Wheaton Precious Metals — Celebrating the Ides of March

Wheaton’s Q4/FY23 results were released after the market close on 14 March, within the context of known metals sales during the periods under review and almost known production (given that the latter can be subject to small retrospective adjustments). In the event however, results were slightly in excess of our forecasts, which were already towards the top end of the analysts’ range. One notable feature of the results was achieved metals prices that were above those prevailing in the market in Q4, which resulted in sales 2.3% (or US$7.2m) in excess of our forecast. This was partly offset by depletion that was US$4.6m higher. At the same time, general and administrative costs were US$3.2m below our prior forecast, approximately offsetting a negative variance in ‘other’ income (mostly interest earned) of US$3.1m. These effects combined to result in a US$2.7m positive variance in earnings before tax and a US$2.9m (or 1.8%) positive variance in net earnings relative to our prior expectations.

As a consequence, Wheaton’s actual EPS were 1.7% above our expectations and 10.0% above the market consensus:

At the level of the individual mines, Constancia, Stillwater, Marmato, Antamina and Neves-Corvo notably outperformed our prior expectations, while San Dimas (unusually), Penasquito, Los Filos, Zinkgruvan and Cozamin slightly underperformed.

Similarly, although Salobo’s performance in terms of gold produced attributable to Wheaton was hugely improved (and near record levels) by the successful ramp-up of the Salobo III expansion project (see Exhibit 4), it slightly underperformed our expectations, given the amount of copper that it produced during the period (Exhibit 3).

Also shown in Exhibit 4 is our forecast quarterly production of gold attributable to WPM from Salobo in FY24 in the light of the company’s guidance.

As expected, silver sales were 1.0Moz, or 24.5%, below production, which compares with a long-term average under-sales rate of 11.8% of production per quarter (±11.0%) and our prior expectation of a 1.3Moz, or 29.7%, under-sale. By contrast, gold sales were 1,652oz, or 1.5%, in excess of production, which compares with a long-term average rate of under-sales of 7.3% of production per quarter (±17.6%) and our prior expectation that sales and production would be aligned. As also expected, the over-sale could be attributed to Salobo after a material shortfall in Q3 when sales lagged the ramp-up of Salobo III.

As a result, silver ounces produced but not yet delivered to Wheaton (PBND) increased to 1.8Moz, although this was less than our prior estimate of 2.4Moz, and equated to 1.29 months of FY23 production (cf 1.68 months predicted). By contrast, gold ounces produced but not yet delivered decreased fractionally, to 99,767oz (cf 95,941oz predicted), or 3.18 months of FY23 production. Note that these compare with WPM’s target levels of two to three months for gold and palladium production and two months for silver production:

At the time of its Q422 results, WPM provided guidance for non-stock general and administrative (G&A) expenses of US$47–50m, or US$11.75–12.50m per quarter, for FY23 (cf US$47–49m in FY22, US$42–44m in FY21 and US$40–43m in FY20), including all employee-related expenses, charitable contributions, etc, but excluding performance share units (PSU) and equity settled stock-based compensation.

Given WPM’s share price movement during the fourth quarter, in our last note, we forecast that its total G&A charge for WPM in Q423 would have been US$21.2m, of which 59% would have been attributable to non-stock-based G&A expenses and 41% to stock-based expenses. In the event, non-stock based G&A expenses were less than that implied by guidance and stock-based G&A expenses were US$2.1m below our forecast (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$3.2m saving in total G&A expenses for the quarter relative to our prior expectations.

As at the end of Q423, the analysis of stock-based G&A expenses relative to the change in WPM’s share price (also in US dollars) over the previous 17 quarters continued to exhibit a close Pearson product moment (correlation) coefficient between the two 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).

At the same time as updating the market for its actual sales and production in FY23, on 20 February, WPM took the opportunity to provide detailed production guidance for FY24 and beyond, which is summarised below relative to guidance and the actual outcome in FY23 and our production forecast, similarly, for FY24 and beyond:

The main change in our longer-term forecasts, relative to our last note, has been to assume the start of production at Curipamba in FY26, compared to FY25 previously.

In the meantime, in 2024, WPM forecasts GEO production to be consistent with levels achieved in 2023, as expected stronger attributable production from Peñasquito and Voisey’s Bay is forecast to be offset by lower production from Salobo, the suspension of operations at Minto and the temporary halting of production at Aljustrel. Attributable production is forecast to increase at Peñasquito as a result of uninterrupted operations and at Voisey’s Bay owing to the transition from the Ovoid pit to the underground mines. Attributable production is forecast to decrease slightly at Salobo owing to lower grades, which are expected to be partially offset by increasing throughput as the Salobo III expansion project continues towards completion. However, we note that, for WPM to not exceed its gold production guidance at least, quarterly production at Salobo will have to fall quite sharply into Q124 and Q224 (see Exhibit 4). In the meantime, WPM anticipates that production from the Blackwater and Platreef projects will commence in Q424, although we have yet to assume any production from either of these projects in FY25, instead preferring to factor in meaningful production only from Q125. As such, we consider the ‘risks’ to WPM’s FY24 guidance to be very much skewed to the upside.

