Q3 results and update

Wheaton Precious Metals 18 November 2019 Update
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Wheaton Precious Metals

Q3 results and update

Q3 results

Metals & mining

18 November 2019

Price

C$35.61

Market cap

C$15.9bn

C$1.3233/US$

Net debt (US$m) at 30 September 2019

865.5

Shares in issue

446.8m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

7.1

0.3

75.6

Rel (local)

3.2

(5.7)

56.2

52-week high/low

C$40.8

C$20.4

Business description

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

Next events

Q4/FY19 results

March 2020

Q120 results

May 2020

Q220 results

August 2020

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Despite relatively conservative precious metals price assumptions, underlying earnings for Q3 were within US$2.0m, or 2.7%, of our forecasts. Both Wheaton’s gold and silver divisions outperformed our production expectations. However, a 1.6Moz under-sale of silver relative to production resulted in an ‘inventory’ build and a deferment of sales. In addition, there was a 14.5% quarter-on-quarter increase in general & administrative expenses (albeit entirely attributable to differences in accrued performance share units’ costs), as a result of which underlying EPS was 16c (in line with consensus) compared with our forecast of 17c (which assumed no inventory and no stock-based general & administrative effects). Nevertheless, our FY19e EPS forecasts remain almost unchanged at 57c, while our FY20e forecasts exist within a wide range depending on the metal prices assumed, from 80c (at spot prices) to 130c (at our higher long-term prices) and, in particular, the gold/silver price ratio assumed.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

843.2

277.4

63

33

42.0

1.3

12/18

794.0

203.1

48

36

55.2

1.4

12/19e

869.4

246.3

57

36

46.5

1.4

12/20e

1,247.3

582.8

130

53

20.4

2.0

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

FY19 production guidance tweaked

In addition to its results, Wheaton Precious Metals (WPM) adjusted its production guidance for FY19 to 390koz of gold (cf 385koz previously) and 21.0Moz of silver (cf 22.5Moz previously). For the five-year period ending in FY23 however, it has maintained its average annual gold equivalent production at 750koz pa.

Inventories poised for traditional year-end declines

As at end-Q3, inventories of both silver and gold were towards the upper end of their ranges, at 2.31 months and 2.60 months of forecast FY19 production, respectively, compared with target levels of two months and two to three months. As such, WPM would seem to be well disposed to a fourth quarter in which there is no further inventory build and, possibly, even a reduction (which would be consistent with past years).

Valuation: C$43.37 in FY21

Assuming no material purchases of additional streams (which we think unlikely), we forecast a value per share for WPM of US$32.78, or C$43.37 in FY21 at (updated) average precious metals prices of US$24.76/oz Ag and US$1,509/oz Au. This valuation excludes the value of 20.2m shares in First Majestic held by WPM, with an immediate value of C$288.2m, or US$0.49 per WPM share. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than those of its royalty/streaming ‘peers’ in at least 70% of financial measures considered in Exhibit 8, and the miners themselves in at least 34% of the same measures, despite being associated with materially less operating and cost risk.

Q319 results

Despite relatively conservative precious metals price assumptions, underlying earnings for Q3 were within US$2.0m, or 2.7%, of our prior forecasts. Both Wheaton’s gold and silver divisions outperformed our production expectations. However, a 1.6Moz under-sale of silver relative to production resulted in an ‘inventory’ build and a deferment of sales, albeit this was almost exactly offset by a similar reduction in associated costs, such that earnings from operations were within 1.0% and US$1.0m of our forecasts. The only other significant departure from our expectations was a 14.5% quarter-on-quarter increase in the general & administrative charge, albeit US$4.8m of the US$1.8m increase could be attributed to the differences in accrued costs associated with the company’s performance share units, without which the charge would have been almost exactly in line with Edison’s expectations and WPM’s pro-rata guidance of non-stock general and administrative expenses in the range US$36–38m for FY19 as a whole. As a result, underlying EPS was reported to be 16c (in line with consensus) compared with our forecast of 17c (which assumed no inventory and no stock-based general & administrative effects). A full analysis of WPM’s underlying Q3 results relative to our prior forecasts and Q119 results is provided in the table below:

Exhibit 1: Wheaton Precious Metals underlying Q319 results vs Q219 and Q319e, by quarter*

