Wheaton Precious Metals — Bagging elephants in British Columbia

Wheaton Precious Metals (TSX: WPM)

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Research: Metals & Mining

Wheaton Precious Metals — Bagging elephants in British Columbia

On 13 December, Wheaton Precious Metals (WPM) announced that it has entered into a definitive agreement to acquire a gold and a silver stream relating to the Blackwater gold project in British Columbia for US$441m. For its consideration, Wheaton will be entitled to receive 8% of the payable gold produced at Blackwater (dropping to 4% once 279,908oz have been delivered) and 50% of the payable silver produced (dropping to 33% once 17.8Moz have been delivered). For these streams, it will make ongoing cash payments equal to 35% of the spot gold price and 18% of the spot silver price (rising to 22% once the upfront cash consideration of the silver stream has been recouped). This note analyses the Blackwater stream.

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

Metals & Mining

Wheaton Precious Metals

Bagging elephants in British Columbia

Blackwater stream analysis

Metals & mining

16 December 2021

Price

C$51.53

Market cap

C$23,215m

C$1.2871/US$, US$1.3257/£

Net cash at end-September (US$m) excluding US$3.1m in lease liabilities.

372.5

Shares in issue

450.5m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

LSE, NYSE

Share price performance

%

1m

3m

12m

Abs

(10.9)

(10.1)

(4.5)

Rel (local)

(6.9)

(10.4)

(19.5)

52-week high/low

C$59.16

C$45.11

Business description

Wheaton Precious Metals (WPM) is the world’s pre-eminent ostensibly precious metals streaming company, with 33 high-quality precious metals streams and early deposit agreements over mines in Mexico, Canada, Brazil, Chile, the US, Argentina, Peru, Sweden, Greece, Portugal and Colombia.

Next events

Q421/FY21 results

March 2022

Q122 results

May 2022

Q222 results

August 2022

Analyst

Lord Ashbourne

(formerly Charles Gibson)

+44 (0)20 3077 5724

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

On 13 December, Wheaton Precious Metals (WPM) announced that it has entered into a definitive agreement to acquire a gold and a silver stream relating to the Blackwater gold project in British Columbia for US$441m. For its consideration, Wheaton will be entitled to receive 8% of the payable gold produced at Blackwater (dropping to 4% once 279,908oz have been delivered) and 50% of the payable silver produced (dropping to 33% once 17.8Moz have been delivered). For these streams, it will make ongoing cash payments equal to 35% of the spot gold price and 18% of the spot silver price (rising to 22% once the upfront cash consideration of the silver stream has been recouped). This note analyses the Blackwater stream.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/19

861.3

242.7

54

36

74.1

0.9

12/20

1,096.2

503.2

112

42

35.7

1.0

12/21e

1,234.6

608.9

135

57

29.6

1.4

12/22e

1,408.0

690.1

153

65

26.2

1.6

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

Adding c 37koz AuE to production in FY26–30

First gold from Blackwater is 2½ to 3½ years away. Once in production however, we estimate that the project will add 37koz gold equivalent (AuE) on average pa, or 4.6%, to WPM’s production profile in FY26–30 (Exhibit 3) and that it will increase WPM’s basic EPS by 5–15c/share (c 2.4–7.0%) over the first six years of its productive life to FY30 – potentially worth c US$1.48–4.44/share in those years. In addition, incorporating the Blackwater project into our forecasts brings our production estimates to within 1.1% of WPM’s guidance for FY22–30 (Exhibit 5).

Re-proving the concept

Strategically, the acquisition of the two streams further enhances and diversifies Wheaton’s existing portfolio of low-cost, high-quality, long-life mines as well as demonstrating that it is both able to conclude business in a COVID-19 environment and that its terminal markets are far from saturated or even mature.

Valuation: Paying Canadian dollars for US dollars

In normal circumstances and assuming no material purchases of additional streams in the foreseeable future (which we think unlikely), we forecast a value per share for WPM of US$61.19 or C$78.75 or £46.16 in FY23, based on a multiple of earnings. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than those of its peers on at least 66% of common valuation measures if Edison forecasts are used or 58% of the same valuation measures if consensus forecasts are used. Hence, if WPM’s shares were to trade at the same level as the average of its peers, then we calculate that its year one share price should be US$47.39 (C$60.99 or £35.75), based on our forecasts for FY21. Alternatively, if precious metals return to favour and WPM to a premium rating, we believe an US$82.98 (C$104.85 or £62.59) per share valuation is still achievable (see page 8).

