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Research: Metals & Mining
Wheaton Precious Metals’ (WPM’s) Q222 results are scheduled for release after the market close in North America on 11 August. This note reduces our forecasts for Q2–Q422 and FY23–24 in light of details about Salobo’s operational performance contained in Vale’s Q2 production and sales update, released on 19 July, and of recent changes in precious metals prices. It also analyses WPM’s sale of its Keno Hill stream for a consideration of US$135m (which we calculate will provide the buyer with an internal rate of return of 3.06%).
Wheaton Precious Metals |
Incorporating Salobo Q222 operating results |
Q222 results preview |
Metals and mining |
27 July 2022 |
Share price performance
Business description
Next events
Analyst
Wheaton Precious Metals is a research client of Edison Investment Research Limited |
Wheaton Precious Metals’ (WPM’s) Q222 results are scheduled for release after the market close in North America on 11 August. This note reduces our forecasts for Q2–Q422 and FY23–24 in light of details about Salobo’s operational performance contained in Vale’s Q2 production and sales update, released on 19 July, and of recent changes in precious metals prices. It also analyses WPM’s sale of its Keno Hill stream for a consideration of US$135m (which we calculate will provide the buyer with an internal rate of return of 3.06%).
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/20 |
1,096.2 |
503.2 |
112 |
42 |
29.0 |
1.3 |
12/21 |
1,201.7 |
592.1 |
132 |
57 |
24.6 |
1.7 |
12/22e |
1,086.0 |
526.3 |
116 |
60 |
27.9 |
1.8 |
12/23e |
1,413.5 |
687.7 |
152 |
63 |
21.3 |
1.9 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles and exceptional items.
Vale Q2 production and sales update
On 19 July, Vale announced that, although mine movement had continued to improve throughout Q2 at Salobo, concentrate production was adversely affected by plant performance owing to delays in ramp-up after planned and unplanned maintenance. Moreover, it stated that it expected further maintenance work to continue into H222. As a consequence, copper production at Vale declined by 12.7% in Q2 relative to Q1 and the company reduced its guidance for group-wide production for the full year by 19.0% (albeit not all attributable to Salobo).
Valuation: Precious metal prices already discounted
Adopting a CAPM-type method to value WPM and applying a nominal discount rate of 9.0% to cash flows implies a ‘terminal’ valuation for Wheaton at end-FY26 of US$58.42 (C$75.27) per share, assuming zero subsequent long-term growth in real cash flows. Stated alternatively, we calculate that WPM’s current share price of C$41.82 discounts a long-term compound annual average growth rate in nominal cash flows per share of just 2.4% pa, which is lower than the equivalent average rate of US inflation over the past 30 years. Otherwise, after the recent falls in precious metals prices 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$35.08, or C$44.19 or £29.16 in FY22, based on a 30.1x historical multiple of earnings (ie all of the recent precious metal price declines appear to be already discounted in WPM’s share price) and US$59.75, or C$76.98 or £49.67 in FY26. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than those of its peers on 69% of common valuation measures, regardless of whether Edison or consensus forecasts are used. If WPM’s shares were instead to trade at the average level of its peers, then we calculate that its FY22 share price should be US$41.02, or C$52.86 or £34.10 (based on Edison forecasts). Alternatively, if precious metals return to favour, then we believe that a near-term US$58.65 (C$75.56 or £48.75) per share valuation is possible.
FY22 guidance and forecasts
Ahead of Wheaton’s Q222 results, which are scheduled for release on 11 August, we have revised our short-term financial forecasts to reflect the following developments:
■
On 19 July, Vale announced that, although mine movement had continued to improve throughout Q2 at Salobo, concentrate production was adversely affected by plant performance owing to delays in ramp-up after planned and unplanned maintenance. Moreover, it stated that it expected further maintenance work to continue into H222. As a consequence, copper production at Vale declined by 12.7% in Q2 relative to Q1 and Vale reduced its guidance for group-wide production for the full year by 19.0% (albeit not all attributable to Salobo). Gold sales at Vale similarly reduced by 15.5% in Q222 relative to Q122, albeit again not all attributable to Salobo. As a result, rather than assuming a recovery in output and sales at Salobo in Q2 relative to Q1, we are now assuming that production attributable to Wheaton will have fallen by 12.8%, from 44.9koz Au to 39.2koz Au, and that sales will have fallen 14.5% to 36.4koz. Moreover, while we are continuing to assume that production will recover to 53.8koz, we assume that this will now only be achieved in Q4 (cf Q3 previously).
