Swings and roundabouts

Wheaton Precious Metals 3 April 2020 Update
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Wheaton Precious Metals

Swings and roundabouts

Q419/FY19 results

Metals & mining

3 April 2020

Price

C$40.32

Market cap

C$18bn

C$1.4127/US$

Net debt (US$m) at 30 December 2019

774.8

Shares in issue

447.8m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

NYSE

Share price performance

%

1m

3m

12m

Abs

3.3

4.5

27.9

Rel (local)

30.5

36.4

58.8

52-week high/low

C$44.28

C$26.56

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

Q120 results

May 2020

Q220 results

August 2020

Q320 results

November 2020

Analyst

Charles Gibson

+44 (0)20 3077 5724

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

On 1 April, Wheaton Precious Metals (WPM) announced that all of its partners’ mines are operational, with the exception of Voisey’s Bay, Constancia, Yauliyacu and Penasquito. Voisey’s Bay is not scheduled to deliver cobalt to WPM until FY21, so its temporary furlough will make no difference to FY20 estimates. However, other mines at risk of temporary closure include San Dimas and Los Filos in Mexico. As a result, WPM has withdrawn its production guidance for FY20. However, assuming these mines remain closed throughout Q220, but at higher prevailing metals prices (see Exhibit 1, overleaf), our FY20 EPS forecast for WPM has increased by 18.6%.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/18

794.0

203.1

48

36

59.5

1.3

12/19

861.3

242.7

56

36

51.0

1.3

12/20e

952.0

342.8

76

43

37.6

1.5

12/21e

1,154.6

508.3

114

52

25.0

1.8

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

Temporary mine suspensions due to COVID-19

Vale made the decision to temporarily suspend operations at Voisey’s Bay on 17 March, while Hudbay announced it was to shut down operations at Constancia on account of the limited availability of critical mining supplies on 20 March. Yauliyacu is similarly reported to have shut down on account of supply chain issues. Finally, on 31 March, the Mexican government mandated that all non-essential businesses should suspend operations until 30 April and on 1 April Newmont reported that mining had been deemed non-essential and that, as a result, it was taking steps towards a ‘safe and orderly ramp down of operations’ at Penasquito. Other Mexican mining operations over which WPM has precious metals purchase agreements include the San Dimas and Los Filos mines.

Updated production forecasts

Assuming these six mines remain closed for the entirety of Q220, our full-year production forecasts for WPM are 20.4Moz Ag and 373.5koz Au, compared with WPM’s prior (but now withdrawn) guidance of 22.0–23.5Moz Ag and 390–410koz Au. Together with unchanged forecast palladium production of 23.75koz, this equates to 599.7koz of gold equivalent production (at average annual prices) or 649.5koz at WPM’s nominal prices of US$18.00/oz silver, US$1,500/oz gold and US$2,000/oz palladium (cf a prior guidance range of 685–725koz).

Valuation: Effectively unchanged at C$47.27

Assuming no material purchases of additional streams (which we think unlikely), we forecast a value per share for WPM of US$33.46 (cf US$33.63 previously), or C$47.27 (cf C$46.34 previously) in FY21. This excludes the value of 20.2m shares in First Majestic held by WPM, with an immediate value of C$176.7m, or US$0.28 per WPM share.

Updated FY20 forecasts by quarter

In our last note on WPM (In the right place at the right time, 23 March), we based our FY20 earnings expectations on the then prevailing gold and silver prices of US$1,479/oz and US$12.00/oz, respectively, for the remainder of the year. To date, this has proved unduly conservative, as the gold price has since rallied to c US$1,591/oz, while the silver price has rallied proportionately more, to c US$14.17/oz. Self-evidently, given the current environment, both are potentially susceptible to elevated levels of volatility.