Blackwater stream acquisition

On 13 December, WPM announced that it has entered into a definitive agreement to acquire an existing gold stream held by New Gold in respect of gold production from the Blackwater gold project in British Columbia. In addition, it has also entered into a precious metal purchase agreement with Artemis Gold in respect of silver production, also from the Blackwater project. The upfront consideration for the two streams will be US$441m, for which Wheaton will be entitled to receive 8% of the payable gold production from Blackwater until 279,908oz have been delivered (thereafter dropping to 4% for the remainder of the life of the mine) and 50% of the payable silver production until 17.8Moz have been delivered (thereafter dropping to 33%) and will make ongoing cash payments equal to 35% of the spot gold price and 18% of the spot silver price (rising to 22% of the spot price of silver once the silver production payment is equal to the upfront cash consideration). A summary of the terms of each stream is as follows:

Exhibit 1: Blackwater project streams’ terms summary

Stream

Consideration

(US$m)

Amount of metal

Ongoing production payment terms

Gold stream

300

8% of payable gold production until 279,908oz delivered, then dropping to 4% of gold produced for the remainder of the life of the mine.

35% of spot price.

Silver stream

141

50% of payable silver production until 17.8Moz delivered, then dropping to 33% of silver produced for the remainder of the life of the mine.

18% of the spot price of silver until the value of silver delivered less the ongoing silver production payments is equal to the upfront cash consideration, at which point the silver production payments increase to 22% of the spot silver price

Total

441

Source: Edison Investment Research, Wheaton Precious Metals

Blackwater gold project

The Blackwater gold project is a top-tier gold and silver project located in central British Columbia, approximately 446km north-east of Vancouver, accessible via major highway and access/service roads. It is 100% owned by Artemis Gold, which has a 100% recorded interest in 329 mineral claims covering an area of 148,902ha distributed among the property and the Capoose, Auro, Key, Parlane and RJK claim blocks.

The Blackwater deposit itself is an example of an intermediate sulphidation epithermal-style gold-silver deposit. Resources and reserves delineated to date are as follows:

Exhibit 2: Blackwater project reserves and resources

Category

Tonnage

(Mt)

Gold grade (g/t)

Contained gold (koz)

Silver grade (g/t)

Contained silver (koz)

Category

Tonnage

(Mt)

Gold grade (g/t)

Contained gold (koz)

Silver grade (g/t)

Contained silver (koz)

Measured

427.1

0.65

8,905

5.5

75,802

Proven

325.1

0.74

7,800

5.8

60,400

Indicated

169.6

0.51

2,766

8.5

46,578

Probable

9.2

0.80

200

5.8

1,700

Inferred

16.9

0.45

246

12.8

6,953

Possible*

-

-

-

-

-

Total

Total

334.3

0.75

8,000

5.8

62,200

Source: Artemis Gold. Note: Resources cut-off grade 0.20g/t AuE; resources are reported inclusive of reserves; *Archaic. Mineral resources are reported using the 2014 CIM Definition Standards and are estimated in accordance with the 2019 CIM Best Practices Guidelines; mineral reserves are reported using the 2014 CIM Definition Standards.

Mineralisation is hosted within felsic to intermediate composition volcanic rocks that have undergone extensive silicification and hydrofracturing in association with pervasive stockwork veined and disseminated sulphide mineralisation. It is strongly controlled by north-west-south-east trending structures characterised by zones of tectonic brecciation and chloritic gouge, crosscut by a major north-south-trending fault that was used to subdivide the resource block model into two structural domains: one to the east of it and one to the west. The alteration minerals most commonly identified included muscovite, high- and low-temperature illite, ammonium-bearing illite, smectite, silica, biotite and chlorite. Gold-silver mineralisation is associated with a variable assemblage of pyrite-sphalerite-marcasite-pyrrhotite ± chalcopyrite ± galena ± arsenopyrite (± stibnite ± tetrahedrite ± bismuthite).

