average annual attributable production over the next five years is anticipated to be approximately 385,000oz of gold, 25.0Moz of silver, 27,000oz of palladium and (from FY21) 2.1Mlbs of cobalt per annum. These compare with our expectations, as follows:

Exhibit 4: Edison forecast WPM precious metals production

FY18e

FY19e

FY20e

FY21e

FY22e

Previous

Silver production (Moz)

24.0

22.3

23.0

23.9

23.7

Gold production (koz)

351

385

352

348

353

Cobalt production (klbs)

0

0

0

2,100

2,100

Palladium production (koz)

10.4

27

27

27

27

Current

Silver production (Moz)

24.0

22.7

23.0

23.9

23.7

Gold production (koz)

351

385

352

348

353

Cobalt production (klbs)

0

0

0

2,100

2,100

Palladium production (koz)

10.4

27

27

27

27

Guidance

Silver production (Moz)

22.5

25.0

25.0

25.0

25.0

Gold production (koz)

355

385

385

385

385

Cobalt production (klbs)

0

0

0

2,100

2,100

Palladium production (koz)

10.4

27

27

27

27

Source: Edison Investment Research

In the immediate future, 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 ahead of schedule in CY18 and grades improve once again with mine sequencing. From Q418 onwards, 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. At the same time, mining at Constancia will start at the Pampacancha pit in FY19, which hosts significantly higher gold grades than those mined hitherto and of which WPM will now be entitled to an increased portion.

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 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 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, and thus fully financeable via the c US$0.73bn 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 etc); 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 75% of WPM’s gold division’s output in Q218). 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 100% of its 24Mtpa nameplate capacity in Q218. 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 forecast 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 in June. 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 ROD 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/share) spread over three years.

FY18 by quarter

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 5: Wheaton Precious Metals FY18 forecast, by quarter*

US$000s
(unless otherwise stated)

Q118

Q218

Q318e

Q418e

FY18e
(current)

FY18e
(previous)

Silver production (koz)

7,428

6,091

4,861

5,661

24,041

24,009

Gold production (oz)

79,657

85,292

92,856

92,856

350,660

350,781

Palladium production (oz)

0

0

5,200

5,200

10,400

10,400

Silver sales (koz)

6,343

5,972

4,861

5,661

22,837

22,924

Gold sales (oz)

69,973

87,140

92,829

92,829

342,770

341,043

Palladium sales (oz)

0

0

5,179

5,179

10,358

10,358

Avg realised Ag price (US$/oz)

16.73

16.52

15.49

15.49

16.11

16.11

Avg realised Au price (US$/oz)

1,330

1,305

1,225

1,225

1,267

1,267

Avg realised Pd price (US$/oz)

N/A

N/A

914

914

914

914

Avg Ag cash cost (US$/oz)

4.49

4.54

4.74

4.66

4.60

4.50

Avg Au cash cost (US$/oz)

399

407

412

412

408

408

Avg Pd cash cost (US$/oz)

N/A

N/A

165

165

165

165

Sales

199,252

212,400

193,747

206,139

811,538

810,831

Cost of sales

Cost of sales, excluding depletion

56,414

62,580

62,078

65,414

246,485

243,900

Depletion

57,265

62,494

70,173

72,541

262,474

255,781

Total cost of sales

113,679

125,074

132,251

137,955

508,959

499,681

Earnings from operations

85,573

87,326

61,496

68,184

302,579

311,150

Expenses and other income

- General and administrative**

9,757

11,972

8,750

8,750

39,229

36,007

- Foreign exchange (gain)/loss

(170)

26

(144)

(170)

- Net interest paid/(received)

5,591

5,659

5,797

5,797

22,844

22,844

- Other (income)/expense

2,757

466

3,223

2,757

Total expenses and other income

17,935

18,123

14,547

14,547

65,152

61,438

Earnings before income taxes

67,638

69,203

46,949

53,637

237,427

249,712

Income tax expense/(recovery)

(485)

(3,224)

(3,709)

(485)

Marginal tax rate (%)

(0.7)

(4.7)

0.0

0.0

(1.6)

(0.2)

Net earnings

68,123

72,427

46,949

53,637

241,136

250,197

Ave. no. shares in issue (000s)

442,728

443,191

443,191

443,191

443,075

442,728

Basic EPS (US$)

0.15

0.16

0.11

0.12

0.54

0.57

Diluted EPS (US$)

0.15

0.16

0.11

0.12

0.54

0.56

DPS (US$)

0.09

0.09

0.09

0.08

0.35

0.35

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 forecast of basic EPS of US$0.54/share compares with a consensus forecast of US$0.58/share (source: Bloomberg 15 August), within a range of US$0.52–0.68 per share.

