Starting as it means to continue

Wheaton Precious Metals 14 May 2019 Update
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Wheaton Precious Metals

Starting as it means to continue

Q119 results

Metals & mining

14 May 2019

Price

C$27.37

Market cap

C$12,185m

C$1.3478/US$

Net debt (US$m) at 31 March 2019

1,057.7

Shares in issue

445.2m

Free float

100.0%

Code

WPM

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

(10.0)

0.3

(0.8)

Rel (local)

(8.4)

(3.2)

(2.1)

52-week high/low

C$33.69

C$20.15

Business description

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

Next events

Q219 dividend record date

24 May 2019

Q219 dividend payment

About 6 June 2019

Q219 results

8 August 2019

Q319 results

14 November 2019

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

Once again, Wheaton’s Q119 results were closely in line with our prior expectations, with the exception of a large oversale of gold relative to production, which broadly offset a large under-sale of silver to result in net earnings that were within 3.5% of our prior forecast for the quarter. Consistent with its policy, Wheaton Precious Metals (WPM) declared a dividend of US$0.09/share for the quarter to bring the total for the year to date to US$0.18/share. In recognition of a lower precious metal price environment in Q219 than previously expected plus production disruptions owing to illegal industrial action at Penasquito, we have revised our EPS forecasts for FY19 downwards by a very modest 5.6%, but continue to remain optimistic for the medium to longer term.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/17

843.2

277.4

63

33

32.2

1.6

12/18

794.0

203.1

48

36

42.3

1.8

12/19e

845.7

221.2

50

36

40.9

1.8

12/20e

1,140.3

521.8

117

48

17.3

2.4

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

Rosemont first production before end of FY22

Further to receiving its Section 404 Water Permit from the US Army Corps of Engineers and its Mine Plan of Operations from the US Forest Service in March, Hudbay has indicated that it expects to seek board approval to commence construction work at its Rosemont project by the end of the year, which “should enable first production by the end of 2022”. In the meantime, it has commenced an early works programme to run concurrently with financing activities (including a potential joint venture partner) during the remainder of the year. The proposed mine 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. 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 will contribute an average c US$0.11 per share to WPM’s basic EPS in its first nine years of operations from FY22–30 for an upfront payment of US$230m (equivalent to US$0.52/share)

Valuation: C$45.03 in FY20

Assuming no material purchases of additional streams (which we think unlikely), we now forecast a value per share for WPM of US$33.41, or C$45.03 in FY20 at (unchanged) average precious metals prices of US$25.95/oz Ag and US$1,482/oz Au (vs US$33.97, or C$45.18, previously). This valuation excludes the value of 20.9m shares in First Majestic held by WPM, with an immediate value of C$165.9m, or US$0.28 per WPM share. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than those of its royalty/streaming ‘peers’ in at least 91% of financial measures considered in Exhibit 7, and the averages of the miners themselves in at least 41% of the same measures, despite being associated with materially less operating and cost risk.

Investment summary

Wheaton’s results in Q119 were closely aligned with our prior expectations (see Exhibit 1), with the exception of the fact that a large oversale of gold relative to production (resulting from a drawdown in inventory – see ‘Ounces produced but not yet delivered – aka inventory’ on page 3) broadly offset a large under-sale of silver, resulting in a US$5.4m positive variance in revenues during the quarter relative to our expectations. This was then augmented by a US$2.2m positive variance in depletion, but offset by a US$7.3m negative variance in general and administrative expenses (albeit including stock-based compensation, which Edison declines to attempt to forecast) to result in net earnings that were within 3.5% of our prior forecast for the quarter. A full analysis of WPM’s Q1 results relative to our prior forecasts is provided in the table below:

Exhibit 1: Wheaton Precious Metals Q119 results vs Q418 and Q119e, by quarter*

US$000s
(unless otherwise stated)

Q118

Q218

Q318

Q418

Q418 (underlying)

Q119e

Q119a

***Change
(%)

****Variance
(%)

****Variance
(units)

Silver production (koz)