Disseminated gold-silver mineralisation is defined by an east-west trending tabular-conical shaped deposit with a lateral extent of up to 1,300m east-west × 950m north-south. Mineralisation remains open at depth in the south-western part of the deposit as well as to the north and north-west. The centre of the deposit has an average thickness of 350m and, where open, a vertical extension of up to 600m. The mineralised zone plunges shallowly to the north and north-west with inferred steep, north plunging higher-grade mineralised shoots, measuring tens of metres thick, probably influenced by near-vertical structural intersections.

The development of the project is envisaged to involve the construction and operation of a conventional open pit and associated ore processing facilities, initially targeting high-grade, near surface ore. It will commence with a nominal milling rate of 6.0Mtpa (Phase 1), before being expanded twice, to 12.0Mtpa in year 6 (Phase 2) and 20 Mtpa in year 11 (Phase 3). A combined gravity circuit and whole ore leach will be used for recovering gold and silver. Variability composite results averaged 93.7% total gold extraction with gravity gold recovery of 34.2% and a 65% silver recovery.

Open-pit operations are anticipated to run for 17 years (excluding 15–18 months of pre-production mining). Following mining operations, stockpiled low-grade material will be processed for an additional five years, resulting in a total life of mine of 22 years.

Full details for the project may be found on Artemiss website and also in the feasibility study prepared for it by Ausenco in September 2021. A summary of the principal findings of the study’s economic analysis is as follows:

base case after-tax NPV5% of C$2.15bn at a long-term gold price of US$1,600/oz and C$1.2658/US$, increasing to C$2.76bn at a US$1,800/oz gold price;

base case after-tax internal rate of return of 32%;

initial development capital cost of C$645m to develop a 6Mtpa Phase 1 open-pit mining and processing operation (cf Artemis’s market capitalisation at the time of writing of C$1,054m); life of mine capital cost of C$2,248m; and

an after-tax payback period on initial capex of 2.3 years.

Stream analysis

Artemis has disclosed that it expects major construction of the Blackwater project to commence in Q222, with production commencing in Q124. For a project of this magnitude, we would expect a construction period of approximately three years, albeit the final year of construction would overlap with the first year of production. As such, we believe that this timeline is achievable although, given potential delays and the need to ramp up, it is difficult to assess how much production will be achieved in FY24. For the purposes of Edison’s evaluation of the stream therefore, we have assumed that the first year of full production will be FY25. Any production in FY24 therefore represents upside potential to our valuation and returns calculations.

In the table below we provide an analysis of the estimated cash flows generated as a result of the stream for the first 11 years of its life, including the first eight years of production (incorporating the full Phase 2 expansion, but not the Phase 3 expansion in year 11):

Exhibit 3: Blackwater stream analysis

2022

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

Gold production (oz)

291,000

297,000

297,000

297,000

421,000

476,000

374,000

339,000

Silver production (koz)

1,120

927

946

934

1,223

2,183

2,566

1,296

Gold subject to stream (oz)

23,280

23,760

23,760

23,760

33,680

38,080

29,920

27,120

Silver subject to stream (koz)

560

464

473

467

612

1,092

1,283

648

Nominal gold price (US$/oz)

1,892

1,892

1,929

2,006

2,087

2,170

2,257

2,348

Nominal silver price (US$/oz)

30.78

30.78

31.64

32.91

34.23

35.60

37.03

38.51

Gold costs (US$/oz)

662

662

675

702

730

760

790

822

Silver costs (US$/oz)

5.54

5.54

5.69

5.92

6.16

6.41

6.66

6.93

Gold revenue (US$000s)

44,045

44,953

45,833

47,670

70,283

82,651

67,544

63,678

Silver revenue (US$000s)

17,236

14,266

14,964

15,367

20,929

38,855

47,503

24,954

Total revenue (US$000s)

61,281

59,219

60,797

63,037

91,212

121,506

115,047

88,632

Gold costs (US$000s)

15,416

15,734

16,041

16,685

24,599

28,928

23,640

22,287

Silver costs (US$000s)

3,103

2,568

2,694

2,766

3,767

6,994

8,551

4,492

Total costs (US$000s)

18,518

18,302

18,735

19,451

28,366

35,922

32,191

26,779

Gold cash-flow* (US$000s)

28,629

29,220

29,791

30,986

45,684

53,723

43,904

41,391

Silver cash-flow* (US$000s)

14,134

11,698

12,271

12,601

17,162

31,861

38,953

20,463

Total cash-flow* (US$000s)

42,763

40,918

42,062

43,587

62,845

85,584

82,856

61,853

Estimated gross cash-flow* (US$000s)

(335,250)

(35,250)

(70,500)

42,763

40,918

42,062

43,587

62,845

85,584

82,856

61,853

Source: Edison Investment Research, Artemis/Ausenco Blackwater project feasibility study (September 2021). Note: *Before tax.

