Wheaton Precious Metals — Refining forecasts ahead of results

Wheaton Precious Metals (TSX: WPM)

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Research: Metals & Mining

Wheaton Precious Metals — Refining forecasts ahead of results

On 7 February, Wheaton announced attributable production and sales statistics for FY21 plus guidance for FY22 and beyond to FY31. While (implied) production for Q421 was within 1% of our prior expectations, sales lagged production by c 12%. This is quite normal for a ‘typical’ quarter, but is slightly unusual for a fourth quarter, in which a ‘flush through’ effect is often observed as underlying operators look to clear out their sales pipelines. This under-sale of metal in Q4 has caused us to reduce our basic EPS forecast for FY21 by 2.9% to US$1.31/share, albeit we note that the consensus forecast has remained at US$1.34/share.

Lord Ashbourne

Written by

Lord Ashbourne

Director, Energy & Resources

Metals & Mining

Wheaton Precious Metals

Refining forecasts ahead of results

Q421/FY21 results preview

Metals & mining

24 February 2022

Price

C$55.49

Market cap

C$24,999m

C$1.2745/US$, US$1.3597/£

Net cash at end-September (US$m) excluding US$3.1m in lease liabilities

372.5

Shares in issue

450.5m

Free float

100%

Code

WPM

Primary exchange

TSX

Secondary exchange

LSE, NYSE

Share price performance

%

1m

3m

12m

Abs

8.6

3.9

11.7

Rel (local)

7.9

7.5

(1.3)

52-week high/low

C$59.16

C$45.11

Business description

Wheaton Precious Metals (WPM) is the world’s pre-eminent ostensibly precious metals streaming company, with 33 high-quality precious metals streams and early deposit agreements over mines in Mexico, Canada, Brazil, Chile, the US, Argentina, Peru, Sweden, Greece, Portugal and Colombia.

Next events

Q421/FY21 results

10 March 2022

Q122 results

5 May 2022

Q222 results

11 August 2022

Q322 results

3 November 2022

Analyst

Lord Ashbourne

+44 (0)20 3077 5724

Wheaton Precious Metals is a research client of Edison Investment Research Limited

On 7 February, Wheaton announced attributable production and sales statistics for FY21 plus guidance for FY22 and beyond to FY31. While (implied) production for Q421 was within 1% of our prior expectations, sales lagged production by c 12%. This is quite normal for a ‘typical’ quarter, but is slightly unusual for a fourth quarter, in which a ‘flush through’ effect is often observed as underlying operators look to clear out their sales pipelines. This under-sale of metal in Q4 has caused us to reduce our basic EPS forecast for FY21 by 2.9% to US$1.31/share, albeit we note that the consensus forecast has remained at US$1.34/share.

Year end

Revenue (US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/19

861.3

242.7

54

36

80.6

0.8

12/20

1,096.2

503.2

112

42

38.9

1.0

12/21e

1,201.4

591.2

131

57

33.2

1.3

12/22e

1,364.0

697.0

154

64

28.2

1.5

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

Circa 33% production increase anticipated to FY31

At the same time as providing detailed production and sales numbers for FY21, WPM also took the opportunity to provide guidance for FY22 and the 10-year period from FY22–31. Production guidance of 700–760koz gold equivalent ounces (GEOs or AuE) for FY22 is very similar to the outcome of 750.2koz in FY21. By implication, WPM then expects gold equivalent production to increase to 880koz pa GEOs in the period FY23–26 (850koz pa average for the period FY22–26) and 970koz GEOs for the period FY27-31 (910koz pa average for the period FY22–31).

Nearly US$1bn in recent investment

In support of its production ambitions, WPM has announced five new streams over the course of the past four months. Including the stream relating to Artemis’s Blackwater project, this will involve the investment by WPM of an aggregate c US$980m to benefit from streams with an aggregate attributable production rate of c 100koz GEOs per annum in the first five years of production.

