Wheaton Precious Metals — Continuing where Q1 left off

WPM’s Q124 results were released after the market close on 7 August and exceeded our forecasts, as well as the market’s. In general, WPM produced more than we had expected, albeit sales were in line, as were costs, such that earnings from operations were within US$0.23m (or 0.1%) of our prior forecast. As such, the main points of variance were G&A costs (US$1.9m better) and ‘other’ income (also US$1.9m better) to result in a US$4.1m positive variance at the pre-tax level. Reported tax (for both Q1 and Q2 combined, but both reported together in Q2) was similarly US$2.5m (4.7%) better than our prior assumption, with the result that earnings were US$6.6m (5.7%) above our forecasts for the period. Although WPM adjusted Q1’s tax reported in Q2 (since Global Minimum Tax has now been substantially enacted in Canada) back out again, this exercise merely flipped it back into Q1 (effectively) and therefore had no material effect on FY24 estimates. Exhibit 1, below, provides a full analysis of WPM’s results on both an ‘as reported’ and ‘underlying’ basis with respect to both the prior quarter and our prior expectations:

As a consequence, WPM’s actual EPS was 5.9% above our expectations and at the top of the market range from immediately before the results were announced:

At the level of the individual mines, Stillwater, Antamina, Los Filos, Zinkgruvan and Neves-Corvo all outperformed our expectations in terms of both production and sales, while San Dimas, Sudbury, Constancia, Marmato and Cozamin underperformed. Peñasquito and Voisey’s Bay outperformed in terms of production, but underperformed in terms of sales, which may augur well for the future. WPM’s biggest asset, Salobo, outperformed in terms of production, but was in line with our estimates in terms of sales after a slightly larger than normal under-sale of material during the period. Nevertheless, gold attributable to WPM from Salobo was almost exactly at the level that would be expected, given the mine’s copper output (see Exhibit 3). Given its performance in H1, we would be surprised if this asset did not outperform our slightly conservative production expectations for the full year, notwithstanding a 31-day hiatus in production at Salobo III in July on account of a conveyor belt fire (see Exhibit 4):

Silver sales were 1.2Moz, or 24.5%, below production, which was at approximately the same level as Q1 and Q423, but relatively large in the historical context, where the long-term average under-sales rate is 12.1% (±11.0% standard deviation) since Q112. By contrast, at 7,667oz (9.0% of production) the gold under-sale rate reverted to close to its historical average of 7.1% per quarter (±17.6%). In this case, all of the relative gold under-sale could be attributed to Salobo, which sold 8,263oz, or 13.1%, fewer ounces than it produced.

As a result, silver ounces produced but not yet delivered (PBND) to WPM increased to 2.8Moz and now equate to 1.65 months of our forecast FY24 production level (cf 1.41 at the end of Q124), albeit this is still below WPM’s target level of two months for silver production. Gold ounces PBND increased by a more modest 3,553oz (or 4.1%) to 89,667oz, or 3.07 months of estimated FY24 production (cf 3.02 months at the end of Q124), 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 in mid-May, we forecast that the total G&A charge for WPM in Q2 would be US$19.1m, of which 56% would have been attributable to non-stock-based G&A expenses and 44% to stock-based expenses. In the event, non-stock-based G&A expenses were almost exactly in line with our forecast (and guidance) for the quarter, 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), after WPM’s share price gave up some of its earlier gains by end June.

In the event, however, stock-based G&A expenses were almost exactly in line with the level we would have expected them to be at, given WPM’s share price on 30 June in US dollar terms (see Exhibit 8, below) and hence we are continuing to make this methodology the basis of our forecasts for G&A going forwards.

WPM provided detailed production guidance for FY24 and beyond on 20 February. This guidance is summarised below relative to our updated FY24 forecasts in light of the Q1 and Q2 results:

In formulating our forecasts, we are assuming that production will commence at Goose, Platreef and Blackwater in late FY24 or early FY25, to be followed by production from Curipamba and Marathon in FY26, Curraghinalt, Kudz ze Kayah (KZK) and Santo Domingo 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 88.9x, 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 598.7koz gold equivalent (AuE) for FY24 is towards the upper end of WPM’s guidance range of 550–620koz AuE, although our gold equivalent sales forecast of 542.7koz 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 estimates, and WPM’s, necessarily exclude potential future stream acquisitions (of which we expect there to be a number, given the time horizon involved).

In the light of Q224 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 higher ‘other’ income to recognise more interest earned on higher cash balances throughout the year in anticipation of the precious metal purchase agreement (PMPA) payments relating to Marmato, Copper World, Santo Domingo and Curipamba being pushed back from FY24 to FY25.

Our updated adjusted basic EPS forecast of US$1.354 per share for the full year is nevertheless near to consensus, which has also been gently rising since the time of our last note in mid-May, when it was US$1.24/share for FY24, within a range of US$0.91–1.74/share.

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) based on the appropriate discount rate.

In this case, our estimate of WPM’s ‘terminal’ cash flow in FY27 has remained unchanged at US$2.77/share.

Assuming 4% growth in nominal cash flows beyond FY27 (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$57.78 per share (cf US$57.89/share previously), or C$79.34 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 WPM increases many times to US$190.13/share, or C$261.06/share and our current valuation to US$139.47/share, or C$191.51/share.

Stated alternatively, WPM’s current share price of C$74.57 appears to be discounting future compound annual average increases in cash flow per share of just 4.8% 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 40.1x Edison and 39.3x LSEG Data & Analytics consensus FY24e currently – see Exhibit 16).

Applying this 30.8x multiple to our EPS forecast of US$1.77 in FY27 (cf US$1.78 previously) implies a potential value per share for WPM of US$54.61 or C$74.99 in that year.

In the meantime, WPM is maintaining its premium rating relative to its peers, albeit it also appears good value within the context of future dividend expectations, especially in years 2 and 3:

Readers will note our relatively high year 2 P/E ratio. This arises from our relatively low precious metals forecasts of US$2,004/oz Au and US$23.72/oz Ag for FY25. These will be revisited early in the next financial year.

As at 30 June, WPM had US$534.5m in cash on its balance sheet and no debt outstanding under its US$2bn revolving credit facility. Including a modest US$5.7m in lease liabilities, it therefore had US$534.5m in net cash after generating US$234.4m in operating cash flow and receiving a further US$131.7m from investing activities (cf a US$463.5m outflow in Q124, a US$464.2m outflow in Q423 but a US$98.9m outflow in Q323), largely from the disposal of its Hecla shareholding and after relatively few PMPA investments during the quarter.

In addition, WPM had long-term investments, in the form of equity share holdings and warrant holdings, in listed companies in the sum of US$88.1m as at end-June (cf US$246.7m as at end March), equivalent to US$0.19/share, after it disposed of its investment in Hecla for gross proceeds of US$177.1m.

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 it will generate US$973.3m from operating activities (cf US$954.7m previously), before consuming US$824.2m in investing activities (cf US$917.0m previously) and paying out an increased US$281.1m in dividends under the influence of its 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.