Our (nominal in this case) gold forecasts remain unchanged relative to previous notes and are the same as those expounded in our sector note A golden future, published in June 2020.

Readers should note that Edison’s analysis has been performed over the full 22-year life of the Blackwater operation; however, it is only possible to show the first eight years of operation in the table above, owing to space constraints. A number of features of the analysis are nevertheless noteworthy:

We estimate that the gold stream will reduce from 8% to 4% of gold produced in year 11 of the project (albeit invisible in Exhibit 3).

We estimate that the silver stream will reduce from 50% to 33% of silver produced in year 21 of the project.

We estimate that the ongoing production payment for silver will rise from 18% of spot to 22% of spot in year 9 of the project.

Aggregate cash flows from the gold and silver streams (excluding initial investment) are approximately equal over the life of the operation, in the ratio 49.6:50.4 gold:silver, albeit with gold predominating over the earlier years of the operation and silver predominating in the later years.

We estimate an internal rate of return of 10.4% on WPM’s investment over the full 22-year life of the stream in US dollar terms; however, this rises to 11.3% if all of the positive cash flows are advanced by one year (ie if Artemis is able to make FY24 the first full year of production, rather than Edison’s more conservative FY25 assumption).

All other things being equal, we calculate that the Blackwater stream will increase WPM’s basic EPS by a minimum of 5c/share and a maximum of 15c/share (average 7c/share) over the first six years of its productive life to FY30, as follows:

Exhibit 4: WPM estimated EPS uplift as a result of Blackwater stream transaction

FY25

FY26

FY27

FY28

FY29

FY30

EPS uplift (US$/share)

0.05

0.05

0.05

0.05

0.10

0.15

Do. (%)

2.5

2.2

2.3

2.4

4.5

7.0

Source: Edison Investment Research

Formally discounted at Edison’s customary 10% discount rate, we estimate that Blackwater’s life of mine cash flows are worth an immediate US$14.3m, or 3c/share, to WPM. This increases to US$46.2m, or 10c/share, in the event that Artemis is able to make FY24 (rather than FY25) the first full year of production. These valuations rise to US$1.19/share and US$1.21/share, respectively, at the start of FY25. As always however, the project also offers ‘optionality’ to WPM in the form of its operator’s ability to expand and/or extend the life of the project via its ongoing exploration efforts. At currently prevailing year one P/E multiples (eg 29.6x – see Exhibit 7), such increases in EPS (Exhibit 4) could prove to be worth c US$1.48–4.44/share in the year in which they are realised.

FY21 and five-year and 10-year guidance

At the time of its Q420/FY20 results, WPM provided production guidance of 720–780koz AuE for FY21 and well as five-year average production guidance of 810,000oz AuE per annum and maiden 10-year average guidance of 830,000oz AuE per annum. At the same time as announcing its Q321 results however, Wheaton took the opportunity to refine its guidance to 735–765koz AuE in FY21, albeit its longer-term guidance remained unchanged. This compares with Edison’s updated forecasts in the wake of the Blackwater announcement, as follows:

Exhibit 5: WPM precious metals production – Edison forecasts cf guidance

FY21e

FY21–25 average

Implied FY22–25 average*

FY21–30 average

Implied FY26–30 average**

Previous Edison forecasts

Silver production (Moz)

25.8

Gold production (koz)

340.6

Cobalt production (klb)

2,311

Palladium production (koz)

21.7

Gold equivalent (koz)

749.4

819

804

Current Edison forecasts

Silver production (Moz)

25.8

Gold production (koz)

340.6

Cobalt production (klb)

2,311

Palladium production (koz)

21.7

Gold equivalent (koz)

749.4

827

841

WPM guidance

Silver production (Moz)

25.5–26.0

Gold production (koz)

330–345

Cobalt & palladium production (koz AuE)

45–55

Palladium production (koz)

N/A

Gold equivalent (koz)

735–765

810

825

830

850

Source: WPM, Edison Investment Research forecasts. Note: *Adjusted for assumed 749.4koz AuE production in FY21. **Adjusted for assumed 810koz AuE production in FY21–25 (inclusive).