US$000s
(unless otherwise stated)

Q118

Q218

Q318

Q418

Q119

Q219

Q319e

Q319a

Change ***
(%)

Variance ****
(%)

Variance ****
(units)

Silver production (koz)

7,428

6,091

5,701

5,499

5,614

4,834

5,807

6,095

26.1

5.0

288

Gold production (oz)

79,657

85,292

101,552

107,567

93,585

100,577

95,419

104,175

3.6

9.2

8,756

Palladium production (koz)

0

0

8,817

5,869

4,729

5,736

5,500

5,471

-4.6

-0.5

-29

 

 

 

Silver sales (koz)

6,343

5,972

5,018

4,400

4,294

4,241

5,594

4,484

5.7

-19.8

-1,110

Gold sales (oz)

69,973

87,140

89,242

102,813

115,020

90,077

95,383

94,766

5.2

-0.6

-617

Palladium sales (koz)

0

0

3,668

5,049

5,189

5,273

5,478

4,907

-6.9

-10.4

-571

 

 

 

Avg realised Ag price (US$/oz)

16.73

16.52

14.80

14.66

15.64

14.93

16.55

17.09

14.5

3.3

1

Avg realised Au price (US$/oz)

1,330

1,305

1,210

1,229

1,308

1,320

1,416

1,471

11.4

3.9

55

Avg realised Pd price (US$/oz)

N/A

N/A

955

1,137

1,443

1,381

1,320

1,535

11.2

16.3

215

 

 

 

Avg Ag cash cost (US$/oz)

4.49

4.54

5.04

4.66

4.64

5.14

5.22

5.16

0.4

-1.1

0

Avg Au cash cost (US$/oz)

399

407

418

409

417

420

421

424

1.0

0.7

3

Avg Pd cash cost (US$/oz)

N/A

N/A

169

205

254

247

238

271

9.7

13.9

33

 

 

 

Sales

199,252

212,400

185,769

196,591

225,049

189,466

234,875

223,595

18.0

-4.8

-11,280

Cost of sales

 

 

 

Cost of sales, excluding depletion

56,414

62,580

63,202

63,598

69,214

60,957

70,657

64,624

6.0

-8.5

-6,033

Depletion

57,265

62,494

64,684

67,844

68,381

61,404

69,588

63,396

3.2

-8.9

-6,192

Total cost of sales

113,679

125,074

127,886

131,442

137,595

122,361

140,245

128,020

4.6

-8.7

-12,225

Earnings from operations

85,573

87,326

57,883

65,149

87,454

67,105

94,631

95,575

42.4

1.0

944

Expenses and other income

 

 

 

– General and administrative**

9,757

11,972

8,779

16,597

16,535

12,249

9,250

14,028

14.5

51.7

4,778

– Foreign exchange (gain)/loss

(170)

26

0

144

0

N/A

N/A

0

– Net interest paid/(received)

5,591

5,659

12,877

12,743

13,946

13,306

10,391

11,871

-10.8

14.2

1,480

– Other (income)/expense

2,757

466

1,301

581

(266)

(500)

(265)

-47.0

N/A

-265

Total expenses and other income

17,935

18,123

22,957

30,065

30,215

25,055

19,641

25,634

2.3

30.5

5,993

Earnings before income taxes

67,638

69,203

34,926

35,084

57,239

42,050

74,990

69,941

66.3

-6.7

-5,049

Income tax expense/(recovery)

(485)

(3,224)

905

(1,662)

(110)

(2,758)

250

(2,751)

-0.3

-1,200.4

-3,001

Marginal tax rate (%)

(0.7)

(4.7)

2.6

(4.7)

(0.2)

(6.6)

0.3

(3.9)

-40.9

-1,400.0

-4.2

Net earnings

68,123

72,427

34,021

36,745

57,349

44,808

74,740

72,692

62.2

-2.7

-2,048

Avg no. shares in issue (000s)

442,728

443,191

443,634

444,057

444,389

445,769

445,219

446,802

0.2

0.4

1,583

Basic EPS (US$)

0.15

0.16

0.08

0.08

0.13

0.10

0.17

0.16

60.0

-5.9

-0.01

Diluted EPS (US$)

0.15

0.16

0.08

0.08

0.13

0.10

0.17

0.16

60.0

-5.9

-0.01

DPS (US$)

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.0

0.0

0.00

Source: Wheaton Precious Metals, Edison Investment Research. Note: *As reported by WPM, excluding exceptional items. **Quarterly forecasts exclude stock-based compensation costs. ***Q319 vs Q219. ****Q319a vs Q319e.