Valuation: +45% potential to FY23

In normal circumstances 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$63.64 or C$80.42 or £46.80 in FY23, based on a multiple of earnings. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than those of its peers on at least 77% of common valuation measures if Edison forecasts are used or 58% if consensus forecasts are used. Hence, if WPM’s shares were to trade at the same level as the average of its peers, then we calculate that its year one share price should be US$47.49 (C$60.02 or £34.93), based on our forecasts for FY21. Alternatively, if precious metals return to favour and WPM to a premium rating, we believe an US$86.30 (C$109.05 or £63.47) per share valuation is achievable (see page 10).

Q421 and FY21 forecast refinements

On 7 February, Wheaton announced attributable production and sales statistics for FY21, from which it is possible to derive preliminary Q421 production and sales numbers – subject to any restatements – as shown in Exhibit 1, below.

Exhibit 1: WPM FY21 attributable production and sales cf Edison estimates

Guidance

Actual FY21

Implied Q421

Prior Edison forecast

Variance* (%)

Metal

Production

Sales

Production

Sales

Production

Sales

Production

Sales

Gold (oz)

330,000–345,000

342,546

312,465

88,582

79,622

86,650

86,617

+2.2

-8.1

Silver (koz)

25,500–26,500

25,801

22,860

5,933

5,116

5,921

5,921

+0.2

-13.6

Palladium (koz)

} 45,000–55,000 GEOs

20,908

19,344

4,733

4,641

5,561

5,539

-14.9

-16.2

Cobalt (klbs)

2,293

886

381

228

400

400

-4.8

-43.0

Gold equivalent (oz)

735,000–765,000

750,220

663,415

180,793

158,852

179,933

179,872

+0.5

-11.7

Source: Wheaton Precious Metals, Edison Investment Research. Note: *Q421a cf Q421e. GEOs = gold equivalent ounces, or AuE.

While it can be seen that production numbers were broadly in line with Edison’s prior estimates for Q4 – and especially for Wheaton’s two major metals, gold and silver – it can also be seen that, whereas Edison had presumed that sales would be approximately in line with production, there was in fact a 12.1% under-sale of metal relative to production (on a gold equivalent, AuE or GEO, basis). FY21 was, in general, a year that was anyway subject to the disruptions of the global COVID-19 pandemic. In this respect however, it may be observed that the sales pattern in Wheaton’s fourth quarter more closely approximated a typical Q1–Q3 type pattern, whereby sales undershoot production, rather than a typical Q4 pattern, whereby there is a ‘flush through’ effect as underlying operators attempt to clear the sales pipeline and sales therefore roughly equal (or even exceed) production.

Relative to guidance, gold equivalent production exceeded the midpoint of guidance primarily as a result of stronger than expected production from Peñasquito, Antamina, Constancia and Voisey’s Bay, partially offset by weaker production from Salobo and Sudbury. Attributable production exceeded Wheaton’s forecast at: 1) Peñasquito owing to higher recoveries as a result of the implementation by Newmont Corporation of the Full Potential programme, 2) Antamina owing to higher grades, 3) Constancia owing to higher grades as a result of the successful commencement of mining at the Pampacancha deposit and 4) Voisey’s Bay owing to higher production as a result of Wheaton’s benefiting from some material introduced to the processing pipeline the previous year, but only being produced in Q121. Attributable production was below Wheaton’s forecast at: 1) Salobo owing to lower throughput and grades as the result of coronavirus induced changes in maintenance routines, which restricted mine movement in H121, coupled with the effect on production of a conveyor belt fire in October 2021; and 2) Sudbury owing to lower throughput and grades as the result of operations at the mine being suspended following a labour dispute from 1 June 2021 to 9 August 2021 and the suspension of mining at the Totten mine as a result of a shaft incident.

