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Research: Metals & Mining
On 11 February, Wheaton Precious Metals (WPM) provided production and sales data for FY20. While production was in the top half of WPM’s prior guidance range, there was evidence that sales had not kept pace with output. Uncharacteristically for WPM, we estimate that ounces produced but not yet delivered to WPM probably increased by c 33.6koz gold equivalent in Q420 cf Q320. Both WPM and Edison had previously expected gold equivalent ounces produced but not yet delivered to increase by c 20koz in Q320. When that failed to materialise, we assumed any coronavirus-induced increase in Q4 would be approximately offset by the tendency for WPM’s mining partners to ‘flush though’ sales in the final quarter. We have now adjusted our forecasts for FY20 accordingly. However, we have left our FY21 and longer-term forecasts and valuation ostensibly unchanged, pending information about a material increase in production from WPM at the time of its results on 11 March 2021. In total, we believe the number of ounces produced but not yet delivered has reached a level that means it is more likely to decrease than increase.
Wheaton Precious Metals |
Looking to the long term |
Production update and guidance |
Metals & mining |
17 February 2021 |
Share price performance
Business description
Next events
Analyst
Wheaton Precious Metals is a research client of Edison Investment Research Limited |
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On 11 February, Wheaton Precious Metals (WPM) provided production and sales data for FY20. While production was in the top half of WPM’s prior guidance range, there was evidence that sales had not kept pace with output. Uncharacteristically for WPM, we estimate that ounces produced but not yet delivered to WPM probably increased by c 33.6koz gold equivalent in Q420 cf Q320. Both WPM and Edison had previously expected gold equivalent ounces produced but not yet delivered to increase by c 20koz in Q320. When that failed to materialise, we assumed any coronavirus-induced increase in Q4 would be approximately offset by the tendency for WPM’s mining partners to ‘flush though’ sales in the final quarter. We have now adjusted our forecasts for FY20 accordingly. However, we have left our FY21 and longer-term forecasts and valuation ostensibly unchanged, pending information about a material increase in production from WPM at the time of its results on 11 March 2021. In total, we believe the number of ounces produced but not yet delivered has reached a level that means it is more likely to decrease than increase.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/18 |
794.0 |
203.1 |
48 |
36 |
84.1 |
0.9 |
12/19 |
861.3 |
242.7 |
56 |
36 |
72.1 |
0.9 |
12/20e |
1,094.4 |
498.2 |
108 |
42 |
37.4 |
1.0 |
12/21e |
1,493.9 |
810.4 |
180 |
69 |
22.4 |
1.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, and exceptional items.
Longer-term production increases pending
In addition to its production and sales results for FY20, WPM also provided guidance for FY21 and the periods FY21–25 and FY21–30. While its guidance for FY21 remains effectively unchanged, WPM has now provided guidance for FY21–25 that implies an increase in output of c 10% in FY22–25 relative to its prior estimates, from 750koz to 825koz gold equivalent per year, with further increases to come over FY26–30 (see page 4).
Valuation: Long-term forecasts, valuation unchanged
Pending further details on a longer-term increase in production at WPM in the period FY22–30, we have left our valuation unchanged, although we note the risk now lies to the upside. In our last note on WPM, we wrote that in normal circumstances and assuming no material purchases of additional streams in the foreseeable future (which we think unlikely given its business strategy), we would ordinarily forecast a value per share for WPM of US$53.37 (C$67.44 at current forex rates) in FY21. Given its peers’ valuations at the time, however, and the precious metals investing environment, we believed WPM was capable of supporting a premium valuation that could rise as high as US$75.98 (C$96.01 at current forex) per share and, for the time being, this outlook remains unchanged. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than the averages of its peers on 83% of six common valuation measures using our forecasts and 66% using consensus forecasts.
Summary and conclusions
FY20 production and sales result
On 11 February, WPM provided production and sales data for FY20, which are summarised in the table below relative to our prior forecasts. In addition, we have provided its estimates of the sales and production for Q420 implied from the full-year numbers.