7,428

6,091

5,701

5,499

5,499

5,807

5,614

2.1

-3.3

-193

Gold production (oz)

79,657

85,292

101,552

107,567

107,567

93,011

93,585

-13.0

0.6

574

Palladium production (koz)

0

0

8,817

5,869

5,869

5,500

4,729

-19.4

-14.0

-771

Silver sales (koz)

6,343

5,972

5,018

4,400

4,400

5,807

4,294

-2.4

-26.1

-1,513

Gold sales (oz)

69,973

87,140

89,242

102,813

102,813

92,975

115,020

11.9

23.7

22,045

Palladium sales (koz)

0

0

3,668

5,049

5,049

5,478

5,189

2.8

-5.3

-289

Avg realised Ag price (US$/oz)

16.73

16.52

14.80

14.66

14.66

15.59

15.64

6.7

0.3

0.05

Avg realised Au price (US$/oz)

1,330

1,305

1,210

1,229

1,229

1,304

1,308

6.4

0.3

4.00

Avg realised Pd price (US$/oz)

N/A

N/A

955

1,137

1,137

1,441

1,443

26.9

0.1

2.00

Avg Ag cash cost (US$/oz)

4.49

4.54

5.04

4.66

4.66

4.76

4.64

-0.4

-2.5

-0.12

Avg Au cash cost (US$/oz)

399

407

418

409

409

420

417

2.0

-0.7

-3

Avg Pd cash cost (US$/oz)

N/A

N/A

169

205

205

259

254

23.9

-1.9

-5

Sales

199,252

212,400

185,769

196,591

196,591

219,665

225,049

14.5

2.5

5,384

Cost of sales

 

 

 

Cost of sales, excluding depletion

56,414

62,580

63,202

63,598

63,598

68,141

69,214

8.8

1.6

1,073

Depletion

57,265

62,494

64,684

67,844

67,844

70,615

68,381

0.8

-3.2

-2,234

Total cost of sales

113,679

125,074

127,886

131,442

131,442

138,756

137,595

4.7

-0.8

-1,161

Earnings from operations

85,573

87,326

57,883

65,149

65,149

80,909

87,454

34.2

8.1

6,545

Expenses and other income

 

 

 

- General and administrative**

9,757

11,972

8,779

21,142

16,597

9,250

16,535

-0.4

78.8

7,285

- Foreign exchange (gain)/loss

(170)

26

0

144

144

0

0

-100.0

N/A

0

- Net interest paid/(received)

5,591

5,659

12,877

17,060

12,743

12,009

13,946

9.4

16.1

1,937

- Other (income)/expense

2,757

466

1,301

1,302

581

0

(266)

-145.8

N/A

-266

Total expenses and other income

17,935

18,123

22,957

39,648

30,065

21,259

30,215

0.5

42.1

8,956

Earnings before income taxes

67,638

69,203

34,926

25,501

35,084

59,651

57,239

63.1

-4.0

-2,412

Income tax expense/(recovery)

(485)

(3,224)

905

18,672

(1,662)

250

(110)

-106.6

-56.0

-140

Marginal tax rate (%)

(0.7)

(4.7)

2.6

73.2

(4.7)

0.4

(0.2)

-95.7

-150.0

-0.6

Net earnings

68,123

72,427

34,021

6,828

36,745

59,401

57,349

56.1

-3.5

-2,052

Avg no. shares in issue (000s)

442,728

443,191

443,634

444,057

444,057

444,057

444,389

0.1

0.1

332

Basic EPS (US$)

0.15

0.16

0.08

0.02

0.08

0.13

0.13

62.5

0.0

0.0

Diluted EPS (US$)

0.15

0.16

0.08

0.02

0.08

0.13

0.13

62.5

0.0

0.0

DPS (US$)

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.0

0.0

0.0

Source: Wheaton Precious Metals, Edison Investment Research. Note: *As reported by WPM, excluding exceptional items. **Quarterly forecasts exclude stock-based compensation costs. ***Q119a vs Q418 (underlying). ****Q119a vs Q119e.