WPM’s updated five-year and 10-year guidance is now based on standardised pricing assumptions of US$1,800/oz Au, US$25.00/oz Ag, US$2,300/oz palladium (Pd) and US$17.75/lb cobalt (Co). Of note in this context is an implied gold/silver ratio of 72.0x, which compares with its current ratio of 81.4x and a long-term average of 61.5x (since gold was demonetised in 1971). Readers will otherwise note that the execution of the Blackwater transaction and its inclusion into Edison’s forecasts brings Edison’s longer-term production forecasts to within 1.1% of WPM’s guidance for the period FY22–30.

Other longer-term growth opportunities

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 at that point scheduled for H222 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 for this expansion, which WPM estimates will be c US$550–650m in FY23, in return for which it will be entitled to its full 75% attributable share of expanded gold production. This compares to WPM’s purchase of a 25% stream from Salobo in August 2016 for a consideration of US$800m (see our note 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 it paid for its original 25% stream in February 2013.

According to Vale’s Q321 performance report, the Salobo III mine expansion is now 81% complete (cf 77% at the end of Q221, 73% at the end of Q121, 68% at the end of Q420, 62% at the end of Q320, 54% at the end of Q220, 47% at the end of Q120, 40% at the end of Q419 and 27% at the end of Q319) and remains on schedule for start-up in H222.

Once Salobo III has been completed, however, WPM believes reserves and resources could support a further 33% capacity increase at Salobo, from 90ktpd to 120ktpd (denoted Salobo IV). In addition to its long-term underground mining potential, WPM believes such an expansion could still be supported by output from the open pit. Under the terms of its agreement with Vale, there would be no additional payment due from WPM in respect of this expansion, although Vale could exercise a right to alter the timing of the incremental payment due for Salobo III.

Pascua-Lama

WPM’s contract with Barrick provided for a completion test that, if unfulfilled by 30 June 2020, would result in WPM 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 which point it would have no further streaming interest in the mine). Given the test was unfulfilled, WPM had the right to an estimated US$252.3m (the carrying value of Pascua-Lama in WPM’s accounts) repayment from Barrick in FY20. Given the long-term optionality provided by the Pascua-Lama project, however, WPM instead opted not to enforce the repayment of its entitlement, but to maintain its streaming interest in the project (which was originally expected to deliver an attributable 1.7–12.0Moz silver pa, averaging 5.2Moz Ag pa, to WPM at a cost of US$3.90/oz (inflating at 1% per year).

Rosemont

Another major longer-term project with which WPM has a streaming agreement for attributable gold and silver production is Rosemont Copper in Arizona.

The proposed Rosemont development is near a number of large porphyry-type producing copper mines and would be one of the largest three copper mines in the United States, 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 is estimated to be c 2.7Moz Ag pa and c 16,100oz Au pa.

Rosemont’s operator, Hudbay, has received both a Mine Plan of Operations from the US Forest Service and a Section 404 Water Permit from the US Army Corps of Engineers (in March 2019), which was effectively the final material administrative step before the mine could start development. Subsequently, Hudbay indicated it would seek board approval to start construction work by the end of CY19, which would have enabled first production ‘by the end of 2022’. In the meantime, it started early works to run concurrently with financing activities (including a potential joint venture partner).

On 31 July 2019, however, the US District Court for the District of Arizona issued a ruling relating to a number of lawsuits challenging the US Forest Service’s issuance of the Final Record of Decision effectively halting construction, 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 Forest Service had ‘no factual basis to determine that Rosemont had valid unpatented mining claims’ on 2,447 acres and the claims were invalid under the Mining Law of 1872.