WPM’s updated guidance for FY24 and beyond is based on standardised pricing assumptions of US$2,000/oz gold (cf US$1,850/oz in FY23), US$23.00/oz silver (cf US$24.00/oz), US$1,000/oz palladium (cf US$1,800/oz), US$1,000/oz platinum (cf US$1,100/oz) and US$13.00/lb cobalt (cf US$18.75/lb). Of note is the implied gold/silver ratio of 87.0x, which compares with an equivalent figure of 83.0x in FY23, the current ratio of 86.7x (after a notably more significant move in the silver price than in the gold price over the course of the past week), 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 613.9koz gold equivalent (AuE) for FY24 is towards the top end of WPM’s guidance range of 550–620koz AuE, although our gold equivalent sales forecast of 566.1koz is towards the bottom end of the same range (see Exhibit 10).

Otherwise, readers will note that our longer-term production forecasts are within 1.8% of 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 Q423 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 updated metals prices, a higher depletion charge and lower ‘other’ income to reflect less interest earned on lower cash balances throughout the year, owing to higher than previously forecast levels of investment during the year. As before, we also assume the imposition of global minimum tax (GMT – see our last note, dated 11 March 2024) from Q224. In line with its announcement, we have also assumed a higher quarterly dividend throughout the year, to reflect WPM’s new, progressive dividend policy.

Our updated adjusted basic EPS forecast of US$1.179 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 three years to the start of FY24 and then apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY26) based on the appropriate discount rate.

Relative to our previous note published on 11 March 2024, our estimate of WPM’s ‘terminal’ cash flow in FY26 remains, to all intents and purposes, unchanged at US$2.54 per share.

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-FY26 is US$52.96 per share (cf US$52.72/share previously), or C$71.70 per share. However, it should be noted that this valuation is inherently conservative in that it assumes zero growth in (real) cash flows beyond FY26. 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 7.4% (ie the average compound average annual growth rate in the gold price from 1967 to 2023 cf 4.0% above), then our valuation of Wheaton increases many times to US$174.25/share, or C$235.92/share.

Stated alternatively, Wheaton’s current share price – discounted back to FY24 – appears to be discounting future compound annual average increases in cash flow per share only very fractionally higher than the long-term average rate of inflation (4.2% cf 4.0%).

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 38.2x Edison and 39.2x Refinitiv consensus FY24e currently – see Exhibit 15).

Applying this 30.8x multiple to our unchanged EPS forecast of US$1.60 in FY26 implies a potential value per share for WPM of US$49.28 or C$66.72 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 and EPS and cash flows per share. This could be explained either by the market’s anticipating a slower ramp-up in production 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 in all years, 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 a result, Wheaton is cheaper than its peers on 23 out of 36 common valuation measurements (63%) if Edison forecasts are used, or eight out of 36 of the same valuation measurements (22%) if consensus forecasts are used.

As at 31 December, WPM had US$546.5m in cash on its balance sheet and no debt outstanding under its US$2bn revolving credit facility. As such (including a modest US$6.2m in lease liabilities), it had US$540.3m in net cash overall after generating US$242.2m in operating cash flow, investing US$464.2m (cf US$98.9m in Q323) and paying out US$67.0m in dividends during the quarter. Relative to our prior expectations therefore, operating cash flows were higher, but the final cash, and net cash, balance was lower – principally on account of earlier than expected payments for mineral stream interests (notably Curraghinalt), as well as an expected US$370m instalment to Vale in respect of Salobo III’s successfully concluded completion test during the quarter.

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-December (cf US$200.9m as at end-September), equivalent to US$0.54/share.

For FY23, WPM generated US$750.8m from operating activities (cf US$754.4m forecast), before consuming US$646.6m in investing activities (cf US$584.5m forecast) and paying out US$265.1m in forecast dividends, with the variance in investing activities, in particular, principally attributable to accelerated payments for mineral stream interests.

In FY24, we estimate that WPM will generate US$887.4m from operating activities, before consuming US$890.6m in investing activities (cf US$843.8m previously – owing to the further acceleration of payments relating to the accelerated development of underlying projects) 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 that WPM will require recourse to its debt facilities at any point in the foreseeable future.