In addition to variations in actual compared with forecast production and sales, actual metals prices were also different from those forecast in our last note to the extent shown below:

Exhibit 2: Edison forecast metals prices for remainder of FY21

Metals

Actual

Previous forecast

Change

(%)

Gold (US$/oz)

1,796

1,787

+0.5

Silver (US$/oz)

23.35

23.42

-0.3

Palladium (US$/oz)

1,947

2,013

-3.3

Cobalt (US$/lb)

28.04

21.78

+28.7

Source: Edison Investment Research

FY21 updated forecasts by quarter

In the light of the variations in actual prices and performance relative our prior expectations, we have updated our forecasts for Wheaton for Q421 and FY21 as shown in the table below relative to our prior expectations:

Exhibit 3: WPM FY21 forecast, by quarter*

US$000s
(unless otherwise stated)

FY20

Q121

Q221

Q321

Q421e

(prior)

Q421e

(current)

FY21e

(current)

FY21e

(prior)

Silver production (koz)

22,892

6,754

6,720

6,394

5,921

5,933

25,801

25,789

Gold production (oz)

367,419

77,733

90,290

85,941

86,650

88,582

342,546

340,614

Palladium production (koz)

22,187

5,769

5,301

5,105

5,561

4,733

20,908

21,736

Cobalt production (klb)

1,161

380

370.5

400

382

2,293

2,311

Silver sales (koz)

19,232

6,657

5,600

5,487

5,921

5,116

22,860

23,665

Gold sales (oz)

369,553

75,104

90,090

67,649

86,617

79,622

312,465

319,460

Palladium sales (oz)

20,051

5,131

3,869

5,703

5,539

4,641

19,344

20,242

Cobalt sales (klb)

132.3

395

131.2

400

228

886

1,058

Avg realised Ag price (US$/oz)

20.78

26.12

26.69

23.80

23.42

23.35

25.08

25.04

Avg realised Au price (US$/oz)

1,767

1,798

1,801

1,795

1,787

1,796

1,798

1,795

Avg realised Pd price (US$/oz)

2,183

2,392

2,797

2,426

2,013

1,947

2,376

2,375

Avg realised Co price (US$/lb)

20.90

19.82

23.78

21.79

28.04

22.88

21.35

Avg Ag cash cost (US$/oz)

5.28

6.33

6.11

5.06

5.33

5.33

5.75

5.74

Avg Au cash cost (US$/oz)

426

450

450

464

430

430

448

447

Avg Pd cash cost (US$/oz)

389

427

503

468

362

350

436

435

Avg Co cash cost (US$/lb)

4.98

4.41

5.15

3.92

5.05

4.77

4.39

Sales

1,096,224

324,119

330,393

268,957

311,101

277,881

1,201,350

1,234,569

Cost of sales

Cost of sales, excluding depletion

266,763

78,783

78,445

62,529

72,358

64,257

284,014

292,115

Depletion

243,889

70,173

70,308

54,976

70,790

62,099

257,557

266,248

Total cost of sales

510,652

148,956

148,753

117,505

143,148

126,356

541,571

558,363

Earnings from operations

585,572

175,164

181,640

151,452

167,953

151,525

659,778

676,206

Expenses and other income

– General and administrative**

65,698

11,971

18,465

13,595

17,674

19,019

63,050

61,705

– Foreign exchange (gain)/loss

0

0

– Net interest paid/(received)

16,715

1,573

1,357

1,379

1,249

1,249

5,558

5,558

– Other (income)/expense

(387)

420

136

(684)

-128

-128

Total expenses and other income

82,026

13,964

19,958

14,290

18,923

20,267

68,479

67,135

Earnings before income taxes

503,546

161,199

161,682

137,162

149,030

131,258

591,299

609,071

Income tax expense/(recovery)

211

67

56

75

250

250

448

448

Marginal tax rate (%)

0.0

0.0

0.0

0.1

0.2

0.2

0.1

0.1

Net earnings

503,335

161,132

161,626

137,087

148,780

131,008

590,851

608,623

Average no. shares in issue (000s)

448,964

449,509

450,088

450,326

450,507

450,507

450,108

450,108

Basic EPS (US$)

1.12

0.358

0.359

0.304

0.330

0.291

1.31

1.35

Diluted EPS (US$)

1.12

0.358

0.358

0.303

0.329

0.290

1.31

1.35

DPS (US$)

0.42

0.13

0.14

0.15

0.15

0.15

0.57

0.57

Source: WPM, 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$1.31/share for FY21 is 2.2% below the consensus forecast of US$1.34/share (source: Refinitiv, 22 February 2021), albeit within the range of analysts’ expectations of US$1.26–1.38 per share (NB narrowed from US$1.29–1.58 per share on 5 November 2021 – source: Refinitiv):

Exhibit 4: WPM FY21e consensus EPS forecasts (US$/share), by quarter

Q121

Q221

Q321e

Q421e

Sum Q1–Q421e

FY21e

Edison forecasts

0.358

0.359

0.304

0.291

1.312

1.31

Mean consensus

0.358

0.359

0.304

0.322

1.343

1.34

High consensus

0.358

0.359

0.304

0.370

1.391

1.38

Low consensus

0.358

0.359

0.304

0.280

1.301

1.26

Source: Refinitiv, Edison Investment Research. Note: At 22 February 2022.