In response, Hudbay said it believed the ruling to be without precedent and 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 10 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 of the proposed mine on the environment. Hudbay also pointed out that various agencies had accepted the company could operate the mine in compliance with environmental laws. As a result, Hudbay has appealed the ruling to the Ninth Circuit Court of Appeals, which it expects to be successful, not least as a result of there being legal precedents for its waste disposal plan. As per its MD&A for the year ended December 2020, final briefs relating to its appeal were filed in November 2020 and the oral hearing was completed in early February 2021, such that Hudbay expects a ruling from the Ninth Circuit in the near future. Nevertheless, as an alternative, it is also able to adapt its mine and waste plan to accommodate its waste dumps on privately owned, patented land alone, if necessary.

In the meantime, Hudbay has continued to explore in and around the area of the mine and, on 22 September, announced the intersection of additional high-grade copper sulphide and oxide mineralisation on its wholly owned patented mining claims (Copper World). To date, seven deposits have been identified at Copper World with a combined strike length of over 7km. As of 30 June approximately 166 holes had been completed at Copper World, totalling over 91,000 feet, on the back of which Hudbay expects to publish an initial inferred mineral resource estimate for Copper World shortly. These mineral resources will then form the basis for a preliminary economic assessment on the project, expected to be released H122. Note, the Copper World discovery is included in Wheaton’s area of interest under its PMPA with Hudbay.

Once in production, we estimate Rosemont will contribute c 16,750oz gold and 2.7Moz silver to WPM’s production profile in return for an upfront payment of US$230m in two instalments of US$50m and US$180m (neither of which has yet been paid) and this production is included in our financial forecasts from FY25.

Other potential future growth opportunities

WPM reports that its corporate development team remains ‘exceptionally busy’. While the majority of deals are now reported to be with development companies in the US$100–300m range (with fewer ‘balance sheet repair’ opportunities), it is also reported there have been a number of approaches made by producing companies for transactions to fund expansion and even to fund M&A activity. In the first instance, WPM would fund any such transactions via the US$2bn available under its revolving credit facility, and, potentially, its US$300m at-the-market equity programme.

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

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

the 30% of the gold output at Constancia that is not subject to any streaming arrangement.

Otherwise, WPM also has streaming agreements with other potential producing mines, including Navidad and Cotabambas, and a recently acquired 2.0% net smelter return royalty interest with the Brewery Creek mine in the Yukon in Canada.

Valuation

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.0x current year basic underlying EPS, excluding impairments (cf 29.6x Edison or 29.9x Refinitiv consensus FY21e – see Exhibit 7).

Exhibit 6: WPM’s historical current year P/E multiples, 2005–20

Source: Edison Investment Research

Applying this 30.0x multiple to our (unchanged) EPS forecast of US$2.04 in FY23 would ordinarily imply a potential value per share for WPM of US$61.19 or C$78.75 in that year. However, the graph above suggests the current year multiple has been on a broadly upward trend between FY12 and FY19, on which basis we would argue that a multiple in excess of 40x (as evidenced by FY18 and FY19) could be supported in the event of a return to favour of precious metals and precious metals stocks (not least given the fact that these years were not subject to the extraordinary trials and tribulations experienced in FY20 and so far in FY21). In this case, applying a 40.7x earnings multiple (the average of FY18, FY19 and FY20) to our FY23 EPS forecast of US$2.04 implies a potential value per share for WPM in that year of US$82.98 or C$104.85 (note this analysis implicitly assumes metals prices in FY24 would be experiencing the same sort of increases relative to FY23 that they did in FY20 relative to FY19 and the average multiple would probably then contract again in FY24 as EPS ‘caught up’ with the share price). Even at such share price levels, however, a multiple of over 40.7x would put WPM’s shares on little more than par relative to Franco-Nevada (see Exhibit 7).

In the meantime, from a relative perspective, it is notable that WPM has a lower valuation than the average of its royalty/streaming ‘peers’ on seven out of nine valuation measures if Edison forecasts are used or six out of nine valuation measures if consensus forecasts are used. On an individual basis, it is cheaper than its peers on 66% (24 out of 36) of the valuation measures observed in Exhibit 7 if our estimates are adopted or 58% (21 out of 36) of the same valuation measures if consensus forecasts are adopted.