Exhibit 1: WPM FY20 production and sales cf prior Edison forecast and implied Q420 production and sales
Actual FY20 |
Prior Edison FY20 forecast |
Actual/Edison |
Implied Q420 |
Q420 sales shortfall cf production |
||||||
Production |
Sales |
Production |
Sales |
Production (%) |
Sales (%) |
Production |
Sales |
(oz) |
(%) |
|
Gold (oz) |
368,044 |
369,553 |
376,624 |
384,790 |
-2.3 |
-4.0 |
92,936 |
86,243 |
-6,693 |
-7.2 |
Silver (koz) |
22,915 |
19,232 |
22,334 |
20,608 |
+2.6 |
-6.7 |
6,533 |
4,576 |
-1,957 |
-30.0 |
Palladium (oz) |
22,187 |
20,051 |
22,453 |
21,374 |
-1.2 |
-6.2 |
5,672 |
4,591 |
-1,081 |
-19.1 |
Source: Wheaton Precious Metals, Edison Investment Research
In fact, the sales shortfall of 7.2% of gold ounces in Q420 is in line with the historical average since Q112. At 30% of production, the silver sales shortfall is larger than the historical average of 11.4%, although consistent with Q319–Q120, as shown in the graph below:
|
Exhibit 2: WPM gold and silver over/under sales relative to production, Q112–Q320 |
|
|
Source: Edison Investment Research |
Self-evidently, FY20 has been an unusual year, given the tribulations of the coronavirus. Whereas historically, there has been a slight tendency for sales to be ‘flushed through’ by WPM’s mining partners in the fourth quarter of the year, in FY20 there was clear evidence of an acceleration of sales in the second quarter. Similarly, while ounces produced but not yet delivered has had a slight tendency to build up between the first and third quarters in prior years, in FY20 this pattern was evidently partially reversed, with most of the build up occurring in the fourth quarter.
Despite the unusual quarterly patterns of production and sales in FY20, WPM’s update allows us to hone our financial forecasts to reflect actual outcomes for the year, rather than being based entirely on our prior production estimates (note that, given the unpredictability in the trend of sales relative to production, in the absence of any other information, we typically forecast that sales will closely approximate production in individual quarters).
For FY20, we have therefore adjusted our sales forecasts (on which our financial forecasts are based) so they now match WPM’s actual reported sales levels for the year. The results of this process are provided in Exhibit 3 relative to our prior forecasts. In addition, small adjustments have been made to reflect the difference in actual versus forecast precious metals’ prices for the periods in question.
Exhibit 3: Wheaton Precious Metals FY20 forecast, by quarter*
US$000s |
FY19 |
Q120 |
Q220 |
Q320 |
Q420e (previous) |
Q420e (current) |
FY20e |
FY20e |
Silver production (koz) |
22,562 |
6,704 |
3,650 |
6,028 |
5,952 |
22,334 |
||
Gold production (oz) |
406,675 |
94,707 |
88,631 |
91,770 |
101,516 |
376,624 |
||
Palladium production (koz) |
21,993 |
5,312 |
5,759 |
5,444 |
5,938 |
22,453 |
||
Silver sales (koz) |
17,703 |
4,928 |
4,729 |
4,999 |
5,952 |
4,576 |
19,232 |
20,608 |
Gold sales (oz) |
389,086 |
100,405 |
92,804 |
90,101 |
101,480 |
86,243 |
369,553 |
384,790 |
Palladium sales (oz) |
20,681 |
4,938 |
4,976 |
5,546 |
5,914 |
4,591 |
20,051 |
21,374 |
Avg realised Ag price (US$/oz) |
16.29 |
17.03 |
16.73 |
24.69 |
24.22 |
24.44 |
20.71 |
20.90 |
Avg realised Au price (US$/oz) |
1,391 |
1,589 |
1,716 |
1,906 |
1,887 |
1,875 |
1,765 |
1,773 |
Avg realised Pd price (US$/oz) |
1,542 |
2,298 |
1,917 |
2,182 |
2,431 |
2,349 |
2,183 |
2,216 |
Avg Ag cash cost (US$/oz) |
5.02 |
4.50 |
5.23 |
5.89 |
5.97 |
5.98 |
5.39 |
5.43 |
Avg Au cash cost (US$/oz) |
421 |
436 |
418 |
428 |
426 |
426 |
424 |
424 |
Avg Pd cash cost (US$/oz) |
273 |
402 |
353 |
383 |
438 |
423 |
389 |
396 |
Sales |
861,332 |
254,789 |
247,954 |
307,268 |
350,032 |
284,348 |
1,094,359 |
1,160,043 |
Cost of sales |
||||||||
Cost of sales, excluding depletion |
258,559 |
66,908 |
65,211 |
70,119 |
81,361 |
66,035 |
268,273 |
283,598 |
Depletion |
256,826 |
64,841 |
58,661 |
60,601 |
70,676 |
57,862 |
241,965 |
254,779 |
Total cost of sales |
515,385 |
131,748 |
123,872 |
130,720 |
152,037 |