Ounces produced but not yet delivered (PBND)

Notwithstanding Edison’s prior forecasts, Wheaton’s under-sales of both gold and silver relative to production were within 3 percentage points of their long-term averages since Q112 and well within the range of normal quarterly performance:

Exhibit 5: Over/(under) sale of silver and gold as a percentage of production, Q112–Q421e

Source: Edison Investment Research, WPM. Note: As reported.

As at 30 September, payable ounces attributable to WPM produced but not yet delivered amounted to 4.1Moz silver and 81,246oz gold and we estimate that, all other things being equal, this ‘inventory’ will have increased to 4.9Moz and 90,206oz, respectively. These equate to 2.27 and 3.16 months of Edison’s forecast FY21 silver and gold production, respectively (cf 1.89 and 2.86 months estimated as at end-Q321) and compare with WPM’s target of two months of silver and two to three months of gold and palladium production, respectively:

Exhibit 6: WPM ounces produced but not yet delivered, Q316–Q421e (months of production)

Source: Edison Investment Research, WPM. Note: As reported.

Note that, for these purposes, the use of the term ‘inventory’ reflects ounces of gold and silver produced by WPM’s operating counterparties at the mines over which it has streaming agreements, but which have not yet been delivered to WPM. It in no way reflects the other use of the term in the mining industry, where it typically refers to metal in circuit and ore on stockpiles etc.

General and administrative expenses

At the time of its Q321 results, WPM provided updated guidance for non-stock general and administrative (G&A) expenses of US$42–44m (or US$10.5–11.0m per quarter) in FY21, cf US$42–45m previously and to a guided range of US$40–43m in FY20 and an actual outcome of US$38.7m (ie 3.1% below the bottom of the range), including all employee-related expenses, charitable contributions, etc, but excluding performance share units (PSUs) and equity settled stock-based compensation. In the event, at US$9.5m, non-stock G&A expenses in Q321 were below the pro-rata quarterly rate implied by WPM’s full-year guidance for the third quarter in succession.

Compared with non-stock G&A expenses, total G&A expenses are relatively difficult to forecast, given their dependence on the price of WPM’s shares. However, a simple analysis of stock-based G&A expenses over the past eight quarters relative to the change in WPM’s share price (also in US dollars) exhibits a relatively close Pearson product moment (correlation) coefficient between the two of 0.78, which is 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). The graph relating to the analysis is shown below (including the point relating to our updated forecast for Q421e in the light of WPM’s share price move over the three-month period in question):

Exhibit 7: Graph of historical share price move (US$/share) versus quarterly stock-based G&A expense, Q419–Q421e

Source: Edison Investment Research (underlying data: Bloomberg and Wheaton Precious Metals)

As such, we forecast that stock-based G&A expenses in Q421 will have been in the order of US$7.4m, supplementing non-stock-based expenses of US$11.6m to result in a total G&A charge for the quarter of US$19.0m, as shown in the table below:

Exhibit 8: WPM FY19–FY21 general and administrative expense (US$000s)

Item

FY21e

Q421e

Q321

Q221

Q121

FY20

Q420

Q320

Q220

Q120

FY19

G&A excluding PSU* and equity settled stock-based compensation

4,283

4,634

4,709

16,733

4,466

4,037

4,095

4,135

13,840

Other (inc. depreciation, donations and professional fees)