We expect the mine closures in late March to have little effect on our Q1 forecasts as any closures will provide mines with the opportunity to sell metal out of inventory and should therefore lead to a drawdown in ounces produced but not yet sold. While precise forecasts are difficult to make in the current environment, the following table demonstrates the effect on our FY20 forecasts of Yauliyacu, Constancia, Penasquito, San Dimas and Los Filos all remaining closed for the entirety of Q220 at our updated metals prices:

Exhibit 1: Wheaton Precious Metals FY20 forecast, by quarter*

US$000s
(unless otherwise stated)

FY19

Q120e

Q220e

Q320e

Q420e

FY20e

(current)

FY20e

(previous)

Silver production (koz)

22,562

5,926

2,578

5,926

5,926

20,357

23,705

Gold production (oz)

406,675

97,105

82,230

97,105

97,105

373,544

388,419

Palladium production (koz)

21,993

5,938

5,938

5,938

5,938

23,750

23,750

Silver sales (koz)

17,703

5,926

2,578

5,926

5,926

20,357

23,705

Gold sales (oz)

389,086

97,068

82,193

97,068

97,068

373,399

388,274

Palladium sales (oz)

20,681

5,914

5,914

5,914

5,914

23,655

23,655

Avg realised Ag price (US$/oz)

16.29

16.89

14.17

14.17

14.17

14.96

13.14

Avg realised Au price (US$/oz)

1,391

1,581

1,591

1,591

1,591

1,588

1,501

Avg realised Pd price (US$/oz)

1,542

2,296

2,296

2,296

2,296

2,296

1,844

Avg Ag cash cost (US$/oz)

5.02

5.16

5.06

5.06

5.06

5.09

5.02

Avg Au cash cost (US$/oz)

421

425

402

425

425

420

425

Avg Pd cash cost (US$/oz)

273

413

413

413

413

413

370

Sales

861,332

267,138

180,881

251,990

251,990

951,998

937,831

Cost of sales

Cost of sales, excluding depletion

258,559

74,282

48,564

73,760

73,760

270,365

291,778

Depletion

256,826

71,623

53,669

71,623

71,623

268,537

286,490

Total cost of sales

515,385

145,904

102,233

145,382

145,382

538,902

578,268

Earnings from operations

345,947

121,234

78,648

106,607

106,607

413,097

359,563

Expenses and other income

– General and administrative**

54,507

9,750

9,750

9,750

9,750

39,000

39,000

– Foreign exchange (gain)/loss

0

0

0

– Net interest paid/(received)

48,730

7,830

7,830

7,830

7,830

31,320

31,320

– Other (income)/expense

(217)

0

0

Total expenses and other income

103,020

17,580

17,580

17,580

17,580

70,320

70,320

Earnings before income taxes

242,927

103,654

61,068

89,027

89,027

342,777

289,243

Income tax expense/(recovery)

(9,066)

250

250

250

250

1,000

1,000

Marginal tax rate (%)

(3.7)

0.2

0.4

0.3

0.3

0.3

0.3

Net earnings

251,993

103,404

60,818

88,777

88,777

341,777

288,243

Ave. no. shares in issue (000s)

446,021

446,802

446,802

446,802

446,802

446,802

446,802

Basic EPS (US$)

0.56

0.23

0.14

0.20

0.20

0.76

0.65

Diluted EPS (US$)

0.56

0.23

0.14

0.20

0.20

0.76

0.64

DPS (US$)

0.36

0.10

0.12

0.10

0.11

0.43

0.42

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 updated production forecasts of 20.4Moz silver and 373.5koz gold compare to WPM’s prior production guidance (now withdrawn) of 22.0–23.5Moz silver and 390–410koz gold and our prior forecasts of 23.7Moz silver and 388.4koz gold. Our production forecast for palladium remains unchanged. At annual average prices for the year, our updated production forecasts now equate to 599.7koz of gold equivalent production. At WPM’s nominal prices of US$18.00/oz silver, US$1,500/oz gold and US$2,000/oz palladium, they equate to 649.5koz (cf a prior guidance range of 685–725koz). Self-evidently, these forecasts are at risk to the downside if the mine shutdowns last longer than one quarter and are at risk to the upside if they are shut down for less than one quarter.

Relative to our prior FY20e EPS forecast of 65c, the change (+11c) to achieve our updated forecast of 76c may be apportioned as follows:

To increased precious metals prices (+18c)

To decreased production (-7c)

A subsequent quarter (Q320) of the same mines remaining no furlough would result in our EPS forecast decreasing by another 6c to 70c per share.