In the meantime, our FY19 EPS forecast (see Exhibit 9) 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 81.5x at the time of writing (see Exhibit 6, below). Within this context, our US$0.82 basic EPS forecast compares with a consensus of US$0.70 (source: Bloomberg 15 August), within a range of US$0.49–0.86.

Exhibit 6: 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)

Miscellaneous

Adventus

On 17 July, WPM acquired 7.1m shares of Adventus, for a 9.99% equity interest in the company, in a private placement transaction, for a total consideration of C$6.0m. Concurrently, it also acquired a right of first refusal on any new streaming or royalty transactions on precious metals on Adventus’s existing properties in Ecuador and a right of first offer on any subsequently acquired properties in Ecuador.

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 33.5x Edison or 34.5x Bloomberg consensus FY18e, currently – see Exhibit 8).

Exhibit 7: WPM’s historical current year P/E multiples

Source: Edison Investment Research

Applying this multiple to our updated EPS forecast of US$1.20 in FY21 (cf US$1.26 in FY21 previously) implies a potential share value for WPM of US$33.00, or C$43.25 in that year (cf US$34.68, or C$45.71 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$153.5m, or US$0.27 per WPM share (priced as at 15 August).

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 8 and on multiples that are cheaper than the miners themselves in at least 37% (34 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 8: 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

58.1

51.6

1.3

1.4

26.1

23.0

Royal Gold

40.5

34.8

1.2

1.2

17.4

16.1

Sandstorm Gold

64.4

44.8

0.0

0.0

16.2

13.3

Osisko

77.9

53.3

1.7

1.8

21.1

18.1

Average

60.2

46.1

1.1

1.1

20.2

17.6

WPM (Edison forecasts)

33.5

22.3

1.9

2.3

15.5

12.5

WPM (consensus)

34.5

28.8

1.8

1.9

17.1

15.0

Gold producers

Barrick

17.3

15.9

1.2

1.1

5.2

5.3

Newmont

25.5

21.8

1.7

1.7

8.9

7.9

Goldcorp

38.4

18.1

0.7

0.7

7.9

5.6

Newcrest

29.1

17.0

1.2

1.7

9.3

7.8

Kinross

16.5

20.0

0.0

3.3

3.8

3.8

Agnico-Eagle

108.2

44.8

1.2

1.2

13.2

10.8

Eldorado

246.1

109.4

0.4

0.4

7.5

5.4

Yamana

21.0

17.7

0.7

0.7

4.5

4.4

Randgold Resources

21.3

18.0

4.4

5.5

11.0

9.9

Average

58.1

31.4

1.3

1.8

7.9

6.8

Silver producers

Hecla

118.8

23.8

0.3

0.3

10.3

6.3

Pan American

23.3

20.4

0.8

1.1

10.8

9.3

Coeur Mining

198.3

20.3

0.0

0.0

10.1

5.2

First Majestic

100.0

31.7

0.0

0.0

12.9

7.7

Hocschild

45.9

15.9

1.8

2.2

4.5

3.7

Fresnillo

17.9

16.6

2.8

2.8

9.8

9.2

Average

84.0

21.4

0.9

1.1

9.7

6.9

Source: Bloomberg, Edison Investment Research. Note: Peers priced on 15 August 2018.

Financials: Solid equity base

As at 30 June 2018, WPM had US$92.7m in cash (before a dividend of c US$39.9m payable on or about 13 September) and US$956.5m 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$863.8m overall, after US$135.2m (US$0.31/share) of cash inflows from operating activities during the quarter. Relative to the company’s Q2 balance sheet equity of US$5,234.6m, this level of net debt equated to a financial gearing (net debt/equity) ratio of 16.5% and a leverage (net debt/[net debt+equity]) ratio of 14.2%. It also compared with a net debt position of US$547.4m as at 31 March 2018 and is consistent with WPM generating c US$100–150m per quarter from operating activities before financing and investing activities and dividend payments.