5,173

5,852

5,632

22,013

5,957

5,488

6,302

4,266

17,802

Sub-total

41,880

11,587

9,466

10,486

10,341

38,746

10,423

9,525

10,397

8,401

31,642

Guidance

42,000–44,000

10,500–11,000

10,500–11,000

10,500–11,000

10,500–11,000

40,000–43,000

10,000–10,750

10,000–10,750

10,000–10,750

10,000–10,750

33,000–36,000

PSU* accrual

2,824

6,672

305

21,520

(2,336)

10,482

10,097

3,277

17,174

Equity settled stock-based compensation

1,315

1,307

1,325

5,432

1,305

1,319

1,305

1,503

5,691

Total general & administrative

63,050

19,019

13,595

18,465

11,971

65,698

9,392

21,326

21,799

13,181

54,507

Total/sub-total (%)

+50.5

+64.1

+43.6

+76.1

+15.8

+69.6

-9.9

+123.9

+109.7

+56.9

+72.3

Source: WPM, Edison Investment Research. Note: *Performance share units.

FY22 and five-year and 10-year guidance

At the same time as providing detailed production and sales numbers for FY21 on 7 February, WPM also provided its detailed outlook for FY22 as well as updating its longer-term guidance out to FY31. This is summarised in the table below and compares with Edison’s updated forecasts, as follows:

Exhibit 9: WPM precious metals production – Edison forecasts cf guidance

FY22e

Implied *FY23–26 average

FY22–31 average

Current Edison forecast

Silver production (Moz)

23.6

Gold production (koz)

376.8

Cobalt production (klb)

1,386

Palladium production (koz)

19

Gold equivalent (koz)

739.0

855

828

WPM updated guidance

Silver production (Moz)

23.0-25.0

Gold production (koz)

350-380

Cobalt & palladium production (koz AuE)

44-48

Palladium production (koz)

N/A

Gold equivalent (koz)

700–760

880

**910

Source: WPM, Edison Investment Research forecasts. Note: *Edison forecasts include a contribution from Salobo III from FY23e and Rosemont from FY25e. **Increased from 900koz AuE on 8 February on the occasion of the announcement of the Goose stream (see below).

WPM’s updated five-year and 10-year guidance is based on standardised pricing assumptions of US$1,800/oz Au, US$24.00/oz Ag (cf US$25.00/oz previously), US$2,100/oz palladium (cf US$2,300/oz previously) and US$33.00/lb cobalt (cf US$17.75/lb previously). Of note in this context is an implied gold/silver ratio of 75x, which compares with its current ratio of 79.1x and a long-term average of 61.5x (since gold was demonetised in August 1971). Self-evidently, at the standardised prices indicated, our gold equivalent production forecast of 739.0koz AuE for FY22e lies well within WPM’s guidance range of 700–760koz AuE.

Otherwise, readers will note that Edison’s medium-term production forecasts are within 3% of WPM’s guidance for the period FY23–26. With respect to longer-term guidance, while Edison’s forecasts currently appear below WPM’s guidance range, these forecasts currently exclude any contribution from either Marathon, Curipamba, Goose or Fenix, over which Wheaton has announced streaming deals over the course of the past four months (since November 2021). These will be built into our forecasts at the time of our next major update note on WPM. In the meantime however, it may be readily appreciated from the table below that including them will bring our forecasts to within 5% of WPM’s guidance:

Exhibit 10: WPM recent stream announcements’ summary

Project

Status

Consideration

Attributable to WPM in first five years

Attributable to WPM in first 10 years

Gold

(koz pa)

Silver

(koz pa)

Platinum

(koz pa)

Gold

(koz pa)

Silver

(koz pa)

Platinum

(koz pa)

Marathon

Binding

C$240m (c US$188.3m)

16.0

14.0

15.0

11.0

Curipamba

Definitive

US$175.5m

17.0

551.0

Goose

Definitive

US$125.0

11.7

10.7

Fenix

Non-binding

US$50.0m

5.9

5.8

Total

US$538.8m

50.6

551.0

14.0

31.5

0.0

11.0

Source: Wheaton Precious Metals, Edison Investment Research

Readers should note that a fifth stream, relating to Artemis’s Blackwater project (US$441m consideration for 37koz GEOs of production in the first five years of operation), was announced on 13 December 2021. This stream was the subject of a separate note by Edison (see Bagging elephants in British Columbia, published on 16 December 2021).