Once again, Salobo reported an exceptionally strong quarter, with lower grades and recovery offset by higher throughput, such that production records were set for both gold and copper in July, albeit 10,551oz of production remained unsold at the end of the quarter. In addition, Vale also noted that the 50% capacity expansion at Salobo (which is scheduled to start up in H122) is 27% complete, including the completion of the concrete foundations for the mill and primary crusher bases and the arrival to site of the first loads related to the long-distance conveyor belt. Otherwise, positive production performances relative to our expectations were also recorded at Constancia, San Dimas and Antamina – although in each of these cases (with the exception of San Dimas) there was an under-sale of product with respect to production. Conversely, production and sales at Penasquito were negatively affected by the illegal blockage that began there on 15 September and finished on 8 October and which Newmont (the operator) estimated cost Wheaton c 0.4Moz in attributable production. Production and sales at Sudbury were negatively affected by its traditional maintenance shutdowns in Q3.

Ounces produced but not yet delivered – aka inventory

After converging to close to their long-term rates (92.2% for gold and 88.8% for silver) in Q219, sales relative to production diverged once again in Q319, with silver sales, in particular, amounting to just 73.6% of production, principally as a result of the disruption to operations at Penasquito during the quarter:

Exhibit 2: Over(/under) sale of silver and gold as a % of production, Q112–Q319

Source: Edison Investment Research, Wheaton Precious Metals

As at 30 September, payable ounces attributable to WPM produced but not yet delivered amounted to 4.2Moz silver and 85,468oz gold (vs a reported 3.3Moz silver and 80,740oz gold in June). This ‘inventory’ equates to 2.31 months and 2.60 months of forecast FY19 silver and gold production, respectively, and compares with WPM’s target level of two months of annualised production for silver, and two to three months of annualised gold and palladium production.

Exhibit 3: WPM ounces produced but not yet delivered, Q316–Q319 (months of production)

Source: Edison Investment Research, Wheaton Precious Metals

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

Medium-term outlook

WPM has adjusted its production guidance for FY19 to 390,000oz of gold (cf 385,000oz previously), 21.0Moz of silver (cf 22.5Moz previously) and 22,000oz of palladium (unchanged). For the five-year period ending in FY23, the company has maintained its average annual gold equivalent production at 750,000oz pa. This compares with Edison’s (updated) longer-term forecasts, as follows:

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

FY19e

FY20e

FY21e

FY22e

FY23e*

Previous Edison forecast

Silver production (Moz)

22.1

23.7

20.7

20.5

17.4

Gold production (koz)

385

388

386

356

369

Cobalt production (klbs)

0

0

2,100

2,100

2,100

Palladium production (koz)

22

27

27

27

30

Gold equivalent (koz)

666

675

806

779

741

Current Edison forecast

Silver production (Moz)

21.7

21.8

20.7

20.5

17.4

Gold production (koz)

394

388

386

356

369

Cobalt production (klbs)

0

0

2,100

2,100

2,100

Palladium production (koz)

21

27

27

27

30

Gold equivalent (koz)

670

691

781

744

716

Current WPM guidance

Silver production (Moz)

21.0

Gold production (koz)

390

Cobalt production (klbs)

0

Palladium production (koz)

22

Gold equivalent (koz)

750

750

750

750

Previous WPM guidance

Silver production (Moz)

22.5

Gold production (koz)

385

Cobalt production (klb)

0

Palladium production (koz)

22

Gold equivalent (koz)

690

750

750

750

750

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

Note that the major differences between Edison’s gold equivalent production forecasts and Wheaton’s may be explained by the ratio of the gold price to the silver price. Whereas Wheaton assumes an 81.25x ratio (based on a gold price of US$1,300/oz and a silver price of US$16.00/oz), the current ratio is closer to 87.2x and Edison assumes that the ratio will revert to closer its long-term average of 57x from FY20 onwards. In addition, Edison is also expecting a production contribution from Salobo III in FY23. However, in the light of recent events (see ‘Rosemont’, below), it has removed any contribution from Rosemont until there is more clarity regarding the legal situation.

