Wheaton Precious Metals — A strong start to FY24

Wheaton’s Q124 results were released after the market close on 9 May and exceeded our forecasts, which were already at the top of the market range. In general, Wheaton produced more (with the single exception of gold, which recorded a small negative variance) and sold more at higher prices than our prior expectations for the three-month period. This resulted in a positive 5.6% (US$15.8m) variance in sales that was minimally counteracted by a US$0.8m negative variance in costs (including general & administrative costs). Other income (largely interest earned) was also US$0.4m higher, which resulted in a US$15.3m (10.3%) positive variance in profits at the pre-tax level that, to all intents and purposes, fell straight through to the bottom line. Exhibit 1, below, provides a full analysis of WPM’s results with respect to both the prior quarter and our prior expectations:

As a consequence, Wheaton’s actual EPS was 10.4% above our expectations – which were already at the top of the market range – and 24.5% above the market consensus immediately before the results were announced:

At the level of the individual mines, Constancia, Stillwater, Penasquito, Antamina, Los Filos, Neves-Corvo and Voisey’s Bay all outperformed our expectations in terms of sales, while San Dimas (unusually) slightly underperformed. Salobo outperformed our slightly conservative production expectations by 4.0% (or 2,381oz Au) and our sales expectations by 3.5% (or 1,932oz) in a performance that was nevertheless consistent with the amount of copper that it produced during the period:

Also shown in Exhibit 4 is our forecast quarterly production of gold attributable to WPM from Salobo in Q2–Q424 in the light of the company’s guidance.

Silver sales were 1.4Moz, or 25.7%, below production, which compares with a long-term average under-sales rate of 12.1% (±11.0%). This is towards the top end of the typical range and the second quarter in succession in which sales have under-shot production by this order of magnitude. By contrast, gold sales were closely aligned with production, compared to a long-term average rate of under-sales of 7.1% per quarter (±17.6%). In this case, almost all of the relative gold sales outperformance could be attributed to Constancia, which sold 6,226oz (or 44.8%) more gold than it produced and without which Wheaton would have recorded an 8.1% (or 7,577oz) gold under-sale relative to production during the period. By contrast, Salobo’s sales were within 7.8% of production.

As a result, silver ounces produced but not yet delivered (PBND) to Wheaton increased to 2.3Moz and now equate to 1.29 months of Edison’s forecast FY24 production level (cf 1.29 months of FY23 production at the end of Q423) – albeit this is still below Wheaton’s target level of two months for silver production. By contrast, gold ounces PBND decreased to 87,542oz, or 3.02 months of estimated FY24 production (cf a reported 3.18 months at the end of FY23), which compares with WPM’s target levels of two to three months of PBND for gold and palladium production.

At the time of its Q423 results, WPM provided guidance for non-stock general and administrative (G&A) expenses of US$41–45m, or US$10.25–11.25m per quarter, for FY24, which represents a decline relative to US$47–50m in FY23 and US$47–49m in FY22 and on a par with guidance of US$42–44m for FY21 and US$40–43m for FY20.

Given WPM’s share price as at the date of our last note (18 March), we forecast that the total G&A charge for WPM in Q1 would be US$16.2m, of which 80% would have been attributable to non-stock-based G&A expenses and 20% to stock-based expenses. In the event, non-stock based G&A expenses were US$1.0m less than our forecast, while stock-based G&A expenses were US$2.0m lower (albeit still within the US$2.5m error of estimation implied by the regression analysis between the two – see Exhibit 8, below), leading to a US$2.9m saving in total G&A expenses for the quarter relative to our prior expectations.

The extent to which stock-based G&A expenses were lower than we expected is clearly visible in Exhibit 8, below, given the movement in WPM’s share price in the quarter (in US dollar terms). Nevertheless, as at the end of Q124, the analysis of stock-based G&A expenses relative to the change in WPM’s share price over the previous 18 quarters continues to exhibit a close Pearson product moment (correlation) coefficient of 0.77, which can be said to be statistically significant at the 5% level for a directional hypothesis (ie there is less than a 5% probability that this relationship occurred by random chance).