In the light of WPM’s guidance, Edison has calculated the following potential quarterly estimates for FY22:

Exhibit 11: WPM FY22 forecast, by quarter*

US$000s
(unless otherwise stated)

Q122e

Q222e

Q322e

Q422e

FY22e

FY22e

(previous)

Silver production (koz)

5,900

5,900

5,900

5,900

23,598

23,598

Gold production (oz)

95,097

95,097

91,474

95,097

376,763

424,378

Palladium production (koz)

4,750

4,750

4,750

4,750

19,000

27,000

Cobalt production (klb)

347

347

347

347

1,386

2,100

Silver sales (koz)

5,900

5,900

5,900

5,900

23,598

23,598

Gold sales (oz)

95,065

95,065

91,442

95,065

376,635

424,233

Palladium sales (oz)

4,731

4,731

4,731

4,731

18,924

26,892

Cobalt sales (klb)

347

347

347

347

1,386

2,100

Avg realised Ag price (US$/oz)

23.74

23.90

23.90

23.90

23.86

23.40

Avg realised Au price (US$/oz)

1,876

1,890

1,890

1,890

1,886

1,792

Avg realised Pd price (US$/oz)

2,328

2,382

2,382

2,382

2,368

2,009

Avg realised Co price (US$/lb)

32.81

33.01

33.01

33.01

32.96

19.80

Avg Ag cash cost (US$/oz)

5.28

5.29

5.29

5.29

5.29

5.27

Avg Au cash cost (US$/oz)

430

430

432

431

431

429

Avg Pd cash cost (US$/oz)

419

429

429

429

426

362

Avg Co cash cost (US$/lb)

5.91

5.94

5.94

5.94

5.93

4.75

Sales

340,717

343,379

336,531

343,379

1,364,005

1,408,032

Cost of sales

Cost of sales, excluding depletion

76,035

76,201

74,751

76,284

303,271

326,130

Depletion

72,358

72,358

68,649

72,358

285,724

313,889

Total cost of sales

148,394

148,559

143,400

148,642

588,995

640,019

Earnings from operations

192,323

194,820

193,131

194,736

775,010

768,013

Expenses and other income

– General and administrative**

18,329

18,329

18,329

18,329

73,316

73,316

– Foreign exchange (gain)/loss

0

0

– Net interest paid/(received)

1,201

1,166

1,172

1,160

4,699

4,553

– Other (income)/expense

0

0

Total expenses and other income

19,530

19,495

19,501

19,489

78,015

77,869

Earnings before income taxes

172,793

175,324

173,630

175,248

696,995

690,143

Income tax expense/(recovery)

250

250

250

250

1,000

1,000

Marginal tax rate (%)

0.1

0.1

0.1

0.1

0.1

0.0

Net earnings

172,543

175,074

173,380

174,998

695,995

689,143

Average no. shares in issue (000s)

450,507

450,507

450,507

450,507

450,507

450,507

Basic EPS (US$)

0.383

0.389

0.385

0.388

1.54

1.53

Diluted EPS (US$)

0.373

0.378

0.375

0.378

1.50

1.49

DPS (US$)

0.15

0.16

0.16

0.16

0.64

0.65

Source: WPM, 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$1.54/share for FY22 is therefore little changed relative to our prior estimate and is 9.2% above the consensus forecast of US$1.41/share (source: Refinitiv, 22 February 2021), albeit within the range of analysts’ expectations of US$1.21–1.68 per share. Within this context, it is worth noting that our gold price forecast for the remainder of the year is US$1,890/oz, which is that prevailing at the time of writing. Should it revert to its average of US$1,799/oz for FY21, then our estimate of EPS for FY22 reduces by 4.5% to US$1.47/share and our DPS forecast by 2c to 62 US cents per share.

Short-term organic growth opportunities

In the short term, First Majestic is in the process of increasing production at San Dimas by restarting mining operations at the past-producing Tayoltita mine to add another 300tpd (12%) to throughput. In addition, it is investigating installing a 3,000tpd high-intensity grinding mill circuit and an autogenous grinding mill to improve recoveries and reduce operating costs. Production of palladium and gold at Stillwater (operated by Sibanye-Stillwater) will similarly increase under the influence of the Fill-the-Mill project at East Boulder (although the Blitz project has now been delayed by two years, to 2024, following the suspension of growth capital activities due to COVID-19).

