Melrose Industries — Engine for growth

Melrose Industries (LSE: MRO)

Last close As at 20/05/2024

GBP6.70

74.80 (12.57%)

Market capitalisation

GBP8,167m

More on this equity

Research: Industrials

Melrose Industries — Engine for growth

Melrose Industries’ investor event focused on the key GKN Aerospace engines business (Edison estimate 81% of FY23 profit). The industry-wide Risk and Revenue Sharing Partnerships (RRSPs) and its position as a design partner on both the next-generation engines under development are testament to the capabilities and technologies it possesses. Investment continues in order to maintain such leading positions as seen in additive fabrication and manufacturing, which includes a new £40m facility to support signed commercial contracts. This will put GKN Aerospace at the forefront of this step change technology, promoting future partnerships and commercial opportunities.

David Larkam

Written by

David Larkam

Analyst, Industrials

Industrials

Melrose Industries

Engine for growth

Investor event

Aerospace & defence

24 October 2023

Price

459p

Market cap

£6.3bn

Net debt (£m) at 30 June

553

Shares in issue

1,345m

Free float

98.7%

Code

MRO

Primary exchange

LSE

Secondary exchange

N/A

Share price performance

%

1m

3m

12m

Abs

(2.0)

(13.5)

110.1

Rel (local)

2.8

(9.0)

110.5

52-week high/low

543.2p

223.4p

Business description

Melrose is a focused aerospace group through its subsidiary GKN Aerospace, with activities in engine components and structures, operating in both metallic and composite materials. The group has significant risk reward sharing partnership investments on multiple engine programmes.

Next events

Trading update

November 2023

Analyst

David Larkam

+44 (0)20 3077 5700

Melrose Industries is a research client of Edison Investment Research Limited

Melrose Industries’ investor event focused on the key GKN Aerospace engines business (Edison estimate 81% of FY23 profit). The industry-wide Risk and Revenue Sharing Partnerships (RRSPs) and its position as a design partner on both the next-generation engines under development are testament to the capabilities and technologies it possesses. Investment continues in order to maintain such leading positions as seen in additive fabrication and manufacturing, which includes a new £40m facility to support signed commercial contracts. This will put GKN Aerospace at the forefront of this step change technology, promoting future partnerships and commercial opportunities.

Year end

Revenue (£m)

PBT*
(£m)

EPS*
(p)

DPS
(p)

P/E
(x)

Yield
(%)

12/22

2,957

62

4.1

2.3

112.0

0.5

12/23e

3,410

288

16.8

4.2

27.2

0.9

12/24e

3,605

415

24.9

6.3

18.4

1.4

12/25e

4,068

616

37.5

9.4

12.2

2.0

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

Technology driving OE partnerships and RRSPs

Over 40 years GKN Aerospace migrated its engines business from being a component supplier to an integrated design and build partner through its capabilities and technology offering. As a consequence, it has developed strong relationships with all the key engine manufacturers, as demonstrated by the breadth of its 19 RRSPs. The next technology wave is likely to be in additive fabrication and manufacturing (AF/AM), offering the potential for next-generation engines and the retrofit of engines currently in production given the improvements in performance that can be achieved. GKN is investing £40m in a new facility for the engines business to support migrating current business to AF/AM. The success of this adoption, assisted by the sector’s supply constraints, could prove the tipping point to adoption of this technology and a key growth driver past 2025, when growth of the civil new build market may moderate.

Trading update

The full year margin for the Engines division is now expected to be c 24%. This reduces the increase required to meet the 2025 target of 28%, while management is forecasting medium-term margins for the business of at least 30%. A full trading update is due in mid-November. We have not changed our forecasts or valuation (628p a share) as per our note in September on the interim results.

GTF engine programme additional costs

Management provided guidance as to the expected impact in a September release. RTX announced that it anticipates costs of $1.5bn for rectification work and $4.5–5.5bn for compensation. As a full partner, GKN Aerospace will be exposed to these liabilities. Management sees potential upside from the life extension that will be required for other older engines over this period.