123,898 |
510,238 |
538,377 |
Earnings from operations |
345,947 |
123,040 |
124,082 |
176,548 |
197,994 |
160,450 |
584,121 |
621,666 |
Expenses and other income |
||||||||
– General and administrative** |
54,507 |
13,181 |
21,799 |
21,326 |
13,627 |
13,627 |
69,933 |
69,933 |
– Foreign exchange (gain)/loss |
0 |
0 |
0 |
|||||
– Net interest paid/(received) |
48,730 |
7,118 |
4,636 |
2,766 |
1,519 |
1,519 |
16,039 |
16,039 |
– Other (income)/expense |
(217) |
(1,861) |
234 |
391 |
-1,236 |
-1,236 |
||
Total expenses and other income |
103,020 |
18,438 |
26,669 |
24,483 |
15,145 |
15,145 |
84,735 |
84,735 |
Earnings before income taxes |
242,927 |
104,602 |
97,413 |
152,065 |
182,849 |
145,305 |
499,386 |
536,930 |
Income tax expense/(recovery) |
(9,066) |
8,442 |
59 |
58 |
250 |
250 |
8,809 |
8,809 |
Marginal tax rate (%) |
(3.7) |
8.1 |
0.1 |
0.0 |
0.1 |
0.2 |
1.8 |
1.6 |
Net earnings |
251,993 |
96,160 |
97,354 |
152,007 |
182,599 |
145,055 |
490,577 |
528,121 |
Ave. no. shares in issue (000s) |
446,021 |
447,805 |
448,636 |
449,125 |
449,125 |
449,125 |
448,673 |
448,673 |
Basic EPS (US$) |
0.56 |
0.215 |
0.217 |
0.338 |
0.407 |
0.323 |
1.093 |
1.177 |
Diluted EPS (US$) |
0.56 |
0.214 |
0.216 |
0.336 |
0.404 |
0.321 |
1.091 |
1.175 |
DPS (US$) |
0.36 |
0.10 |
0.10 |
0.10 |
0.12 |
0.12 |
0.42 |
0.42 |
Source: Wheaton Precious Metals, Edison Investment Research. Note: *Excluding impairments and exceptional items. **Forecasts now include stock-based compensation costs. Totals may not add up owing to rounding.
Our basic EPS forecast of US$1.093/share for FY20 (cf US$1.177/share previously) for FY20 is closely in line with the consensus forecast of US$1.12/share (source: Refinitiv, 15 February 2021) and within the range of analysts’ expectations of US$1.05–1.23 per share for the period:
Exhibit 4: WPM FY20 consensus EPS forecasts (US$/share)
Q120 |
Q220 |
Q320 |
Q420e (previous) |
Q420e (current) |
Sum Q1–Q420e |
FY20e |
|
Edison forecasts |
0.215 |
0.217 |
0.338 |
0.407 |
0.323 |
1.093 |
1.093 |
Mean consensus |
0.215 |
0.217 |
0.338 |
0.40 |
0.35 |
1.12 |
1.12 |
High consensus |
0.215 |
0.217 |
0.338 |
0.44 |
0.40 |
1.17 |
1.23 |
Low consensus |
0.215 |
0.217 |
0.338 |
0.35 |
0.29 |
1.06 |
1.05 |
Source: Refinitiv, Edison Investment Research. Note: At 15 February 2021.
Ounces produced but not yet delivered
At 30 September, payable ounces attributable to WPM produced but not yet delivered amounted to 3.4Moz silver and 77,000oz gold (cf 3.1Moz silver and a fractionally restated 79,632oz gold at end-June). As a result of WPM’s production update, we estimate this ‘inventory’ will have risen to c 5.4Moz silver and 83,693oz gold, equating to 2.8 and 2.7 months of FY20 silver and gold production, respectively (cf 1.85 and 2.45, as at end-Q320) and compares with WPM’s target level of two months of silver and two to three months of gold and palladium production. While these levels are relatively high by historical standards, they are not without precedent (as shown in Exhibit 5). Moreover, they provide a level from which sales can inevitably improve relative to production in coming quarters.
|
Exhibit 5: WPM ounces produced but not yet delivered, Q316–Q320 (months of production) |
|
|
Source: Edison Investment Research, Wheaton Precious Metals. Note: Historical data as originally reported. |
Longer-term guidance
In addition to its FY20 production and sales update, WPM also provided detailed guidance for FY21 and longer-term guidance for the five years from FY21–25 and 10 years from FY21–30. These are summarised in Exhibit 6 relative to our forecasts over the same periods:
Exhibit 6: WPM’s FY21 and longer-term production guidance and outlook cf Edison
Metal |
FY21 (WPM) |
FY21 (Edison) |
5-yr annual average (FY21-25) |
10-yr annual average (FY21-30) |
Gold (koz) |
370-400 |
397 |
||
Silver (Moz) |
22.5-24.0 |
20.8 |
||
Other (Pd & Co, GEOs) |
40-45 |
55 |
||
GEOs |
720-780 |
741 |
810 |
830 |
Edison |
741 |
685 |
N/A |
Source: Wheaton Precious Metals. Note: GEOs, gold equivalent ounces (based on US$1,800/oz Au, US$25/oz Ag, US$2,300/oz Pd and US$17.75/lb).