■
A summary of the changes in our metals prices assumed for both Q222 and the remainder of the year is as follows:
Exhibit 1: Edison FY22 metals price forecasts
Metal (units) |
Q222 price forecast |
Remainder of FY22 price forecast |
||||
Previous forecast |
Current forecast |
Change |
Previous forecast |
Current forecast |
Change |
|
Gold (US$/oz) |
1,875 |
1,873 |
-0.1 |
1,835 |
1,717 |
-6.4 |
Silver (US$/oz) |
22.67 |
22.63 |
-0.2 |
21.30 |
18.64 |
-12.5 |
Palladium (US$/oz) |
2,090 |
2,091 |
0.0 |
1,887 |
2,014 |
+6.7 |
Cobalt (US$/lb) |
35.03 |
34.92 |
-0.3 |
32.65 |
22.68 |
-30.5 |
Simple average |
-0.2 |
-10.7 |
Source: Edison Investment Research
In addition, we have reduced our medium-term nominal gold prices for FY23 and FY24 by 7.6% and 3.9%, to US$1,749/oz and US$1,818/oz, respectively.
In the light of these changes, Edison has updated its quarterly estimates for WPM for Q2–Q422 as follows:
Exhibit 2: WPM FY22 forecast, by quarter*
US$000s |
Q122 |
Q222e (prior) |
Q222e |
Q322e (prior) |
Q322e |
Q422e (prior) |
Q422e |
FY22e (current) |
FY22e (prior) |
Silver production (koz) |
6,206 |
5,901 |
5,901 |
5,781 |
5,531 |
5,781 |
5,531 |
23,168 |
23,668 |
Gold production (oz) |
79,087 |
93,386 |
78,728 |
86,641 |
79,312 |
90,264 |
90,264 |
327,391 |
349,377 |
Palladium production (koz) |
4,488 |
4,750 |
4,750 |
4,750 |
4,750 |
4,750 |
4,750 |
18,738 |
18,738 |
Cobalt production (klb) |
234 |
347 |
347 |
347 |
347 |
347 |
347 |
1,274 |
1,274 |
Silver sales (koz) |
5,553 |
5,901 |
5,223 |
5,781 |
4,867 |
5,781 |
5,391 |
21,033 |
23,015 |
Gold sales (oz) |
77,901 |
93,354 |
73,030 |
86,609 |
73,572 |
90,232 |
90,232 |
314,735 |
348,095 |
Palladium sales (oz) |
4,075 |
4,731 |
3,860 |
4,731 |
3,860 |
4,731 |
4,731 |
16,527 |
18,268 |
Cobalt sales (klb) |
511 |
347 |
297 |
347 |
297 |
347 |
347 |
1,452 |
1,551 |
Avg realised Ag price (US$/oz) |
24.19 |
22.67 |
22.63 |
21.30 |
18.73 |
21.30 |
18.64 |
21.12 |
22.35 |
Avg realised Au price (US$/oz) |
1,870 |
1,875 |
1,873 |
1,835 |
1,722 |
1,835 |
1,717 |
1,792 |
1,853 |
Avg realised Pd price (US$/oz) |
2,339 |
2,090 |
2,091 |
1,887 |
2,000 |
1,887 |
2,014 |
2,109 |
2,041 |
Avg realised Co price (US$/lb) |
34.61 |
35.03 |
34.92 |
32.65 |
23.58 |
32.65 |
22.68 |
29.58 |
33.84 |
Avg Ag cash cost (US$/oz) |
5.10 |
5.16 |
5.17 |
5.09 |
4.94 |
5.10 |
4.97 |
5.04 |
5.11 |
Avg Au cash cost (US$/oz) |
477 |
448 |
454 |
450 |
450 |
448 |
446 |
456 |
455 |
Avg Pd cash cost (US$/oz) |
394 |
376 |
376 |
340 |
360 |
340 |
363 |
373 |
361 |
Avg Co cash cost (US$/lb) |
5.76 |
6.31 |
6.29 |
5.88 |
4.24 |
5.88 |
4.08 |
5.16 |
5.93 |
Sales |
307,244 |
330,781 |
273,426 |
302,293 |
232,562 |
308,941 |
272,800 |
1,086,032 |
1,249,259 |
Cost of sales |
|||||||||
Cost of sales, excluding depletion |
69,994 |
76,272 |
63,473 |
72,004 |
59,776 |
73,531 |
70,123 |
263,365 |
291,801 |
Depletion |