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 3

Year 1

Year 2

Year 3

Year 1

Year 2

Year 3

Royalty companies

Franco-Nevada

37.3

36.4

35.6

0.9

0.9

0.9

25.6

24.5

24.0

Royal Gold

24.9

24.3

25.7

1.2

1.3

1.3

13.5

13.3

14.0

Sandstorm Gold

35.1

28.2

30.5

0.0

1.2

1.2

13.0

12.4

13.5

Osisko

31.8

28.5

23.8

1.5

1.5

1.5

16.8

14.4

12.6

Average

32.2

29.3

28.9

0.9

1.2

1.2

17.2

16.2

16.0

WPM (Edison forecasts)

29.6

26.2

19.6

1.4

1.6

2.0

20.2

17.9

14.6

WPM (consensus)

29.9

27.2

26.6

1.4

1.5

1.6

20.8

18.8

18.5

Implied WPM share price (US$)*

43.60

44.87

58.91

64.35

53.04

63.98

34.21

36.08

43.91

Source: Refinitiv, Edison Investment Research. Note: Peers priced on 15 December 2021. *Derived using Edison forecasts and average consensus multiples.

Financials: US$372.5m in cash enough to cover capex

At 30 September, WPM had US$372.5m in cash on its balance sheet and no debt outstanding under its US$2bn revolving credit facility, such that (including a modest US$3.1m in leases) it had US$369.4m in net cash overall after US$201.3m of cash generated by operating activities during the quarter (cf US$216.3m in Q221, US$232.2m in Q121 and US$208.0m in Q420).

In the absence of any other immediate calls on its cash, we estimate that Q421 net cash will be more than sufficient to meet its near-term commitments under the Blackwater transaction. Note however that, for the purposes of our financial forecasting in Exhibit 8, below, initial consideration for the Blackwater stream is assumed to be payable in FY22.

Exhibit 8: Financial summary

US$’000s

2016

2017

2018

2019

2020

2021e

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

891,557

843,215

794,012

861,332

1,096,224

1,234,569

1,408,032

1,650,042

Cost of Sales

(254,434)

(243,801)

(245,794)

(258,559)

(266,763)

(292,115)

(326,130)

(343,504)

Gross Profit

637,123

599,414

548,218

602,773

829,461

942,454

1,081,902

1,306,537

EBITDA

 

 

602,684

564,741

496,568

548,266

763,763

880,749

1,008,586

1,233,221

Operating Profit (before amort. and except.)

 

 

293,982

302,361

244,281

291,440

519,874

614,501

694,697

918,030

Intangible Amortisation

0

0

0

0

0

0

0

0

Exceptionals

(71,000)

(228,680)

245,715

(156,608)

4,469

3,934

0

0

Other

(4,982)

8,129

(5,826)

217

387

128

0

0

Operating Profit

218,000

81,810

484,170

135,049

524,730

618,563

694,697

918,030

Net Interest

(24,193)

(24,993)

(41,187)

(48,730)

(16,715)

(5,558)

(4,553)

1,292

Profit Before Tax (norm)

 

 

269,789

277,368

203,094

242,710

503,159

608,943

690,143

919,322

Profit Before Tax (FRS 3)

 

 

193,807

56,817

442,983

86,319

508,015

613,005

690,143

919,322

Tax

1,330

886

(15,868)

(181)

(211)

(448)

(1,000)

(1,000)

Profit After Tax (norm)

266,137

286,383

181,400

242,746

503,335

608,623

689,143

918,322

Profit After Tax (FRS 3)

195,137

57,703

427,115

86,138

507,804

612,557

689,143

918,322

Average Number of Shares Outstanding (m)

430.5

442.0

443.4

446.0

448.7

450.1

450.5

450.5

EPS - normalised (c)

 

 

62

63

48

54

112

135

153

204

EPS - normalised and fully diluted (c)

 

 

62

63

48

54

112

135

149

198

EPS - (IFRS) (c)

 

 

45

13

96

19

113

136

153

204

Dividend per share (c)

21

33

36

36

42

57

65

78

Gross Margin (%)

71.5

71.1

69.0

70.0

75.7

76.3

76.8

79.2

EBITDA Margin (%)

67.6

67.0

62.5

63.7

69.7

71.3

71.6

74.7

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

33.0

35.9

30.8

33.8

47.4

49.8

49.3

55.6

BALANCE SHEET

Fixed Assets

 