Our forecasts, as set out in Exhibit 6, remain unchanged relative to our last note (12 November 2020). By contrast, whereas WPM had previously been forecasting gold equivalent production of c 750koz for the four years FY21–24, this has now increased by a material c 8% to 810koz (albeit for the five-year period FY21–25). Within this context, readers should note the implication that, if production is 750koz in FY21 (the mid-point of WPM’s guidance), then it would have to average 825koz pa for FY22–25 for it to average 810koz for the full five-years FY21–25. In addition, WPM has provided production guidance of 830koz for FY21–30 for the first time. Within this context, we note the implication that, if production averages 810koz pa for FY21–25, then it would have to approximate 850koz pa in the discrete period FY26–30 to average 830koz pa for FY21–30.
In its update announcement, WPM undertook to ‘provide full production and financial details with the release of its 2020 fourth-quarter and full-year results on Thursday, 11 March 2021.’ Until that time, we are leaving our forecasts and valuation ostensibly unchanged. In the meantime, however, we note the potential for our longer-term financial forecasts to increase by 20–30% for FY22–30.
Exhibit 7: Financial summary
US$'000s |
2016 |
2017 |
2018 |
2019 |
2020e |
2021e |
2022e |
||
Dec |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
|||||||||
Revenue |
|
|
891,557 |
843,215 |
794,012 |
861,332 |
1,094,359 |
1,493,868 |
1,465,450 |
Cost of Sales |
(254,434) |
(243,801) |
(245,794) |
(258,559) |
(268,273) |
(307,772) |
(304,858) |
||
Gross Profit |
637,123 |
599,414 |
548,218 |
602,773 |
826,086 |
1,186,096 |
1,160,592 |
||
EBITDA |
|
|
602,684 |
564,741 |
496,568 |
548,266 |
756,154 |
1,116,163 |
1,090,659 |
Operating Profit (before amort. and except.) |
|
293,982 |
302,361 |
244,281 |
291,440 |
514,189 |
817,347 |
790,531 |
|
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
(71,000) |
(228,680) |
245,715 |
(165,855) |
103 |
0 |
0 |
||
Other |
(4,982) |
8,129 |
(5,826) |
217 |
1,236 |
0 |
0 |
||
Operating Profit |
218,000 |
81,810 |
484,170 |
125,802 |
515,528 |
817,347 |
790,531 |
||
Net Interest |
(24,193) |
(24,993) |
(41,187) |
(48,730) |
(16,039) |
(6,925) |
795 |
||
Profit Before Tax (norm) |
|
|
269,789 |
277,368 |
203,094 |
242,710 |
498,150 |
810,422 |
791,326 |
Profit Before Tax (FRS 3) |
|
|
193,807 |
56,817 |
442,983 |
77,072 |
499,489 |
810,422 |
791,326 |
Tax |
1,330 |
886 |
(15,868) |
9,066 |
(13,768) |
(1,000) |
(1,000) |
||
Profit After Tax (norm) |
266,137 |
286,383 |
181,400 |
251,993 |
485,618 |
809,422 |
790,326 |
||
Profit After Tax (FRS 3) |
195,137 |
57,703 |
427,115 |
86,138 |
485,721 |
809,422 |
790,326 |
||
Average Number of Shares Outstanding (m) |
430.5 |
442.0 |
443.4 |
446.0 |
448.7 |
449.5 |
449.5 |
||
EPS - normalised (c) |
|
|
62 |
63 |
48 |
56 |
108 |
180 |
176 |
EPS - normalised and fully diluted (c) |
|
|
62 |
63 |
48 |
56 |
108 |
180 |
175 |
EPS - (IFRS) (c) |
|
|
45 |
13 |
96 |
19 |
108 |
180 |
176 |
Dividend per share (c) |
21 |
33 |
36 |
36 |
42 |
69 |
73 |
||
Gross Margin (%) |
71.5 |
71.1 |
69.0 |
70.0 |
75.5 |
79.4 |
79.2 |
||
EBITDA Margin (%) |
67.6 |
67.0 |
62.5 |