57,402 |
64,880 |
54,092 |
61,532 |
52,414 |
65,488 |
63,641 |
227,549 |
249,303 |
Total cost of sales |
127,396 |
141,152 |
117,565 |
133,536 |
112,190 |
139,020 |
133,764 |
490,914 |
541,103 |
Earnings from operations |
179,848 |
189,629 |
155,861 |
168,757 |
120,372 |
169,921 |
139,037 |
595,118 |
708,156 |
Expenses and other income |
|||||||||
– General and administrative** |
20,118 |
12,325 |
11,335 |
16,965 |
15,319 |
16,965 |
16,965 |
63,738 |
66,374 |
– Foreign exchange (gain)/loss |
0 |
0 |
|||||||
– Net interest paid/(received) |
1,422 |
1,220 |
1,220 |
1,216 |
1,220 |
1,200 |
1,210 |
5,072 |
5,058 |
– Other (income)/expense |
229 |
229 |
229 |
||||||
Total expenses and other income |
21,769 |
13,545 |
12,555 |
18,182 |
16,539 |
18,165 |
18,176 |
69,039 |
71,661 |
Earnings before income taxes |
158,079 |
176,084 |
143,306 |
150,576 |
103,833 |
151,756 |
120,861 |
526,079 |
636,495 |
Income tax expense/(recovery) |
72 |
250 |
250 |
250 |
250 |
250 |
250 |
822 |
822 |
Marginal tax rate (%) |
0.0 |
0.1 |
0.2 |
0.2 |
0.2 |
0.2 |
0.2 |
0.2 |
0.1 |
Net earnings |
158,007 |
175,834 |
143,056 |
150,326 |
103,583 |
151,506 |
120,611 |
525,257 |
635,673 |
Average no. shares in issue (000s) |
450,915 |
451,500 |
451,500 |
451,500 |
451,500 |
451,500 |
451,500 |
451,354 |
451,354 |
Basic EPS (US$) |
0.350 |
0.389 |
0.317 |
0.333 |
0.229 |
0.336 |
0.267 |
1.16 |
1.41 |
Diluted EPS (US$) |
0.350 |
0.379 |
0.308 |
0.324 |
0.223 |
0.326 |
0.260 |
1.13 |
1.37 |
DPS (US$) |
0.15 |
0.15 |
0.15 |
0.16 |
0.15 |
0.15 |
0.15 |
0.60 |
0.61 |
Source: Edison Investment Research. Note: *Excluding impairments, impairment reversals and exceptional items. **Forecasts now include stock-based compensation costs. Totals may not add up owing to rounding.
Our basic EPS forecast of US$1.16/share for FY22 compares with a consensus forecast of US$1.37/share (source: Refinitiv, 26 July 2022), although we suspect that the consensus figure does not yet fully reflect the recent declines in precious metals prices (or, alternatively, that it assumes a swift rebound to the status quo ante). In this context, it is worth noting that Edison’s gold and silver price forecasts for the remainder of the year are now US$1,717/oz and US$18.64/oz, respectively, which are those prevailing at the time of writing (cf US$1,835/oz and US$21.30/oz previously).
Exhibit 3: WPM Edison cf consensus EPS forecasts (US$/share), Q222–FY24e
Q122 |
Q222e |
Q322e |
Q422e |
Sum Q1–Q422e |
FY22e |
FY23e |
FY24e |
|
Edison forecasts |
0.350 |
0.317 |
0.229 |
0.267 |
1.163 |
1.164 |
1.52 |
1.54 |
Mean consensus |
0.35 |
0.33 |
0.34 |
0.35 |
1.37 |
1.37 |
1.41 |
1.41 |
High consensus |
0.35 |
0.38 |
0.39 |
0.43 |
1.55 |
1.53 |
1.74 |
2.02 |
Low consensus |
0.35 |
0.29 |
0.27 |
0.28 |
1.19 |
1.20 |
1.15 |
1.08 |
Source: Refinitiv, Edison Investment Research. Note: As at 26 July 2022.