In the medium term, silver output from Penasquito attributable to WPM is expected to recover back to its steady-state level of 7Moz as the Chile Colorado pit contributes to mill feed and grades improve once again at the main Penasco pit with mine sequencing. It will also benefit from the development of the Pyrite Leach Project, which will add an additional 1.0–1.5Moz of silver attributable to WPM per year by recovering 48% of the silver that previously reported to tailings. Production of palladium and gold at that Stillwater mine is also anticipated to increase as the Blitz project ramps up to full capacity in FY21. In the meantime, production is expected to remain at lower levels at Constancia, owing to delays in mining the Pampacancha satellite deposit (which hosts significantly higher gold grades than those mined hitherto). In lieu of this however, WPM is entitled to receive an additional 2,005oz gold per quarter during FY19 and FY20 relative to its precious metals purchase agreement.

Longer-term outlook

Salobo

On 24 October 2018, Vale announced the approval of the Salobo III brownfields mine expansion, intended to increase processing capacity at Salobo from 24Mtpa to 36Mtpa, with start-up scheduled for H122 and an estimated ramp-up time of 15 months. According to its agreement with Vale, depending on the grade of the material processed, WPM will be required to make a payment to Vale in respect of this expansion, which WPM estimates will be in the range US$550–650m in FY23, in return for which it will be entitled to its full 75% attributable share of gold production. Note: this compares to its purchase of a 25% stream in August 2016 for a consideration of US$800m (see our note, Silver Wheaton: Going for gold, published on 30 August 2016), the US$900m it paid for a similar stream in March 2015 (when the gold price averaged US$1,179/oz) and the US$1.33bn that it paid for its original 25% stream in February 2013.

Pascua-Lama

Wheaton’s contract with Barrick provides for a completion test that, if unfulfilled by 30 June 2020, results in WPM’s being entitled to the return of its upfront cash consideration of US$625m less a credit for any silver delivered up to that date from three other Barrick mines. At the current time it is, to all intents and purposes, impossible for Pascua-Lama to pass a completion test on 30 June 2020, as a result of which Edison had presumed that WPM would be the recipient of c US$273.4m in FY20. Given the long-term optionality provided by the Pascua-Lama project however, Wheaton has indicated that it is unlikely to enforce the repayment of its entitlement and that it prefers instead to maintain its streaming interest in the project. As a result, we have now removed this repayment item from our capital expenditure forecasts for FY20 (see ‘Financials’ on page 10).

Other potential future growth

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

As a consequence, WPM reports that it is busy on the corporate development front. It has the potential for up to six deals with a value in the range US$100–300m, thus fully financeable via the c US$1.14bn available to WPM in cash and under its US$2bn revolving credit facility as at end-Q319.

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

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

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

Rosemont

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

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

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

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

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

The proposed Rosemont development is located near a number of large porphyry-type producing copper mines and is expected to be one of the largest three copper mines in the US, with output of c 112,000t copper in concentrate per year and accounting for c 10% of total US copper production. Total by-product production of silver and gold attributable to WPM will be c 2.7Moz Ag pa and c 16,100oz Au pa and we estimate it could contribute an average c US$0.12 per share to WPM’s basic EPS in its first eight years of operations from FY22–29 for an upfront payment of US$230m (equivalent to US$0.51/share) in two instalments of US$50m and US$180m (of which neither has yet been paid).

Other matters

Gold price

In addition to our short-term FY19 forecast adjustments, we have also adjusted our longer-term gold and silver price assumptions to those set out in our recent report, Portents of economic weakness: Gold – doves in the ascendant, as follows:

Exhibit 5: Updated Edison gold price forecasts*

US$/oz

2020e

2021e

2022e

2023e

Updated gold price forecast (US$/oz)

1,635

1,509

1,560

1,421

Previous gold price forecast (US$/oz)

1,482

1,437

1,304

1,303

Updated silver price forecast (US$/oz)

26.74

24.76

25.56

23.38

Previous silver price forecast (US$/oz)

25.95

25.19

22.90

22.89

Source: Edison Investment Research. Note: *See Portents of economic weakness: Gold – doves in the ascendant.