The 22.9% oversale of gold relative to production was largely the consequence of a significant drawdown of ounces produced but not yet delivered at Salobo in particular and resulted in a record level of gold sales during the quarter and gold sales accounting for 66.8% of WPM’s total sales (almost exactly the reverse of the situation as recently as Q415 when silver sales were dominant).

From an operational perspective, the star performer within WPM’s portfolio of streams was once again Salobo, at which production (although lower than the previous quarter) continued at high levels, despite a lower throughput and grade, which was offset by higher recoveries. WPM’s other assets performed broadly in line with our expectations, with the exception of Penasquito, Constancia and Stillwater. Penasquito continued to be affected by the higher than expected ore hardness that has compromised mill performance since Q318, albeit this has now become the focus of management efforts to remedy. Nevertheless, the newly commissioned Pyrite Leach Project was operated successfully throughout the quarter. In the meantime, production was lower than our expectations at Constancia, owing to delays in mining the Pampacancha satellite deposit (in lieu of which WPM is entitled to receive an additional 2,005oz gold per quarter during FY19 and FY20 relative to its precious metals purchase agreement). Over the remainder the year, Sibanye-Stillwater has also indicated that it will commit additional resources to recover its lower Q1 production. By contrast, silver and gold grades at San Dimas were reported to be 10% and 8% higher compared to the prior quarter, owing to higher in-situ grades in the Victoria and Jessica areas of the mine, together with improvements in mine dilution controls.

Ounces produced but not yet delivered – aka inventory

Sales of gold and silver diverged further in Q119 relative to production. Whereas sales of gold increased to 122.9% of production during the three-month period (relative to a prior long-term average of 91.2% of production), silver sales fell further, to 76.5% of production (cf a prior long-term average of 89.3%),

Exhibit 2: Over/(under) sale of silver and gold as a % of production, Q112–Q119

Source: Edison Investment Research, Wheaton Precious Metals

As at 31 March, payable ounces attributable to WPM produced but not yet delivered amounted to 3.5Moz silver and 51,515oz gold (vs 3.2Moz silver and 77,074oz gold in December, 3.0Moz silver and 77,588oz gold in September, 3.4Moz silver and 70,259oz gold in June, and 4.1Moz silver and 75,153oz gold in March 2018). This ‘inventory’ equates to 1.92 months and 1.66 months of forecast FY19 silver and gold production, respectively (vs 1.59 months and 2.49 months of FY18 production in Q418), and compares with WPM’s target level of two months of annualised production for silver, and two to three months of annualised gold and palladium production.

Exhibit 3: WPM ounces produced but not yet delivered, Q316–Q119 (months of production)

Source: Edison Investment Research, Wheaton Precious Metals

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

Medium-term outlook

WPM has maintained its production guidance for FY19 of 365,000 ounces of gold, 24.5 million ounces of silver, 22,000 ounces of palladium and 690,000 ounces of gold equivalent production. For the five-year period ending in FY23, the company estimates that average annual gold equivalent production will amount to 750,000 ounces per year. This aligns closely with both our current and prior expectations with the exception of the fact that we are also anticipating a production contribution from Rosemont (see below) from FY22 and a production contribution from Salobo III in FY23.

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

FY19e

FY20e

FY21e

FY22e*

FY23e*

Previous Edison forecast

Silver production (Moz)

23.2

23.0

21.3

23.0

21.1

Gold production (koz)

373

347

325

344

356

Cobalt production (klbs)

0

0

2,100

2,100

2,100

Palladium production (koz)

22

27

27

27

30

Gold equivalent (koz)

680

770

755

812

793

Current Edison forecast

Silver production (Moz)

22.1

23.0

21.3

23.0

21.1

Gold production (koz)

372

347

325

344

356

Cobalt production (klbs)

0

0

2,100

2,100

2,100

Palladium production (koz)

21

27

27

27

30

Gold equivalent (koz)

655

770

754

812

793

Company guidance

Silver production (Moz)

24.5

Gold production (koz)

365

Cobalt production (klbs)

0

Palladium production (koz)

22

Gold equivalent (koz)

690

750

750

750

750

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

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. In the short term however, we expect it to continue to be affected by harder than anticipated ore for at least one more quarter. In addition, on 29 April, Newmont Goldcorp announced that it is to temporarily suspend operations at Penasquito, pending resolution of an illegal blockade, which we forecast will affect production there for a one-month period during the second quarter. At the same time, mining at Constancia will not start at the Pampacancha pit (which hosts significantly higher gold grades than those mined hitherto and of which WPM will now be entitled to an increased portion) until FY20. The company also expects palladium and gold production at Stillwater to increase as the Blitz project ramps up to full capacity in FY21.