WPM provided detailed production guidance for FY24 and beyond on 20 February, at the same time as releasing its FY23 sales and production numbers. This guidance is summarised below relative to Edison’s updated FY24 forecasts in the light of Q1 results:

Relative to our prior production forecasts, the main change to our FY24 numbers has been to assume a U-shaped production profile at Constancia over the course of the year to reflect anticipated patterns of high- and low-grade ore blending through the plant and therefore lower production attributable to Wheaton in Q2 and Q3 and a more slowly rising production profile at Antamina after it mined lower grades in Q1. In the longer term, relative to our last note, we have assumed that the start of production at Marathon will be delayed until late FY26 and the start of production at Santo Domingo until FY27. However, we are continuing to forecast that production will commence at Goose, Platreef and Blackwater in late-FY24 or early FY25, to be followed by production from Curipamba in FY26, Curraghinalt and KZK in FY27 and Cangrejos in FY29.

A brief summary of recent developments at WPM’s principal near-term development projects is as follows:

WPM’s guidance for FY24 and beyond is based on standardised pricing assumptions of US$2,000/oz gold, US$23.00/oz silver, US$1,000/oz palladium, US$1,000/oz platinum and US$13.00/lb cobalt. Of note is the implied gold/silver ratio of 87.0x, which compares with the current ratio of 83.0x (after a notably more significant move in the silver price than in the gold price over FY24 to date), but a longer-term average of 60.1x since gold was demonetised in August 1971. At the updated standardised prices indicated, our production forecast of 591.6koz gold equivalent (AuE) for FY24 is towards the middle of WPM’s guidance range of 550–620koz AuE, although our gold equivalent sales forecast of 544.5koz is more conservative (see Exhibit 10).

Otherwise, readers will note that our longer-term production forecasts are very close to WPM’s guidance for the period FY29–33. However, at the moment, these exclude any contribution from either Kutcho or Fenix (together capable of adding c 29k GEOs to production) or Toroparu or WPM’s royalty interests. Note that both our, and WPM’s, estimates necessarily exclude potential future stream acquisitions (of which we expect there to be a number, given the time horizon involved).

In the light of Q124 results, we have updated our FY24 forecasts to those shown in Exhibit 10. Relative to our earlier numbers, the main changes in our estimates reflect the changes in anticipated mine production previously discussed, updated metals prices and lower ‘other’ income to reflect less interest earned on lower cash balances throughout the year, after a large proportion of FY24’s anticipated PMPA investments were made in Q1. As before, we also assume the imposition of global minimum tax (GMT – see our note, dated 11 March 2024) from Q224. In line with WPM’s Q423/FY23 results announcement, we have also assumed higher quarterly dividend payments throughout the year than in FY23, to reflect WPM’s new, progressive dividend policy.

Our updated adjusted basic EPS forecast of US$1.323 per share for FY24 is nevertheless near to consensus, as shown below:

WPM is a multi-asset company that has shown a willingness and desire to buy streams in the past to maintain production and maximise shareholder returns. As a result, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY24, in the case of WPM (as with Newmont and Endeavour), we discount forecast cash flows back over four years to the start of FY24 and then apply an ex-growth terminal multiple to forecast cash flows in that year (FY27 cf FY26 previously) based on the appropriate discount rate.

In this case, our estimate of WPM’s ‘terminal’ cash flow in FY27 is US$2.77/share (cf US$2.54/share in FY26 previously).