General and administrative expenses

WPM has reduced its guidance for non-stock general and administrative expenses for FY19, from US$36–38m to US$33-36m, or US$8.25–9.0m per quarter (vs a comparable forecast of US$34–36m, or US$8.5–9.0m per quarter, for FY18), including all employee-related expenses, charitable contributions, etc. Investors should note, however, that stock-based compensation costs are excluded from our financial forecasts in Exhibits 6 and 9 owing to their inherently unpredictable nature.

FY19 by quarter

Taking into account the aforementioned considerations, plus the improved precious metal pricing environment so far in H219, our updated forecasts for WPM for FY19, by quarter, are now as shown in Exhibit 6. In addition to our Q419 and FY19 forecasts, we have also taken the opportunity to show contingency forecasts for FY20, based on gold and silver prices remaining at current levels of US$1,462/oz and US$16.75/oz, respectively (note that these contrast with our formal base case forecasts in Exhibit 9, which are based on our higher long-term gold and silver prices shown in Exhibit 5). While we believe that our higher, longer-term gold price forecast for FY20 remains eminently achievable, current indications are that it will take some time longer for the silver price, in particular, to revert to its longer-term c 57x price multiple relationship with gold.

Exhibit 6: Wheaton Precious Metals FY19 forecast, by quarter*

US$000s
(unless otherwise stated)

Q119

Q219

Q319

Q419

(previous)

Q419

(current)

FY19

(previous)

FY19

(current)

Q120

Q220

Q320

Q420

Silver production (koz)

5,614

4,834

6,095

5,807

5,140

22,062

21,683

5,926

5,926

5,926

5,926

Gold production (oz)

93,585

100,577

104,175

95,419

95,419

385,000

393,756

97,105

97,105

97,105

97,105

Palladium production (oz)

4,729

5,736

5,471

5,500

5,500

21,465

21,436

6.750

6.750

6.750

6.750

Silver sales (koz)

4,294

4,241

4,484

5,807

4,740

19,936

17,759

5,926

5,926

5,926

5,926

Gold sales (oz)

115,020

90,077

94,766

95,383

95,383

395,863

395,246

97,068

97,068

97,068

97,068

Palladium sales (oz)

5,189

5,273

4,907

5,478

5,478

21,418

20,847

6.723

6.723

6.723

6.723

Avg realised Ag price (US$/oz)

15.64

14.93

17.09

16.95

17.18

16.13

16.25

16.75

16.75

16.75

16.75

Avg realised Au price (US$/oz)

1,308

1,320

1,471

1,418

1,472

1,363

1,389

1,462

1,462

1,462

1,462

Avg realised Pd price (US$/oz)

1,443

1,381

1,535

1,320

1,721

1,365

1,522

1,701

1,701

1,701

1,701

Avg Ag cash cost (US$/oz)

4.64

5.14

5.16

5.20

5.31

5.07

5.07

5.09

5.09

5.10

5.10

Avg Au cash cost (US$/oz)

417

420

424

421

421

420

420

424

424

424

424

Avg Pd cash cost (US$/oz)

254

247

271

238

310

244

271

306

306

306

306

Sales

225,049

189,466

223,595

240,914

231,266

890,304

869,376

252,615

252,615

252,615

252,615

Cost of sales

Cost of sales, excluding depletion

69,214

60,957

64,624

71,648

67,092

272,476

261,887

73,350

73,350

73,390

73,390

Depletion

68,381

61,404

63,396

70,240

66,665

269,613

259,846

71,861

71,861

71,861

71,861

Total cost of sales

137,595

122,361

128,020

141,887

133,756

542,089

521,733

145,211

145,211

145,251

145,251

Earnings from operations

87,454

67,105

95,575

99,027

97,510

348,216

347,643

107,404

107,404

107,364

107,364

Expenses and other income

– General and administrative**

16,535

12,249

14,028

9,250

9,250

47,284

52,062

9,500

9,500

9,500

9,500

– Foreign exchange (gain)/loss

0

0

0

– Net interest paid/(received)

13,946

13,306

11,871

10,391

10,145

48,034

49,268

8,411

8,411

8,411

8,411

– Other (income)/expense

(266)