Keno Hill stream sale
On 5 July, Wheaton announced that it had entered into a definitive agreement with Hecla Mining to terminate its silver stream over Alexco Resource’s Keno Hill Silver District for US$135m in Hecla shares, upon the occasion of the takeover of Alexco by Hecla (subject to shareholder, regulatory and other approvals, but otherwise ‘friendly’ in nature). As a consequence, subsequent to the closing of the transaction, Wheaton will own c 5.6% of Hecla's outstanding share capital, albeit the exact number will only be calculated immediately before the closing date.
While in effect selling a silver stream runs contrary to Wheaton’s normal business plan of acquiring precious metals streams, it demonstrates WPM’s ability to remain flexible in matters of value and to strategically identify opportunities both inside and outside its portfolio that create value for its shareholders.
Wheaton originally paid an upfront consideration of US$50m on its purchase of the Keno Hill stream in October 2008. Although the terms of the agreement were subsequently amended and the value of the stream was also subsequently impaired, in 2015 Wheaton estimated a fair value less a cost to sell (FVLCS) of the stream of US$33.4m. In its FY21 annual report, it estimated a total carrying value for its Canadian silver interests (of which the Keno Hill stream may be considered a subset) of US$28.1m. Both these estimates suggest that, upon closing (presumably in Q3), Wheaton will recognise a profit in excess of US$100m on the sale of its stream. For now, we are declining to include this in our forecasts in Exhibit 2 and Exhibit 9 on account of its ‘exceptional’ nature.
Analysed with respect to future cash flows, Edison estimates that Wheaton has sold for a consideration of US$135m a stream that had an NPV10 of US$109.7m (at output rates that Alexco was not yet achieving). Stated alternatively, we calculate that Hecla’s internal rate of return on its purchase will be 3.06% (absenting any practical mining considerations from the purchase of the stream), which is very similar to the 2.809% yield to maturity currently available from the US 10-year Treasury bond in US dollar terms (source: Bloomberg, 26 July 2022).
In this case, the sale also positions Wheaton to continue to have one of the strongest balance sheets in the industry (see the ‘Financials’ section, below). Note that, for the purposes of our forecasts, we have removed any production contribution from Keno Hill to Wheaton from 1 July 2022.
Valuation
Absolute
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 FY22, in the case of WPM (as with other major gold producers, such as Newmont and Endeavour), we discount forecast cash flows back over five years from the start of FY22 and then apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY26) based on an appropriate discount rate.
In this case, our estimate of WPM’s ‘terminal’ pre-financing cash flow in FY26 has reduced slightly from US$2.90/share to US$2.81/share (not least as a result of the exclusion of Keno Hill production and sales), as shown below:
Exhibit 4: WPM cash flow per share and related valuation (US$/share), FY22–26 |
Source: Edison Investment Research. Note: Valuation assumes ex-growth cash flow per share growth rate of 4.0% pa post-FY26 in nominal terms, which equals the average US rate of CPI inflation since 1972 (ie 0% per annum growth in real terms). |
Assuming 4% growth in nominal cash flows beyond FY26 (ie 0% growth in real cash flows) and applying a discount rate of 9.0% (being the expected long-term required nominal equity return), our terminal valuation of the company at end-FY26 is US$58.42/share (cf US$59.98/share previously), or C$75.27/share, which, when discounted back to FY22 in combination with intervening cash flows, results in a valuation at the start of FY22 of US$42.15/share, or C$54.30/share. However, this valuation is inherently conservative in that it is based on the assumption of 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 7.6% per annum since 1968 and at a simple average annual growth rate of 9.7% per annum:
Exhibit 5: Gold price annual performance, 1968–2021 |
Source: Edison Investment Research (underlying data: US Bureau of Labor Statistics, Bloomberg, kitco.com, South African Chamber of Mines) |
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 23.2% pa for the 16 years between FY05 and FY21, while its operational cash flows per share have increased at compound average annual growth rate of 15.8% pa.