Longer-term outlook

Salobo

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

Potential future growth

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

As a consequence, WPM reports that it is busy on the corporate development front. It has the potential for up to six deals with a value in the range US$100–300m, thus fully financeable via the c US$0.94bn available to WPM in cash and under its US$2bn revolving credit facility as at end-Q119.

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.

One further, major project rapidly 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 is effectively the final material administrative step before the mine can be developed. Hudbay has since indicated that it expects to 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 has commenced an early works programme to run concurrently with financing activities (including a potential joint venture partner) during the remainder of the year. The proposed mine 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 and we estimate it will contribute an average c US$0.11 per share to WPM’s basic EPS in its first nine years of operations from FY22–30 for an upfront payment of US$230m (equivalent to US$0.52/share) in two instalments (vs three previously) of US$50m and US$180m. Note that, for the purposes of our financial modelling, we have assumed that these instalments will be paid from WPM to Hudbay in FY20 and FY21, respectively, although they could fall in FY19 and FY20.

Other matters

General and administrative expenses

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


FY19 by quarter

Taking into account the aforementioned considerations, our updated forecasts for FY19 for WPM, by quarter, are now as shown below:

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

US$000s
(unless otherwise stated)

Q118

Q218

Q318

Q418

Q119

Q219

Q319

Q419

FY19

FY19

(previous)

Silver production (koz)

7,428

6,091

5,701

5,499

5,614

4,874

5,807

5,807

22,102

23,228

Gold production (oz)

79,657

85,292

101,552

107,567

93,585

93,011

93,011

93,011

372,617

372,043

Palladium production (oz)

0

0

8,817

5,869

4,729

5,500

5,500

5,500

21,229

22,000

Silver sales (koz)

6,343

5,972

5,018

4,400

4,294

4,874

5,807

5,807

20,782

23,228

Gold sales (oz)

69,973

87,140

89,242

102,813

115,020

92,975

92,975

92,975

393,944

371,898

Palladium sales (oz)

0

0

3,668

5,049

5,189

5,478

5,478

5,478

21,623

21,912

Avg realised Ag price (US$/oz)

16.73

16.52

14.80

14.66

15.64

14.90

14.83

14.83

15.01

15.59

Avg realised Au price (US$/oz)

1,330

1,305

1,210

1,229

1,308

1,281

1,263

1,263

1,280

1,287

Avg realised Pd price (US$/oz)

N/A

N/A

955

1,137

1,443

1,349.00

1,320

1,320

1,357

1,565

Avg Ag cash cost (US$/oz)

4.49

4.54

5.04

4.66

4.64

4.87

4.76

4.76

4.76

4.76

Avg Au cash cost (US$/oz)

399

407

418

409

417

420

420

420

419

420

Avg Pd cash cost (US$/oz)

N/A

N/A

169

205

254

243

238

238

243

281

Sales

199,252

212,400

185,769

196,591

225,049

199,114

210,750

210,750

845,662

875,012

Cost of sales

Cost of sales, excluding depletion

56,414

62,580

63,202

63,598

69,214

64,087

67,959

67,959

269,219

273,013

Depletion

57,265

62,494

64,684

67,844

68,381

62,946

65,801

65,801

262,928

282,458

Total cost of sales

113,679

125,074

127,886

131,442

137,595

127,033

133,759

133,759

532,147

555,471

Earnings from operations

85,573

87,326

57,883

65,149

87,454

72,081

76,990

76,990

313,515

319,541

Expenses and other income

- General and administrative**

9,757

11,972

8,779

21,142

16,535

9,250

9,250

9,250

44,285

37,000

- Foreign exchange (gain)/loss

(170)