(500)

(265)

(766)

-1,031

Total expenses and other income

30,215

25,055

25,634

19,641

19,395

94,552

100,299

17,911

17,911

17,911

17,911

Earnings before income taxes

57,239

42,050

69,941

79,386

78,115

253,663

247,344

89,493

89,493

89,453

89,453

Income tax expense/(recovery)

(110)

(2,758)

(2,751)

250

250

(2,368)

-5,369

250

250

250

250

Marginal tax rate (%)

(0.2)

(6.6)

(3.9)

0.3

0.3

-0.9

-2.2

0.3

0.3

0.3

0.3

Net earnings

57,349

44,808

72,692

79,136

77,865

256,031

252,713

89,243

89,243

89,203

89,203

Ave. no. shares in issue (000s)

444,389

445,769

446,802

445,219

446,802

445,424

445,941

446,802

446,802

446,802

446,802

Basic EPS (US$)

0.13

0.10

0.16

0.18

0.17

0.57

0.57

0.20

0.20

0.20

0.20

Diluted EPS (US$)

0.13

0.10

0.16

0.18

0.17

0.57

0.57

0.20

0.20

0.20

0.20

DPS (US$)

0.09

0.09

0.09

0.10

0.09

0.37

0.36

0.10

0.11

0.11

0.11

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

Our basic EPS forecast of US$0.57/share (the same as previously) for FY19 is in line with a consensus forecast of US$0.57/share (source: Refinitiv, 15 November 2019) within a range of US$0.49–0.62 per share.

Our US$1.30 basic EPS forecast for FY20 (see Exhibit 9) compares with a consensus of US$0.83 (source: Refinitiv, 15 November), within a range of US$0.52–1.30. As noted previously, this estimate is predicated on an average gold price during the year of US$1,635/oz and an average silver price of US$26.74/oz, which, in the latter case, is 59.6% above the current spot price. One of the central assumptions behind our silver price forecast is that it will, at some point, revert to the long-term correlation that it has exhibited with gold since the latter was demonetised in 1971. In the event that both metals remain at current levels however (US$16.75/oz and US$1,462/oz at the time of writing), we forecast that WPM will instead earn US$0.80 per share in FY20 (as shown in Exhibit 6).

Valuation

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 28.5x current year basic underlying EPS, excluding impairments (vs 46.8x Edison or 46.2x Refinitiv consensus FY19e, currently – see Exhibit 8).

Exhibit 7: WPM’s historical current year P/E multiples, 2005–18

Source: Edison Investment Research

Applying this 28.5x multiple to our updated EPS forecast of US$1.15 in FY21 (cf US$1.20 in FY20 previously) implies a potential value per share for WPM of US$32.78, or C$43.37 in that year (vs US$34.11, or C$45.37 previously). Note that, given the wide range surrounding our FY20e EPS forecasts, we have elected to roll the basis of our valuation forward by one year to FY21 cf FY20, previously. In addition, this valuation excludes the value of 20.2m shares in First Majestic currently held by WPM, with an immediate value (15 November) of C$288.2m, or US$0.49 per WPM share.

In the meantime, from a relative perspective, it is notable that WPM is cheaper than its royalty/streaming ‘peers’ in at least 70% (17 out of 24) of the valuation measures used in Exhibit 8 and on multiples that are cheaper even than the miners themselves in at least 34% (27 out of 78) of the same valuation measures, despite being associated with materially less operational and cost risk (since 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

59.9

48.2

0.9

0.9

30.9

25.9

Royal Gold

53.5

43.5

0.9

0.9

22.5

21.2

Sandstorm Gold

85.4

55.0

0.0

0.0

21.3

17.6

Osisko

47.1

34.8

1.8

1.8

17.5

14.6

Average

61.5

45.4

0.9

0.9

23.1

19.8

WPM (Edison forecasts)

46.5

20.4

1.4

2.0

22.8

13.5

WPM (consensus)