Our updated basic EPS forecast of US$0.76/share for FY20 is 13.6% below the consensus forecast of US$0.88/share (source: Refinitiv, 2 April 2020) within a range of US$0.64–1.05 per share. Relative to the consensus, our forecasts compare as follows on a quarterly basis:

Exhibit 2: WPM FY20 consensus EPS forecasts (US$/share)

Q1

Q2

Q3

Q4

Sum Q1-Q4

FY20

Mean

0.21

0.21

0.21

0.21

0.84

0.88

High

0.24

0.25

0.27

0.27

1.03

1.05

Low

0.17

0.14

0.14

0.14

0.59

0.64

Source: Refinitiv, Edison Investment Research. Note: At 13 March 2020.

Our US$1.14 basic EPS forecast for FY21 (see Exhibit 4) remains, to all intents and purposes, unchanged and compares with a consensus of US$0.95 (source: Refinitiv, 2 April 2020), within a range of US$0.76–1.36. This estimate is predicated on unchanged average gold and silver prices during the year of US$1,509/oz and US$24.76/oz, respectively, which, in the latter case, is 74.7% 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 gold was demonetised in 1971. If both metals remain at current levels, however (US$14.17/oz and US$1,591/oz at the time of writing), we forecast that WPM will instead earn US$0.76 per share in FY21.

Valuation

Relative to our last note, our valuation of WPM remains ostensibly unchanged. Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 29.5x current year basic underlying EPS, excluding impairments (vs 37.6x Edison or 31.4x Refinitiv consensus FY20e, currently).

Exhibit 3: WPM’s historical current year P/E multiples, 2005–19

Source: Edison Investment Research

Applying this 29.5x multiple to our updated EPS forecast of US$1.14 in FY21 implies a potential value per share for WPM of US$33.46 (cf US$33.63 previously), or C$47.27 (cf C$46.34 previously) in that year. Note that this excludes the value of 20.2m shares in First Majestic held by WPM, with an immediate value (2 April) of C$176.7m, or US$0.28 per WPM share.

Exhibit 4: Financial summary

US$'000s

2012

2013

2014

2015

2016

2017

2018

2019

2020e

2021e

Dec

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

849,560

706,472

620,176

648,687

891,557

843,215

794,012

861,332

951,998

1,154,559

Cost of Sales

(117,489)

(139,352)

(151,097)

(190,214)

(254,434)

(243,801)

(245,794)

(258,559)

(270,365)

(288,135)

Gross Profit

732,071

567,120

469,079

458,473

637,123

599,414

548,218

602,773

681,634

866,424

EBITDA

 

 

701,232

531,812

431,219

426,236

602,684

564,741

496,568

548,266

642,634

827,424

Operating Profit (before amort. and except.)

600,003

387,659

271,039

227,655

293,982

302,361

244,281

291,440

374,097

520,201

Intangible Amortisation

0

0

0

0

0

0

0

0

0

0

Exceptionals

0

0

(68,151)

(384,922)

(71,000)

(228,680)

245,715

(165,855)

0

0

Other

788

(11,202)

(1,830)

(4,076)

(4,982)

8,129

(5,826)

217

0

0

Operating Profit

600,791

376,457

201,058

(161,343)

218,000

81,810

484,170

125,802

374,097

520,201

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(41,187)

(48,730)

(31,320)

(11,930)

Profit Before Tax (norm)

 

 

600,003

381,576

268,762

223,565

269,789

277,368

203,094

242,710

342,777

508,271

Profit Before Tax (FRS 3)

 

 

600,791

370,374

198,781

(165,433)

193,807

56,817

442,983

77,072

342,777

508,271

Tax

(14,755)

5,121

1,045

3,391

1,330

886

(15,868)

9,066

(1,000)

(1,000)

Profit After Tax (norm)

586,036

375,495

267,977

222,880

266,137

286,383

181,400

251,993

341,777

507,272

Profit After Tax (FRS 3)

586,036

375,495

199,826

(162,042)

195,137

57,703

427,115

86,138

341,777

507,271

Average Number of Shares Outstanding (m)

353.9

355.6

359.4

395.8

430.5

442.0

443.4

446.0

446.8

446.8

EPS - normalised (c)

 

 

166

106

75

53

62

63

48

56

76

114

EPS - normalised and fully diluted (c)

 

165

105

74

53

62

63

48

56

76

113

EPS - (IFRS) (c)

 

 

166

106

56

(-41)

45

13

96

19

76

114

Dividend per share (c)

35

45

26

20

21

33

36

36

43

52

Gross Margin (%)