Longer-term outlook

Salobo

On 24 October 2018, Vale announced the approval of the Salobo III brownfields mine expansion, intended to increase processing capacity at Salobo from 24Mtpa to 36Mtpa, with start-up at that point scheduled for H222 and an estimated ramp-up time of 15 months. According to its agreement with Vale, depending on the grade of the material processed, WPM will be required to make a payment to Vale for this expansion, which WPM estimates will be c US$550–670m in FY23, in return for which it will be entitled to its full 75% attributable share of expanded gold production. This compares to WPM’s purchase of a 25% stream from Salobo in August 2016 for a consideration of US$800m (see our note Going for gold, published on 30 August 2016), the US$900m it paid for a similar stream in March 2015 (when the gold price averaged US$1,179/oz) and the US$1.33bn it paid for its original 25% stream in February 2013.

According to Vale’s Q321 performance report, the Salobo III mine expansion is now 81% complete (cf 77% at the end of Q221, 73% at the end of Q121, 68% at the end of Q420, 62% at the end of Q320, 54% at the end of Q220, 47% at the end of Q120, 40% at the end of Q419 and 27% at the end of Q319) and remains on schedule for start-up in H222.

Once Salobo III has been completed, however, WPM believes reserves and resources could support a further 33% capacity increase at Salobo, from 90ktpd to 120ktpd (denoted Salobo IV). In addition to its long-term underground mining potential, WPM believes such an expansion could still be supported by output from the open pit. Under the terms of its agreement with Vale, there would be no additional payment due from WPM in respect of this expansion, although Vale could exercise a right to alter the timing of the incremental payment due for Salobo III.

Pascua-Lama

WPM’s contract with Barrick provided for a completion test that, if unfulfilled by 30 June 2020, would result in WPM being entitled to the return of its upfront cash consideration of US$625m less a credit for any silver delivered up to that date from three other Barrick mines (at which point it would have no further streaming interest in the mine). Given the test was unfulfilled, WPM had the right to an estimated US$252.3m (the carrying value of Pascua-Lama in WPM’s accounts) repayment from Barrick in FY20. Given the long-term optionality provided by the Pascua-Lama project, however, WPM instead opted not to enforce the repayment of its entitlement and to instead maintain its streaming interest in the project (which was originally expected to deliver an attributable 1.7–12.0Moz silver pa, averaging 5.2Moz Ag pa, to WPM at a cost of US$3.90/oz (inflating at 1% per year).

Rosemont

Another major project with which WPM has a streaming agreement for attributable gold and silver production is Rosemont copper in Arizona.

The proposed Rosemont development is near a number of large porphyry-type producing copper mines and would be one of the largest three copper mines in the United States, with output of c 112,000t copper in concentrate per year and accounting for c 10% of total US copper production. Total by-product production of silver and gold attributable to WPM is estimated to be c 2.7Moz Ag pa and c 16,100oz Au pa.

Rosemont’s operator, Hudbay, has received both a Mine Plan of Operations from the US Forest Service and a Section 404 Water Permit from the US Army Corps of Engineers (in March 2019), which was effectively the final material administrative step before the mine could start development. Subsequently, Hudbay indicated it would seek board approval to start construction work by the end of CY19, which would have enabled first production ‘by the end of 2022’. In the meantime, it started early works to run concurrently with financing activities (including a potential joint venture partner).

On 31 July 2019, however, the US District Court for the District of Arizona issued a ruling relating to a number of lawsuits challenging the US Forest Service’s issuance of the Final Record of Decision effectively halting construction, saying that:

the US Forest Service ‘abdicated its duty to protect the Coronado National Forest’ when it failed to consider whether the mining company held valid unpatented mining claims; and

the Forest Service had ‘no factual basis to determine that Rosemont had valid unpatented mining claims’ on 2,447 acres and the claims were invalid under the Mining Law of 1872.