Overview

Melrose Industries’ recent investor event focused on the quality and potential of the Engines division, reflecting its dominance in the group. Edison expects it to generate 81% of profit in 2023 and still account for 71% of profits in 2025, when the Structures division margins are due to have recovered significantly (3% to 9%). Our key takeaways can be summarised as:

Strategic strength of the business – The strength of the group’s market position and relationships with the OEMs are driven by internal capabilities and technologies.

Financial progression – Management has confidence in the financial performance, both top line and margin, through 2025 and beyond.

Strong market positions, technology driven

The overarching slide provided by management for the capital markets day emphasised the strong relationships and market positions that the business has with all major engine original equipment groups.

Exhibit 1: Key operational strengths

Source: Melrose Industries capital markets presentation October 2023

This is best evidenced by the group’s portfolio of 19 RRSPs. These stretch across the industry in terms of both engine supplier and short/long haul.

Exhibit 2: RRSP snapshot

Source: Melrose Industries capital markets presentation May 2023

Key to achieving these positions have been GKN Aerospace’s technical and manufacturing capabilities, which differentiates the business, promoting it up the value chain as a ‘customer partner’ rather than a ‘make-to-print’ component manufacturer. The timeline/product chart in Exhibit 3 highlights this shift over time. It is further evidenced with full design and manufacturing responsibility for the exit nozzle of the Ariane 6 rocket and as the only global player involved in the technical phase on the only future jet programmes currently in development, the Pratt & Whitney (P&W) GTF next-generation and the CFMI (GE Safran JV) RISE.

Exhibit 3: GKN Aerospace’s key engine programme timeline

Source: Melrose Industries capital markets presentation October 2023

The technology that GKN Aerospace can bring along with its manufacturing know-how enables it to add value in the development and design phase, including design for manufacture. Technical developments have been driving significant engine performance improvements, while on the production side developments have been more incremental. This could be about to change as the industry looks to embrace the use of AF/AM. Additive offers the potential to significantly reduce component weight, enhancing an engine’s performance, and reduce manufacturing cost, time, emissions and waste, providing direct financial and sustainability benefits.

Additive fabrication and manufacturing

Overview

Metallic aerospace components are currently forged or cast before being machined. The formation of the raw component (forging/casting) ensures the required mechanical properties of the component. However, ‘subtractive machining’ is wasteful. Additive approaches the challenge from the other direction, ‘building’ a component from the ground up, adding material layer by layer to create a component in a ‘near net shape’ form. The benefits of AF/AM are numerous:

Elimination of the casting/forging process: the potential to eliminate a high-energy consuming process.

Reduced waste and cost: forgings may have as much as 90% of material machined away during the manufacturing process, leading to significant scrap/waste, often of expensive alloys. Such subtractive manufacturing requires significant machine hours, which is costly and increases the total machining capacity required. AM also offers the potential for a lower carbon footprint.

Shorter lead times and reduced supply chain complexity: the ability to produce a component from a single machine will reduce the complexities of the supply chain where multiple components from different suppliers are combined into a single casing or component. This is particularly important at present given the sector’s capacity constraints and lengthening lead times.

Increased design flexibility: AM can produce more complex components, permitting non-essential elements of a component to be designed out. This in turn reduces the weight of a component and improves the overall performance of an engine. These benefits are more likely to be realised on a next-generation design.

Aerospace and additive

The aerospace industry has a number of characteristics that make it suitable for the adoption of AF/AM. Components are complex, use high-value alloys, tend to have high levels of material subtraction from machining, require exacting tolerances and are relatively low volume. However, the conservative and safety/regulation drivers mean that the industry is still very much at the early stage of adoption.