26

0

144

0

0

0

- Net interest paid/(received)

5,591

5,659

12,877

17,060

13,946

11,363

11,363

11,363

48,034

48,034

- Other (income)/expense

2,757

466

1,301

1,302

(266)

(266)

0

Total expenses and other income

17,935

18,123

22,957

39,648

30,215

20,613

20,613

20,613

92,053

85,034

Earnings before income taxes

67,638

69,203

34,926

25,501

57,239

51,468

56,377

56,377

221,462

234,507

Income tax expense/(recovery)

(485)

(3,224)

905

18,672

(110)

370

370

370

1,000

1,000

Marginal tax rate (%)

(0.7)

(4.7)

2.6

73.2

(0.2)

0.7

0.7

0.7

0.5

0.4

Net earnings

68,123

72,427

34,021

6,828

57,349

51,098

56,007

56,007

220,462

233,507

Ave. no. shares in issue (000s)

442,728

443,191

443,634

444,057

444,389

445,219

445,219

445,219

445,012

444,057

Basic EPS (US$)

0.15

0.16

0.08

0.02

0.13

0.11

0.13

0.13

0.50

0.53

Diluted EPS (US$)

0.15

0.16

0.08

0.02

0.13

0.11

0.13

0.13

0.50

0.53

DPS (US$)

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.09

0.36

0.36

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

Our forecast basic EPS of US$0.50/share for FY19 compares with a consensus forecast of US$0.53/share (source: Refinitiv, 9 May 2019), within a range of US$0.46–0.69 per share.

Our US$1.17 basic EPS forecast for FY20 (see Exhibit 8) compares with a consensus of US$0.67 (source: Refinitiv, 9 May), within a range of US$0.50–1.17. However, our estimate is predicated on an average gold price during the year of US$1,482/oz and an average silver price of US$25.95/oz. These are 15.8% and 75.0% above current spot prices, respectively, but are consistent with our historical practice and, in particular, assume that silver 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 precious metals prices remain at current levels (US$1,280/oz Au and US$14.83/oz Ag at the time of writing), we forecast that WPM will instead earn US$0.47 per share in FY20.


Valuation

Excluding FY04 (part-year), WPM’s shares have historically traded on a contemporary average P/E multiple of 28.5x current year basic underlying EPS, ie excluding impairments (vs 40.9x Edison or 38.2x Refinitiv consensus FY19e, currently – see Exhibit 7).

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

Source: Edison Investment Research

Applying this 28.5x multiple to our updated EPS forecast of US$1.17 in FY20 (vs US$1.19 previously) implies a potential value per share for WPM of US$33.41, or C$45.03 in that year (vs US$33.97, or C$45.18 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$165.9m, or US$0.28 per WPM share (priced as at 9 May).

In the meantime, from a relative perspective, it is notable that WPM is cheaper than its royalty/streaming ‘peers’ in at least 91% (22 out of 24) of the valuation measures used in Exhibit 7 and on multiples that are cheaper even than the miners themselves in at least 42% (33 out of 78) of the same valuation measures (irrespective of whether Edison or consensus forecasts are used), despite being associated with materially less operational and cost risk (since WPM’s costs are contractually predetermined).

Exhibit 7: WPM comparative valuation vs a sample of operating and royalty/streaming companies

P/E (x)

Yield (%)

P/CF (x)

Year 1

Year 2

Year 1

Year 2

Year 1

Year 2

Royalty companies

Franco-Nevada

56.5

45.8

1.4

1.4

24.9

21.5

Royal Gold

51.5

38.4

1.3

1.3

19.1

17.2

Sandstorm Gold

59.4

54.3

0.0

0.0

16.9

15.6

Osisko

71.4

50.6

1.7

1.6

20.4

17.5

Average

59.7

47.3

1.1

1.1

20.3

18.0

WPM (Edison forecasts)