46.2

31.7

1.4

1.7

22.6

17.6

Gold producers

Barrick

32.8

20.0

1.0

1.0

9.3

7.2

Newmont

28.1

15.8

1.5

1.5

9.8

6.9

Newcrest

18.8

19.1

1.0

1.1

10.4

9.9

Kinross

14.4

11.5

0.0

0.0

4.9

4.2

Agnico-Eagle

59.6

31.2

0.9

1.1

15.9

11.2

Eldorado

63.0

9.2

0.0

0.5

6.9

3.7

Yamana

29.0

18.4

0.8

1.0

6.6

5.1

Average

35.1

17.9

0.7

0.9

9.1

6.9

Silver producers

Hecla

 

100.0

0.4

0.4

10.6

6.7

Pan American

32.9

20.8

0.9

0.8

12.7

7.4

Coeur Mining

 

33.7

0.0

0.0

11.4

6.1

First Majestic

286.7

51.2

0.0

0.0

20.2

13.2

Hochschild

19.3

12.9

1.7

1.9

5.5

4.5

Fresnillo

33.5

23.6

1.5

2.0

9.2

8.1

Average

93.1

40.4

0.8

0.9

11.6

7.7

Source: Refinitiv, Edison Investment Research. Note: Peers priced on 15 November 2019.

Financials: Solid equity base

As at 30 September 2019, WPM had US$151.6m in cash (cf US$87.2m at the end of Q219) and US$1,017.1m of debt outstanding (cf US$1,100.0m at end-Q219), 99.6% of which is under its US$2bn revolving credit facility (which attracts an interest rate of Libor plus 120–220bp and matures in February 2024), such that it had net debt of US$865.5m (cf US$1,012.8m at end-Q2) overall, after US$142.3m (US$0.32/share) of pre-financing cash inflows during the quarter. Relative to the company’s Q3 balance sheet equity of US$5,201.4m (cf US$5,111.9m at end-Q2), this level of net debt equates to a financial gearing (net debt/equity) ratio of 16.6% (cf 19.8% at end-Q2) and a leverage (net debt/[net debt+equity]) ratio of 14.2% (cf 16.5% at end-Q2). It also compares with a net debt position of US$1,057.7m as at end-March, US$1,188.2m as at end-December and US$1,261.1m as at end-September 2018. Self-evidently, such a level of debt is well within the tolerances required by its banking covenants that:

net debt should be no more than 0.75x tangible net worth; and

interest should be no less than 3x covered by EBITDA (we estimate that it will be covered 11.6x in FY19).

All other things being equal and subject to its making no further major acquisitions (which is unlikely in our view), on our current cash flow projections WPM will be net debt free late in H121 (cf FY20 previously when we assumed the return of c US$273.4m from Barrick relating to the Pascua-Lama stream – see page 5).

Exhibit 9: Financial summary

US$000s

2015

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

648,687

891,557

843,215

794,012

869,376

1,247,267

Cost of Sales

(190,214)

(254,434)

(243,801)

(245,794)

(261,887)

(286,915)

Gross Profit

458,473

637,123

599,414

548,218

607,489

960,353

EBITDA

 

 

426,236

602,684

564,741

496,568

555,427

908,291

Operating Profit (before amort. and except.)

227,655

293,982

302,361

244,281

295,581

616,425

Intangible Amortisation

0

0

0

0

0

0

Exceptionals

(384,922)

(71,000)

(228,680)

245,715

(169,824)

0

Other

(4,076)

(4,982)

8,129

(5,826)

1,031

0

Operating Profit

(161,343)

218,000

81,810

484,170

126,788

616,425

Net Interest

(4,090)

(24,193)

(24,993)

(41,187)

(49,268)

(33,645)

Profit Before Tax (norm)

 

 

223,565

269,789

277,368

203,094

246,313

582,780

Profit Before Tax (FRS 3)

 

 

(165,433)

193,807

56,817

442,983

77,520

582,780

Tax

3,391

1,330

886

(15,868)

5,369

(1,000)

Profit After Tax (norm)

222,880

266,137

286,383

181,400

252,713

581,780

Profit After Tax (FRS 3)

(162,042)

195,137

57,703

427,115

82,889

581,780

Average Number of Shares Outstanding (m)

395.8

430.5

442.0

443.4

445.9

446.8

EPS - normalised (c)

 

 

53

62

63

48

56.7

130.2

EPS - normalised and fully diluted (c)

 

53

62

63

48

57

130

EPS - (IFRS) (c)

 

 

(-41)

45

13

96

19

130

Dividend per share (c)