One of the leaders and greatest advocates of AM is General Electric (GE), which acquired two equipment manufacturers in 2016, Arcam and Concept Laser. GE Aerospace has been 3D-printing the fuel nozzle tip for the LEAP engine since 2015. It is a relatively small component yet, according to GE, it consolidates 20 parts into one single structure, achieving a 25% weight reduction and 30% cost efficiency improvement.

GKN Aerospace Engines additive fabrication and manufacturing

GKN Aerospace has been developing its AM capabilities for many years and has a global technology centre in Fort Worth, Texas, primarily for the Structures division. The engines business, based in Sweden, has been working on two technologies:

Laser metal deposition: a laser creates a melt pool on the surface of a component into which the metal powder or wire is inserted, with the laser fusing the two together, similar to welding, and subsequently constructing the required additional metal structure from the additional metal added.

Powder bed fusion: thin layers of metallic powder, often 0.1mm thick, are addressed by a laser or electron beam to fuse the material. The accuracy of the energy applied enables a tight tolerance lattice to be formed, by refreshing the powder and adding layer on layer so the structure of a component is built up.

GKN Aerospace Engines already supplies components that include additive fabrication features. For instance, the intermediate compressor case (ICC) for the Trent XWB-84 with laser wire additive non-structural components, as per the probe insert inspection nodes highlighted in Exhibit 5.

Exhibit 4: Trent XWB-84 ICC

Exhibit 5: AM inspection nodes

Source: GKN Aerospace

Source: Melrose Industries capital markets presentation May 2023

Exhibit 4: Trent XWB-84 ICC

Source: GKN Aerospace

Exhibit 5: AM inspection nodes

Source: Melrose Industries capital markets presentation May 2023

The full benefit that AM brings can be seen in Exhibit 6. Of particular note is the improved buy-to-fly ratio, reflecting the level of material required to that which ends up in the final component. In the fan case example, there is an improvement from 11:1 to 3:1, leading to a 70% reduction in scrap.

Exhibit 6: AM benefit example

Source: Melrose Industries capital markets presentation May 2023. Note: 1 Entry into service. 2 Relates to savings during material processing.

To support the development, GKN Aerospace purchased Permanova Lasersystem in October 2022. Based in Gothenburg, Permanova is a leader in advanced laser technology and laser metal deposition systems.

Exhibit 7: Permanova Permaflex AM station

Source: Permanova Lasersystem

The GKN Aerospace Engines business is now entering scale commercialisation, arguably a first for the aerospace supply sector, with a £40m investment in laser wire, based on Permanova equipment, to be followed by power bed utilising third-party equipment from SLM (SLM announced GKN Aerospace had order two of its latest 12 laser machines in September).

The programme will start by replacing complete machining of forged parts to partial machining of a smaller, tighter tolerance forging with AF/AM used to create additional features such as flanges before moving to powder metal generation to replace the base forging, enabling a fully additive produced component. This staggered adoption will permit tighter control and assist in any certification requirements, albeit these should be limited as a replacement part rather than a newly designed component. The business plans to migrate three parts currently being fully machined: a low-pressure compressor case, a fan case and a turbine rear frame component, to include laser deposition AF elements. The second stage will involve replacing the forgings with powder bed AM modules and hence, with the AF elements, a fully additive fabricated component. Full production is expected from 2025.

Financial impact

Management has pointed to a return on investment of over 20%. It has not indicated the potential margin expectations, but the savings in terms of materials and processing requirements should permit a win-win situation for both GKN Aerospace and the engine OE. More importantly, the success of establishing such a capability as the industry grapples with supply chain issues potentially offers accelerated opportunities.

Financial performance in 2025 and beyond

Management provided a short update on trading, leaving the detailed update until November. The progression expectations for the Engines business were updated, with 2023 margin guidance of 24% and further upside post 2025 above the targeted 28% to 30% and beyond.