40.9

17.3

1.8

2.4

18.4

11.4

WPM (consensus)

38.2

30.4

1.7

2.0

17.6

16.1

Gold producers

Barrick

32.3

26.4

1.2

1.0

8.2

7.1

Newmont

23.1

20.3

1.9

1.9

7.1

6.8

Newcrest

23.5

18.8

1.1

1.2

10.8

9.0

Kinross

23.1

19.3

0.0

0.0

3.9

3.6

Agnico-Eagle

71.3

39.5

1.1

1.1

12.6

9.8

Eldorado

26.6

5.9

0.1

0.5

3.3

1.9

Yamana

53.5

35.1

1.5

1.7

4.5

3.9

Average

36.2

23.6

1.0

1.0

7.2

6.0

Silver producers

Hecla

N/A

31.8

0.5

0.5

7.7

5.3

Pan American

40.0

18.9

1.3

1.3

7.3

5.4

Coeur Mining

N/A

394.4

0.0

0.0

5.3

3.6

First Majestic

N/A

88.6

0.0

0.0

11.2

8.0

Hocschild

25.5

18.1

1.8

1.8

4.9

4.7

Fresnillo

21.6

17.0

2.5

2.9

9.4

8.8

Average

29.0

94.8

1.0

1.1

7.6

5.9

Source: Refinitiv, Edison Investment Research. Note: Peers priced on 9 May 2019.

Financials: Solid equity base

As at 31 March 2019, WPM had US$125.8m in cash and US$1,183.5m of debt outstanding under its US$2bn revolving credit facility (which attracts an interest rate of Libor plus 120–220bp and matures in February 2024), such that it had net debt of US$1,057.7m overall, after US$118.2m (US$0.27/share) of cash inflows from operating activities during the quarter. Relative to the company’s Q1 balance sheet equity of US$5,225.9m, this level of net debt equates to a financial gearing (net debt/equity) ratio of 20.2% and a leverage (net debt/[net debt+equity]) ratio of 16.8%. It also compares with a net debt position of 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 11.1x 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 early in FY21.

Exhibit 8: Financial summary

US$000s

2013

2014

2015

2016

2017

2018

2019e

2020e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

706,472

620,176

648,687

891,557

843,215

794,012

845,662

1,140,345

Cost of Sales

(139,352)

(151,097)

(190,214)

(254,434)

(243,801)

(245,794)

(269,219)

(268,026)

Gross Profit

567,120

469,079

458,473

637,123

599,414

548,218

576,443

872,319

EBITDA

 

 

531,812

431,219

426,236

602,684

564,741

496,568

532,158

828,034

Operating Profit (before amort. and except.)

387,659

271,039

227,655

293,982

302,361

244,281

269,230

556,617

Intangible Amortisation

0

0

0

0

0

0

0

0

Exceptionals

0

(68,151)

(384,922)

(71,000)

(228,680)

245,715

0

0

Other

(11,202)

(1,830)

(4,076)

(4,982)

8,129

(5,826)

266

0

Operating Profit

376,457

201,058

(161,343)

218,000

81,810

484,170

269,496

556,617

Net Interest

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(41,187)

(48,034)

(34,777)

Profit Before Tax (norm)

 

 

381,576

268,762

223,565

269,789

277,368

203,094

221,196

521,840

Profit Before Tax (FRS 3)

 

 

370,374

198,781

(165,433)

193,807

56,817

442,983

221,462

521,840

Tax

5,121

1,045

3,391

1,330

886

(15,868)

(1,000)

(1,000)

Profit After Tax (norm)

375,495

267,977

222,880

266,137

286,383

181,400

220,462

520,840

Profit After Tax (FRS 3)

375,495

199,826

(162,042)

195,137

57,703

427,115

220,462

520,840

Average Number of Shares Outstanding (m)

355.6

359.4

395.8

430.5

442.0

443.4

445.0

445.2

EPS - normalised (c)

 

 

106

75

53

62

63

48

50

117

EPS - normalised and fully diluted (c)

 

105

74

53

62

63

48

49

117

EPS - (IFRS) (c)