In the aftermath of the Stillwater palladium stream acquisition, we now estimate that WPM’s net debt position will be US$1,268.1m by the end of FY18 (cf US$1,270.9m previously), which will equate to gearing of 25.4% (cf 25.5% previously) and leverage of 20.3% (cf 20.3% previously), and that WPM will be net debt free in early-2021 (cf late-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$5,234.6m as at end-Q218 and which we now forecast to be US$4,985.5m 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 23.0x 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.

Canadian Revenue Agency

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 be interpreted not 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 8).

In the meantime, WPM remains in 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 Tax Court of Canada has now scheduled the trial for mid-September 2019 for a two-month period.

Exhibit 9: 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

811,538

1,012,979

Cost of Sales

(117,489)

(139,352)

(151,097)

(190,214)

(254,434)

(243,801)

(246,485)

(276,853)

Gross Profit

732,071

567,120

469,079

458,473

637,123

599,414

565,053

736,126

EBITDA

 

 

701,232

531,812

431,219

426,236

602,684

564,741

525,824

696,897

Operating Profit (before amort. and except.)

600,003

387,659

271,039

227,655

293,982

302,361

263,350

413,185

Intangible Amortisation

0

0

0

0

0

0

0

0

Exceptionals

0

0

(68,151)

(384,922)

(71,000)

(228,680)

245,715

0

Other

788

(11,202)

(1,830)

(4,076)

(4,982)

8,129

(3,079)

0

Operating Profit

600,791

376,457

201,058

(161,343)

218,000

81,810

505,986

413,185

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(22,844)

(51,263)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

269,789

277,368

240,506

361,922

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

193,807

56,817

483,142

361,922

Tax

(14,755)

5,121

1,045

3,391

1,330

886

3,709

0

Profit After Tax (norm)

586,036

375,495

267,977

222,880

266,137

286,383

241,136

361,922

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

195,137

57,703

486,851

361,922

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

430.5

442.0

443.1

443.2

EPS - normalised (c)

 

 

166

106

75

53

62

63

54

81.7

EPS - normalised and fully diluted (c)

 

165

105

74

53

62

63

54

81

EPS - (IFRS) (c)

 

 

166

106

56

(-41)

45

13

110

82

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

69.6

72.7

EBITDA Margin (%)

82.5

75.3

69.5

65.7

67.6

67.0

64.8

68.8

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

70.6

54.9

43.7

35.1

33.0

35.9

32.5

40.8

BALANCE SHEET

Fixed Assets

 

 

2,403,958

4,288,557

4,309,270

5,526,335

6,025,227

5,579,898

6,279,424

6,067,712

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

5,948,443

5,454,106

6,153,632

5,941,920

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

3,680

4,594

Stocks

966

845

26,263

1,455

1,481

1,700

1,457

1,819

Debtors

6,197

4,619

4,132

1,124

2,316

3,194

2,223

2,775

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)

(522,435)

(134,505)

Creditors

(20,898)

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(24,336)

(27,331)

Short term borrowings

(28,560)

0

0

0

0

0

(498,099)

(107,174)

Long Term Liabilities

 

 

(32,805)

(1,002,164)

(1,002,856)

(1,468,908)

(1,194,274)

(771,506)

(775,215)

(775,215)

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)

(5,215)

(5,215)

Net Assets

 

 

3,107,074

3,366,546

3,628,736

4,150,735

4,939,988

4,899,664

4,985,455

5,162,586

CASH FLOW

Operating Cash Flow

 

 

720,209

540,597

434,582

435,783

608,503

564,187

536,151

698,978

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(22,844)

(51,263)

Tax

(725)

(154)

(204)

(208)

28

(326)

7,418

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)

(155,346)

(184,790)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

295,298

398,537

(596,620)

390,925

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

1,068,705

671,479

1,268,099

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

1,268,099

877,174

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.
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

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 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.
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

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

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