Stated alternatively, we can say that WPM’s current share price of C$41.82 discounts a long-term compound annual average growth rate in cash flows per share of 2.4%, which is no more than the compound average annual increase in US consumer prices from 1991 to the end of 2021.
Historical
Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.1x current year basic underlying EPS, excluding impairments (cf 27.9x Edison or 23.7x Refinitiv consensus FY22e – see Exhibit 7).
Exhibit 6: WPM’s historical current year P/E multiples, 2005–21 |
Source: Edison Investment Research |
Applying this 30.1x multiple to our EPS forecast of US$1.98 in FY26 (cf US$2.06 previously) implies a potential value per share for WPM in that year of US$59.75 or C$76.98. However, the graph above suggests that the investing environment post-2017 has been able to support an enhanced WPM multiple relative to earlier years. We would ascribe this observation to macro-economic uncertainty and loose monetary policy combining to create a supportive environment for precious metals prices. As such, we believe that a multiple of 38.6x (the average of FY18–21) may still be supported in the event of a return to favour of precious metals and precious metals stocks. In this case, applying a 38.6x earnings multiple to our updated EPS forecast of US$1.52 in FY23 (cf US$1.72 previously) implies a potential value per share for WPM in that year of US$58.65 or C$75.56. Even at such share price levels however, a multiple of 38.6x would still put WPM’s shares on little more than a comparable multiple relative to that of Franco-Nevada (see Exhibit 7, below).
Relative
From a relative perspective, it is notable that WPM is cheaper than its peers on 69% (25 out of 36) of the valuation measures observed in Exhibit 7 regardless of whether Edison or consensus forecasts are used:
Exhibit 7: WPM comparative valuation versus a sample of operating and royalty/streaming companies
P/E (x) |
Yield (%) |
P/CF (x) |
|||||||
Year 1 |
Year 2 |
Year 3 |
Year 1 |
Year 2 |
Year 3 |
Year 1 |
Year 2 |
Year 3 |
|
Royalty companies |
|||||||||
Franco-Nevada |
32.7 |
33.4 |
32.9 |
1.0 |
1.1 |
1.1 |
23.6 |
23.0 |
23.4 |
Royal Gold |
27.3 |
23.3 |
24.4 |
1.4 |
1.4 |
1.5 |
15.2 |
13.4 |
14.0 |
Sandstorm Gold |
32.6 |
32.9 |
34.7 |
0.0 |
0.0 |
0.0 |
11.4 |
11.6 |
11.1 |
Osisko |
31.4 |
23.0 |
20.2 |
1.7 |
1.7 |
1.7 |
14.4 |
11.7 |
11.1 |
Average |
31.0 |
28.1 |
28.0 |
1.0 |
1.0 |
1.1 |
16.1 |
14.9 |
14.9 |
WPM (Edison forecasts) |
27.9 |
21.3 |
21.1 |
1.8 |
1.9 |
2.1 |
18.8 |
14.5 |
14.1 |
WPM (consensus) |
23.7 |
23.1 |
23.1 |
1.8 |
2.1 |
2.5 |
16.5 |
15.5 |
15.0 |
Implied WPM share price (US$)* |
36.09 |
42.81 |
43.08 |
59.09 |
60.93 |
65.08 |
27.89 |
33.36 |
34.35 |
Source: Refinitiv, Edison Investment Research. Note: Peers priced on 26 July 2022. *Derived using Edison forecasts and average consensus multiples.
In this context, it is worth noting that Edison forecasts imply that WPM’s EPS, DPS and cash flow will increase in FY23 and FY24 (relative to FY22), not least under the influence of the company’s increasing production profile. By contrast, consensus forecasts appear to indicate that the market expects WPM’s EPS and cash flow to be broadly unchanged in FY23 and FY24 relative to FY22, implying that it is either not expecting any production/sales increase, or that the degree of any production/sales increase will be offset by an approximately equal and opposite move in precious metals prices.
Research: TMT
Mirriad’s decision to exit the Chinese market, following weaker than expected trading and restructuring of the Tencent contract, is a clear setback and we adjust our estimates accordingly. Nevertheless, the opportunity in North America dwarves all other markets, and here the company reports good progress. We look to see evidence of new partners being signed up and the progression of existing ones towards revenue generation to demonstrate that the company is still well placed to monetise its IP and platform.
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