Assuming 4% growth in nominal cash flows beyond FY26 (ie 0% growth in real cash flows) and applying a discount rate of 9% (being the expected long-term required nominal equity return), our ‘terminal’ valuation of the company at end-FY27 is US$57.89 per share (cf US$52.96/share in FY26 previously), or C$79.19 per share. However, it should be noted that this valuation is inherently conservative in that it assumes zero growth in (real) cash flows beyond FY27. This is inconsistent with the gold price, which has risen at a compound average annual growth rate of 7.4% per year from 1967 to 2023, a simple average annual growth rate of 9.3% per year (cf a compound average inflation rate over the same period of 4.0%) and a compound average real annual growth rate of 3.0% per year.

It is also inconsistent with WPM’s longer-term historical performance, wherein operational cash flows have increased at a compound average annual growth rate of 19.6% pa for the 18 years between FY05 and FY23, while its operational cash flows per share have increased at a compound average annual growth rate of 13.2% pa.

If we instead assume that cash flows per share increase at a compound average annual growth rate of 7.4% (ie the average compound average annual growth rate in the gold price from 1967 to 2023 cf 4.0% above), then our ‘terminal’ valuation of Wheaton increases many times to US$190.48/share, or C$260.55/share and our current valuation to US$138.94/share, or C$190.06/share.

Stated alternatively, Wheaton’s current share price of C$76.39 appears to be discounting future compound annual average increases in cash flow per share of just 5.0% pa from FY27, which is only very fractionally higher than the long-term average rate of US inflation of 4.0% pa.

A summary of these valuations with respect to their cash flow growth rate assumptions is as follows:

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.8x current year basic underlying EPS, excluding impairments (cf 42.2x Edison and 43.5x Refinitiv consensus FY24e currently – see Exhibit 16).

Applying this 30.8x multiple to our EPS forecast of US$1.78 in FY27 (cf US$1.60 in FY26 previously) implies a potential value per share for WPM of US$54.75 or C$74.89 in that year.

From a relative perspective, WPM’s valuation compares as follows to its most prominent peers:

Of note are the relatively slow pace of earnings and cash flow increases implied by the market’s consensus multiples between years one and three (ie FY24 and FY26) when we anticipate that the company will have begun an aggressive upward trajectory in both GEOs produced, EPS and cash flows per share. This could be explained by the market anticipating either a slower ramp-up in production and/or that the ramp-up will be partially offset by lower metals prices. Also of note is the market’s lower forecast yields for WPM (especially in year one), which seems to imply that it believes that WPM will cut its dividend – a contingency that we would regard as highly unlikely, given its new, progressive dividend policy, except in extenuating circumstances (eg materially lower precious metals prices).

As at 31 March, WPM had US$306.1m in cash on its balance sheet and no debt outstanding under its US$2bn revolving credit facility. As such (including a modest US$5.9m in lease liabilities), it had US$300.2m in net cash overall after generating US$219.4m in operating cash flow and investing US$463.5m (cf US$464.2m in Q423 but US$98.9m in Q323), after a high proportion of the contingent payments for FY24 were made in Q124 – in particular with respect to the Platreef project and, to a lesser extent, KZK.

In addition, WPM had long-term investments, in the form of equity share- and warrant-holdings, in listed companies in the sum of US$246.7m as at end-March (cf US$246.7m as at end-December and US$200.9m as at end-September), equivalent to US$0.54/share. Subsequent to the quarter’s end however, Wheaton disposed of its investment in Hecla for gross proceeds of US$177m.

For FY23, WPM generated US$750.8m from operating activities, before consuming US$646.6m in investing activities and paying out US$265.1m in forecast dividends. In FY24, we estimate that WPM will generate US$954.7m from operating activities (cf US$887.4m previously), before consuming US$917m in investing activities (cf US$890.6m previously) and paying out an increased US$280.9m in dividends under the influence of WPM’s new, progressive dividend policy. However, readers should note that the timing of precious metals purchase agreement payments is uncertain and, inasmuch as investments are advanced or delayed, it is possible that WPM could register either a larger or smaller net cash position on its balance sheet by the year end than that forecast. In any event however, all other things being equal, in the absence of any major new asset acquisitions, we do not expect WPM to need recourse to its debt facilities at any point in the foreseeable future.