20

21

33

36

36

53

Gross Margin (%)

70.7

71.5

71.1

69.0

69.9

77.0

EBITDA Margin (%)

65.7

67.6

67.0

62.5

63.9

72.8

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

35.1

33.0

35.9

30.8

34.0

49.4

BALANCE SHEET

Fixed Assets

 

 

5,526,335

6,025,227

5,579,898

6,390,342

6,132,496

5,842,630

Intangible Assets

5,494,244

5,948,443

5,454,106

6,196,187

5,938,341

5,648,475

Tangible Assets

12,315

12,163

30,060

29,402

29,402

29,402

Investments

19,776

64,621

95,732

164,753

164,753

164,753

Current Assets

 

 

105,876

128,092

103,415

79,704

435,672

1,074,159

Stocks

1,455

1,481

1,700

1,541

1,561

2,239

Debtors

1,124

2,316

3,194

2,396

2,382

3,417

Cash

103,297

124,295

98,521

75,767

431,729

1,068,502

Other

0

0

0

0

0

0

Current Liabilities

 

 

(12,568)

(19,057)

(12,143)

(28,841)

(34,788)

(37,256)

Creditors

(12,568)

(19,057)

(12,143)

(28,841)

(34,788)

(37,256)

Short term borrowings

0

0

0

0

0

0

Long Term Liabilities

 

 

(1,468,908)

(1,194,274)

(771,506)

(1,269,289)

(1,269,289)

(1,269,289)

Long term borrowings

(1,466,000)

(1,193,000)

(770,000)

(1,264,000)

(1,264,000)

(1,264,000)

Other long term liabilities

(2,908)

(1,274)

(1,506)

(5,289)

(5,289)

(5,289)

Net Assets

 

 

4,150,735

4,939,988

4,899,664

5,171,916

5,264,091

5,610,243

CASH FLOW

Operating Cash Flow

 

 

435,783

608,503

564,187

518,680

562,399

909,046

Net Interest

(4,090)

(24,193)

(24,993)

(41,187)

(49,268)

(33,645)

Tax

(208)

28

(326)

0

5,369

(1,000)

Capex

(1,791,275)

(805,472)

(19,633)

(861,406)

(2,000)

(2,000)

Acquisitions/disposals

0

0

0

0

0

0

Financing

761,824

595,140

1,236

1,279

0

0

Dividends

(68,593)

(78,708)

(121,934)

(132,915)

(160,539)

(235,628)

Net Cash Flow

(666,559)

295,298

398,537

(515,549)

355,962

636,773

Opening net debt/(cash)

 

 

690,420

1,362,703

1,068,705

671,479

1,188,233

832,271

HP finance leases initiated

0

0

0

0

0

0

Other

(5,724)

(1,300)

(1,311)

(1,205)

0

0

Closing net debt/(cash)

 

 

1,362,703

1,068,705

671,479

1,188,233

832,271

195,498

Source: Company sources, Edison Investment Research


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

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

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

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

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

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

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

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The research in this document is intended for New Zealand resident professional financial advisers or brokers (for use in their roles as financial advisers or brokers) and habitual investors who are “wholesale clients” for the purpose of the Financial Advisers Act 2008 (FAA) (as described in sections 5(c) (1)(a), (b) and (c) of the FAA). This is not a solicitation or inducement to buy, sell, subscribe, or underwrite any securities mentioned or in the topic of this document. For the purpose of the FAA, the content of this report is of a general nature, is intended as a source of general information only and is not intended to constitute a recommendation or opinion in relation to acquiring or disposing (including refraining from acquiring or disposing) of securities. The distribution of this document is not a “personalised service” and, to the extent that it contains any financial advice, is intended only as a “class service” provided by Edison within the meaning of the FAA (i.e. without taking into account the particular financial situation or goals of any person). As such, it should not be relied upon in making an investment decision.

United Kingdom

This document is prepared and provided by Edison for information purposes only and should not be construed as an offer or solicitation for investment in any securities mentioned or in the topic of this document. A marketing communication under FCA Rules, this document has not been prepared in accordance with the legal requirements designed to promote the independence of investment research and is not subject to any prohibition on dealing ahead of the dissemination of investment research.

This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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

United States

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

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1,185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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