 

6,025,227

5,579,898

6,390,342

6,123,255

5,755,441

5,612,220

5,801,581

6,306,640

Intangible Assets

5,948,443

5,454,106

6,196,187

5,768,883

5,521,632

5,370,267

5,559,628

6,064,687

Tangible Assets

12,163

30,060

29,402

44,615

33,931

34,622

34,622

34,622

Investments

64,621

95,732

164,753

309,757

199,878

207,331

207,331

207,331

Current Assets

 

 

128,092

103,415

79,704

154,752

201,831

517,890

727,701

789,579

Stocks

1,481

1,700

1,541

43,628

3,265

2,216

2,528

2,962

Debtors

2,316

3,194

2,396

7,138

5,883

3,382

3,858

4,521

Cash

124,295

98,521

75,767

103,986

192,683

512,291

721,316

782,096

Other

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(19,057)

(12,143)

(28,841)

(64,700)

(31,169)

(46,957)

(50,312)

(52,026)

Creditors

(19,057)

(12,143)

(28,841)

(63,976)

(30,396)

(46,184)

(49,539)

(51,253)

Short term borrowings

0

0

0

(724)

(773)

(773)

(773)

(773)

Long Term Liabilities

 

 

(1,194,274)

(771,506)

(1,269,289)

(887,387)

(211,532)

(16,532)

(16,532)

(16,532)

Long term borrowings

(1,193,000)

(770,000)

(1,264,000)

(878,028)

(197,864)

(2,864)

(2,864)

(2,864)

Other long term liabilities

(1,274)

(1,506)

(5,289)

(9,359)

(13,668)

(13,668)

(13,668)

(13,668)

Net Assets

 

 

4,939,988

4,899,664

5,171,916

5,325,920

5,714,571

6,066,621

6,462,438

7,027,661

CASH FLOW

Operating Cash Flow

 

 

608,503

564,187

518,680

548,301

784,843

900,214

1,011,154

1,233,838

Net Interest

(24,193)

(24,993)

(41,187)

(41,242)

(16,715)

(5,558)

(4,553)

1,292

Tax

28

(326)

0

(5,380)

(2,686)

(448)

(1,000)

(1,000)

Capex

(805,472)

(19,633)

(861,406)

10,571

149,648

(123,027)

(503,250)

(820,250)

Acquisitions/disposals

0

0

0

0

0

0

0

0

Financing

595,140

1,236

1,279

37,198

22,396

0

0

0

Dividends

(78,708)

(121,934)

(132,915)

(129,986)

(167,212)

(256,573)

(293,326)

(353,099)

Net Cash Flow

295,298

398,537

(515,549)

419,462

770,274

514,608

209,025

60,780

Opening net debt/(cash)

 

 

1,362,703

1,068,705

671,479

1,188,233

774,766

5,954

(508,654)

(717,679)

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

(1,300)

(1,311)

(1,205)

(5,995)

(1,462)

0

0

0

Closing net debt/(cash)

 

 

1,068,705

671,479

1,188,233

774,766

5,954

(508,654)

(717,679)

(778,459)

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 £60,000 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.

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.

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 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

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London +44 (0)20 3077 5700

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New York +1 646 653 7026

1185 Avenue of the Americas

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United States of America

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Level 4, Office 1205

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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

1185 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

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 £60,000 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.

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.

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 2021 Edison Investment Research Limited (Edison).

Australia

Edison Investment Research Pty Ltd (Edison AU) is the Australian subsidiary of Edison. Edison AU is a Corporate Authorised Representative (1252501) of Crown Wealth Group Pty Ltd who holds an Australian Financial Services Licence (Number: 494274). This research is issued in Australia by Edison AU and any access to it, is intended only for "wholesale clients" within the meaning of the Corporations Act 2001 of Australia. Any advice given by Edison AU is general advice only and does not take into account your personal circumstances, needs or objectives. You should, before acting on this advice, consider the appropriateness of the advice, having regard to your objectives, financial situation and needs. If our advice relates to the acquisition, or possible acquisition, of a particular financial product you should read any relevant Product Disclosure Statement or like instrument.

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

1185 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

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

1185 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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