Exhibit 8: Financial target bridge

Source: Melrose Industries capital markets presentation October 2023

The RRSPs form a critical part of the improvement programme. These were a key focus for the capital markets event in May, including the accounting treatment for these complex long-term agreements (see Edison note page 4). The key elements are:

The production phase: supply of components generates significant revenue, but profit is only achievable if the manufacturing cost is below the pre-agreed ‘should cost’ rate and hence tends to be relatively low. In addition, IFRS 15 contract accounting requires an element of the aftermarket profit to be recognised, as the delivery of an engine triggers the aftermarket and associated income. Melrose has looked to be conservative on such profit recognition due to the level of uncertainty and the timing mismatch with cash.

The aftermarket phase: GKN Aerospace’s work is largely complete at this point as its components are ‘life of engine’. Hence the costs incurred are relatively low (admin, technical development but no cost of goods) and consequently the margin on the revenue received is very high.

Exhibit 9 provides a breakdown of the anticipated cash generation from OE delivery and from the aftermarket. The aftermarket is expected to grow significantly faster than the OE deliveries, reflecting the growth in air traffic, additional engines added to the pool and the position of many of the group’s RRSPs in terms of key maintenance shop visits. Hence there will be a clear mix benefit to margin as the richness of the aftermarket increases.

Exhibit 9: RRSP cashflow expectations

Source: Melrose Industries capital markets presentation October 2023. Note: ¹ Pre-tax. ² OE sale of expected future engine deliveries on current programmes. ³ After market on delivered engines. After market of expected future engine deliveries on current programmes. 5 Pre-tax.

Exhibit 10 shows a breakdown of our Engine division forecasts. Note that these are above the latest guidance (2023 operating margin of 24%) but highlight how the individual components of the division are expected to perform in generating the improved performance broadly in line with management’s views. Engines is expected to generate 81% of group operating profit in 2023 and 71% of profits in 2025.

Exhibit 10: Edison forecast breakdown for the Engines division

2023e

Annual growth

2025e

Revenue (£m)

RRSPs – aftermarket

200

30%

338

RRSPs OE

488

13%

622

Government partnerships

125

10%

151

Repairs

100

40%

196

Original equipment

313

13%

399

Total Engines

1,250

1,707

Operating margin (%)

RRSPs – aftermarket

85%

80%

RRSPs OE

8%

8%

Government partnerships

10%

10%

Repairs

25%

25%

Original equipment

15%

15%

Total Engines

25%

28%

Operating profit (£m)

RRSPs – aftermarket

170

270

RRSPs OE

39

50

Government partnerships

13

15

Repairs

25

49

Original equipment

47

60

Restructuring benefits

15

40

Total Engines

308

484

Source: Edison Investment Research

Exhibit 11: Financial summary

£m

2022

2023e

2024e

2025e

Year to 31 December

IFRS

IFRS

IFRS

IFRS

INCOME STATEMENT

Revenue

 

2,957

3,410

3,605

4,068

EBITDA

 

292

505

638

842

Operating profit (before amort. and excepts.)

147

350

476

672

Amortisation of acquired intangibles

(260)

(300)

(300)

(300)

Exceptionals

(157)

(200)

(50)

(10)

Reported operating profit

(270)

(150)

126

362

Net Interest

(85)

(62)

(61)

(56)

Profit Before Tax (norm)

 

62

288

415

616

Profit Before Tax (reported)

 

(355)

(212)

65

306

Reported tax

99

0

0

0

Profit After Tax (norm)

48

227

328

487

Profit After Tax (reported)

(256)

(212)

65

306

Minority interests

(5)

0

0

0

Discontinued operations

(80)

0

0

0

Net income (normalised)

43

227

328

487

Net income (reported)

(341)

(212)

65

306

Average Number of Shares Outstanding (m)

1,406

1,350

1,317

1,297

EPS - normalised (p)

 

4.1

16.8

24.9

37.5

EPS - normalised fully diluted (p)

 

4.1

17.2

26.2

36.0

EPS - basic reported (p)

 

(18.6)

(15.7)

5.0

23.6

Dividend (p)