 

 

106

56

(41)

45

13

96

50

117

Dividend per share (c)

45

26

20

21

33

36

36

48

Gross Margin (%)

80.3

75.6

70.7

71.5

71.1

69.0

68.2

76.5

EBITDA Margin (%)

75.3

69.5

65.7

67.6

67.0

62.5

62.9

72.6

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

54.9

43.7

35.1

33.0

35.9

30.8

31.8

48.8

BALANCE SHEET

Fixed Assets

 

 

4,288,557

4,309,270

5,526,335

6,025,227

5,579,898

6,390,342

6,129,414

5,636,639

Intangible Assets

4,242,086

4,270,971

5,494,244

5,948,443

5,454,106

6,196,187

5,935,259

5,442,484

Tangible Assets

5,670

5,427

12,315

12,163

30,060

29,402

29,402

29,402

Investments

40,801

32,872

19,776

64,621

95,732

164,753

164,753

164,753

Current Assets

 

 

101,287

338,493

105,876

128,092

103,415

79,704

407,560

1,206,365

Stocks

845

26,263

1,455

1,481

1,700

1,541

1,518

2,047

Debtors

4,619

4,132

1,124

2,316

3,194

2,396

2,317

3,124

Cash

95,823

308,098

103,297

124,295

98,521

75,767

403,725

1,201,194

Other

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(28,841)

(35,511)

(35,393)

Creditors

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(28,841)

(35,511)

(35,393)

Short term borrowings

0

0

0

0

0

0

0

0

Long Term Liabilities

 

 

(1,002,164)

(1,002,856)

(1,468,908)

(1,194,274)

(771,506)

(1,269,289)

(1,269,289)

(1,269,289)

Long term borrowings

(998,136)

(998,518)

(1,466,000)

(1,193,000)

(770,000)

(1,264,000)

(1,264,000)

(1,264,000)

Other long term liabilities

(4,028)

(4,338)

(2,908)

(1,274)

(1,506)

(5,289)

(5,289)

(5,289)

Net Assets

 

 

3,366,546

3,628,736

4,150,735

4,939,988

4,899,664

5,171,916

5,232,174

5,538,321

CASH FLOW

Operating Cash Flow

 

 

540,597

434,582

435,783

608,503

564,187

518,680

539,196

826,579

Net Interest

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(41,187)

(48,034)

(34,777)

Tax

(154)

(204)

(208)

28

(326)

0

(1,000)

(1,000)

Capex

(2,050,681)

(146,249)

(1,791,275)

(805,472)

(19,633)

(861,406)

(2,000)

221,359

Acquisitions/disposals

0

0

0

0

0

0

0

0

Financing

58,004

6,819

761,824

595,140

1,236

1,279

0

0

Dividends

(160,013)

(79,775)

(68,593)

(78,708)

(121,934)

(132,915)

(160,204)

(214,693)

Net Cash Flow

(1,618,330)

212,896

(666,559)

295,298

398,537

(515,549)

327,958

797,469

Opening net debt/(cash)

 

 

(728,156)

902,313

690,420

1,362,703

1,068,705

671,479

1,188,233

860,275

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

(12,139)

(1,003)

(5,724)

(1,300)

(1,311)

(1,205)

0

0

Closing net debt/(cash)

 

 

902,313

690,420

1,362,703

1,068,705

671,479

1,188,233

860,275

62,806

Source: Company sources, Edison Investment Research.

General disclaimer and copyright

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 Edison analyst 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.

Exclusion of Liability: To the fullest extent allowed by law, Edison shall not be liable for any direct, indirect or consequential losses, loss of profits, damages, costs or expenses incurred or suffered by you arising out or in connection with the access to, use of or reliance on any information contained on this note.

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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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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 (nor will such persons be able to purchase shares in the placing).

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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 Edison analyst 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.

Copyright: Copyright 2019 Edison Investment Research Limited (Edison). All rights reserved FTSE International Limited (“FTSE”) © FTSE 2019. “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.

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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 (nor will such persons be able to purchase shares in the placing).

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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

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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