86.2

80.3

75.6

70.7

71.5

71.1

69.0

70.0

71.6

75.0

EBITDA Margin (%)

82.5

75.3

69.5

65.7

67.6

67.0

62.5

63.7

67.5

71.7

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

70.6

54.9

43.7

35.1

33.0

35.9

30.8

33.8

39.3

45.1

BALANCE SHEET

Fixed Assets

 

 

2,403,958

4,288,557

4,309,270

5,526,335

6,025,227

5,579,898

6,390,342

6,123,255

5,856,718

5,551,495

Intangible Assets

2,281,234

4,242,086

4,270,971

5,494,244

5,948,443

5,454,106

6,196,187

5,768,883

5,502,346

5,197,123

Tangible Assets

1,347

5,670

5,427

12,315

12,163

30,060

29,402

44,615

44,615

44,615

Investments

121,377

40,801

32,872

19,776

64,621

95,732

164,753

309,757

309,757

309,757

Current Assets

 

 

785,379

101,287

338,493

105,876

128,092

103,415

79,704

154,752

587,949

1,168,375

Stocks

966

845

26,263

1,455

1,481

1,700

1,541

43,628

1,709

2,073

Debtors

6,197

4,619

4,132

1,124

2,316

3,194

2,396

7,138

2,608

3,163

Cash

778,216

95,823

308,098

103,297

124,295

98,521

75,767

103,986

583,632

1,163,139

Other

0

0

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(49,458)

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(28,841)

(64,700)

(79,572)

(81,325)

Creditors

(20,898)

(21,134)

(16,171)

(12,568)

(19,057)

(12,143)

(28,841)

(63,976)

(78,848)

(80,601)

Short term borrowings

(28,560)

0

0

0

0

0

0

(724)

(724)

(724)

Long Term Liabilities

 

 

(32,805)

(1,002,164)

(1,002,856)

(1,468,908)

(1,194,274)

(771,506)

(1,269,289)

(887,387)

(887,387)

(887,387)

Long term borrowings

(21,500)

(998,136)

(998,518)

(1,466,000)

(1,193,000)

(770,000)

(1,264,000)

(878,028)

(878,028)

(878,028)

Other long term liabilities

(11,305)

(4,028)

(4,338)

(2,908)

(1,274)

(1,506)

(5,289)

(9,359)

(9,359)

(9,359)

Net Assets

 

 

3,107,074

3,366,546

3,628,736

4,150,735

4,939,988

4,899,664

5,171,916

5,325,920

5,477,709

5,751,158

CASH FLOW

Operating Cash Flow

 

 

720,209

540,597

434,582

435,783

608,503

564,187

518,680

548,301

703,954

828,258

Net Interest

0

(6,083)

(2,277)

(4,090)

(24,193)

(24,993)

(41,187)

(41,242)

(31,320)

(11,930)

Tax

(725)

(154)

(204)

(208)

28

(326)

0

(5,380)

(1,000)

(1,000)

Capex

(641,976)

(2,050,681)

(146,249)

(1,791,275)

(805,472)

(19,633)

(861,406)

10,571

(2,000)

(2,000)

Acquisitions/disposals

0

0

0

0

0

0

0

0

0

0

Financing

12,919

58,004

6,819

761,824

595,140

1,236

1,279

37,198

0

0

Dividends

(123,852)

(160,013)

(79,775)

(68,593)

(78,708)

(121,934)

(132,915)

(129,986)

(189,988)

(233,821)

Net Cash Flow

(33,425)

(1,618,330)

212,896

(666,559)

295,298

398,537

(515,549)

419,462

479,646

579,507

Opening net debt/(cash)

 

 

(761,581)

(728,156)

902,313

690,420

1,362,703

1,068,705

671,479

1,188,233

774,766

295,120

HP finance leases initiated

0

0

0

0

0

0

0

0

0

0

Other

0

(12,139)

(1,003)

(5,724)

(1,300)

(1,311)

(1,205)

(5,995)

0

0

Closing net debt/(cash)

 

 

(728,156)

902,313

690,420

1,362,703

1,068,705

671,479

1,188,233

774,766

295,120

(284,387)

Source: Company sources, Edison Investment Research.


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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.

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United States

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Australia

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New Zealand

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.

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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