63.7 |
69.1 |
74.7 |
74.4 |
||
Operating Margin (before GW and except.) (%) |
33.0 |
35.9 |
30.8 |
33.8 |
47.0 |
54.7 |
53.9 |
||
BALANCE SHEET |
|||||||||
Fixed Assets |
|
|
6,025,227 |
5,579,898 |
6,390,342 |
6,123,255 |
5,882,384 |
5,771,568 |
5,509,440 |
Intangible Assets |
5,948,443 |
5,454,106 |
6,196,187 |
5,768,883 |
5,528,012 |
5,417,196 |
5,155,068 |
||
Tangible Assets |
12,163 |
30,060 |
29,402 |
44,615 |
44,615 |
44,615 |
44,615 |
||
Investments |
64,621 |
95,732 |
164,753 |
309,757 |
309,757 |
309,757 |
309,757 |
||
Current Assets |
|
|
128,092 |
103,415 |
79,704 |
154,752 |
712,414 |
1,327,250 |
2,050,826 |
Stocks |
1,481 |
1,700 |
1,541 |
43,628 |
1,965 |
2,682 |
2,631 |
||
Debtors |
2,316 |
3,194 |
2,396 |
7,138 |
2,998 |
4,093 |
4,015 |
||
Cash |
124,295 |
98,521 |
75,767 |
103,986 |
707,451 |
1,320,475 |
2,044,180 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(19,057) |
(12,143) |
(28,841) |
(64,700) |
(79,366) |
(83,262) |
(82,974) |
Creditors |
(19,057) |
(12,143) |
(28,841) |
(63,976) |
(78,642) |
(82,538) |
(82,250) |
||
Short term borrowings |
0 |
0 |
0 |
(724) |
(724) |
(724) |
(724) |
||
Long Term Liabilities |
|
|
(1,194,274) |
(771,506) |
(1,269,289) |
(887,387) |
(887,387) |
(887,387) |
(887,387) |
Long term borrowings |
(1,193,000) |
(770,000) |
(1,264,000) |
(878,028) |
(878,028) |
(878,028) |
(878,028) |
||
Other long term liabilities |
(1,274) |
(1,506) |
(5,289) |
(9,359) |
(9,359) |
(9,359) |
(9,359) |
||
Net Assets |
|
|
4,939,988 |
4,899,664 |
5,171,916 |
5,325,920 |
5,628,046 |
6,128,170 |
6,589,905 |
CASH FLOW |
|||||||||
Operating Cash Flow |
|
|
608,503 |
564,187 |
518,680 |
548,301 |
817,858 |
1,118,247 |
1,090,501 |
Net Interest |
(24,193) |
(24,993) |
(41,187) |
(41,242) |
(16,039) |
(6,925) |
795 |
||
Tax |
28 |
(326) |
0 |
(5,380) |
(8,809) |
(1,000) |
(1,000) |
||
Capex |
(805,472) |
(19,633) |
(861,406) |
10,571 |
(1,094) |
(188,000) |
(38,000) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Financing |
595,140 |
1,236 |
1,279 |
37,198 |
0 |
0 |
0 |
||
Dividends |
(78,708) |
(121,934) |
(132,915) |
(129,986) |
(188,452) |
(309,298) |
(328,591) |
||
Net Cash Flow |
295,298 |
398,537 |
(515,549) |
419,462 |
603,465 |
613,024 |
723,705 |
||
Opening net debt/(cash) |
|
|
1,362,703 |
1,068,705 |
671,479 |
1,188,233 |
774,766 |
171,301 |
(441,723) |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
(1,300) |
(1,311) |
(1,205) |
(5,995) |
0 |
0 |
0 |
||
Closing net debt/(cash) |
|
|
1,068,705 |
671,479 |
1,188,233 |
774,766 |
171,301 |
(441,723) |
(1,165,428) |
Source: Company data, Edison Investment Research
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Research: TMT
The recovery from the COVID-19 affected Q2 continued in Q4. Service revenue growth (ex bulk SMS) accelerated to 7.6% y-o-y, resulting in FY20 sales and EBITDA ahead of our forecasts and guidance. This trend is further evidence of an improving market in our view and leads us to raise our FY21 and FY22 adjusted EPS forecasts by 5% and 6% respectively. Kcell grew adjusted EPS by 20% in FY20 despite COVID-19. At $5.80 it trades at an adjusted FY22 P/E of 15x, its lowest rating in a year.
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