2.33

4.20

6.30

9.38

Revenue growth (%)

8.5

15.4

10.1

12.5

Gross Margin (%)

14.3

35.0

36.0

37.0

EBITDA Margin (%)

9.9

14.8

17.7

20.7

Normalised Operating Margin

5.0

10.3

13.2

16.5

BALANCE SHEET

Fixed Assets

 

11,114

5,391

5,123

4,857

Intangible Assets

6,882

3,498

3,198

2,898

Tangible Assets

2,599

821

853

887

Investments & other

1,633

1,072

1,072

1,072

Current Assets

 

2,873

1,524

1,596

1,689

Stocks

1,025

568

596

634

Debtors

1,426

849

892

947

Cash & cash equivalents

355

85

85

85

Other

67

23

23

23

Current Liabilities

 

2,978

1,564

1,607

1,670

Creditors

2,347

1,248

1,311

1,394

Tax and social security

141

32

32

32

Short term borrowings

63

63

63

63

Other

427

221

201

181

Long Term Liabilities

 

3,841

1,676

1,372

831

Long term borrowings

1,433

742

1,045

809

Other long term liabilities

2,408

935

326

21

Net Assets

 

7,168

3,675

3,740

4,046

Minority interests

39

0

0

0

Shareholders' equity

 

7,129

3,675

3,740

4,046

CASH FLOW

Operating Cash Flow

292

505

638

842

Working capital

(148)

(79)

(52)

(46)

Exceptional & other

(83)

(170)

(140)

(80)

Tax

(8)

(67)

(87)

(129)

Net operating cash flow

 

53

189

359

587

Capex

(31)

(190)

(194)

(204)

Acquisitions/disposals

(7)

0

0

0

Net interest

(82)

(62)

(54)

(52)

Equity financing

0

(150)

(350)

0

Dividends

(77)

(20)

(64)

(95)

Other

Net Cash Flow

(144)

(233)

(304)

236

Opening net debt/(cash)

 

343

487

720

1,023

Closing net debt/(cash)

 

487

720

1,023

787

Source: Melrose Industries accounts, Edison Investment Research


General disclaimer and copyright

This report has been commissioned by Melrose Industries and prepared and issued by Edison, in consideration of a fee payable by Melrose Industries. 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 2023 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

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This Communication is being distributed in the United Kingdom and is directed only at (i) persons having professional experience in matters relating to investments, i.e. investment professionals within the meaning of Article 19(5) of the Financial Services and Markets Act 2000 (Financial Promotion) Order 2005, as amended (the "FPO") (ii) high net-worth companies, unincorporated associations or other bodies within the meaning of Article 49 of the FPO and (iii) persons to whom it is otherwise lawful to distribute it. The investment or investment activity to which this document relates is available only to such persons. It is not intended that this document be distributed or passed on, directly or indirectly, to any other class of persons and in any event and under no circumstances should persons of any other description rely on or act upon the contents of this document.

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General disclaimer and copyright

This report has been commissioned by Melrose Industries and prepared and issued by Edison, in consideration of a fee payable by Melrose Industries. 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 2023 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.

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London │ New York │ Frankfurt

20 Red Lion Street

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London │ New York │ Frankfurt

20 Red Lion Street

London, WC1R 4PS

United Kingdom

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Research: Metals & Mining

Wheaton Precious Metals — Honing Q323 numbers

Wheaton Precious Metals’ (WPM’s) Q323 results are scheduled for 9 November. This note adjusts our forecasts – principally for Q3 – for metals prices ( 0.3% simple average for the quarter since our last note), Penasquito (returning to production from mid October, rather than end August), a new life of mine production profile at Constancia (in the aftermath of a site visit in late September) and production at Salobo, Sudbury and Voisey’s Bay (in the aftermath of Vale’s production and sales report on 17 October). We have also re-phased capital payments for Salobo III from FY23 to FY24 and FY25.

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