In response, Hudbay said it believed the ruling to be without precedent and the court had misinterpreted federal mining laws and Forest Service regulations as they apply to Rosemont. It pointed out that the Forest Service issued its decision in 2017 after a ‘thorough process of 10 years involving 17 co-operating agencies at various levels of government, 16 hearings, over 1,000 studies, and 245 days of public comment resulting in more than 36,000 comments’ and with a long list of studies that have examined the potential effects of the proposed mine on the environment. Hudbay also pointed out that various agencies had accepted the company could operate the mine in compliance with environmental laws. As a result, Hudbay has appealed the ruling to the Ninth Circuit Court of Appeals, which it expects to be successful, not least as a result of there being legal precedents for its waste disposal plan. Final briefs relating to its appeal were filed in November 2020 and the oral hearing was completed in early February 2021, such that Hudbay expects a ruling from the Ninth Circuit in the near future. Nevertheless, as an alternative, it is also able to adapt its mine and waste plan to accommodate its waste dumps on privately owned, patented land alone, if necessary.

In the meantime, Hudbay has continued to explore in and around the area of the mine and, on 22 September, announced the intersection of additional high-grade copper sulphide and oxide mineralisation predominantly located on its wholly owned patented mining claims (Copper World). To date, seven deposits have been identified at Copper World with a combined strike length of over 7km and, on 15 December, Hudbay announced a maiden mineral resource at Copper World of 272t in the indicated category and 142Mt in the inferred category, both at an average grade of 0.36% copper. The mineralisation consists of both skarn and porphyry copper sulphides with a significant oxidised component along a regional fault along the west side of the Rosemont, Bolsa and Broad Top Butte deposits known as the Backbone Fault. These mineral resources will now form the basis for a preliminary economic assessment on the project, expected to be released in H122. In the meantime, however, approximately 33Mt of inferred mineral resources at the Bolsa deposit, which were considered to be waste in the resource pit shell used for Rosemont’s NI 43-101 feasibility study, could now potentially be converted into reserves, which would result in less waste being mined at Rosemont, thereby reducing costs and energy consumption per tonne of ore mined. In addition, the Rosemont deposit also contains oxide mineralisation that was previously classified as waste, which could be processed with the oxide mineralisation at Copper World, and it is expected that further synergies will be identified as Hudbay continues to close the drilling gap between Bolsa and Rosemont. Note, the Copper World discovery is included in Wheaton's area of interest under its PMPA with Hudbay.

Once in production, we estimate Rosemont will contribute c 16,750oz gold and 2.7Moz silver to WPM’s production profile in return for an upfront payment of US$230m in two instalments of US$50m and US$180m (neither of which has yet been paid) and this production is included in our financial forecasts from FY25.

Other potential future growth opportunities

At the time of its Q321 results, WPM reported that its corporate development team had been ‘exceptionally busy’. While the majority of potential deals were reported to be with development companies in the US$100–300m range (with fewer ‘balance sheet repair’ opportunities), it was also reported there had been a number of approaches made by producing companies for transactions to fund expansion and even to fund M&A activity. In the first instance, WPM would fund any such transactions via the US$2bn available under its revolving credit facility, plus US$372.5m in cash (at end-Q321) and, potentially, its US$300m at-the-market equity programme.

While it is difficult, or impossible, to predict potential future stream acquisition targets with any degree of certainty, it is possible to highlight two that may be of interest to WPM in due course for which it already has strong, existing counterparty relationships:

the platinum group metal by-product stream at Sudbury (operated by Vale); and

the 30% of the gold output at Constancia that is not currently subject to any streaming arrangement.

Otherwise, WPM also has streaming agreements with other potential producing mines, including Navidad and Cotabambas, and a recently acquired a 2.0% net smelter return royalty interest with the Brewery Creek mine in the Yukon in Canada.

Valuation

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.0x current year basic underlying EPS, excluding impairments (cf 33.2x Edison or 32.7x Refinitiv consensus FY21e – see Exhibit 13).

Exhibit 12: WPM’s historical current year P/E multiples, 2005–20

Source: Edison Investment Research

Applying this 30.0x multiple to our EPS forecast of US$2.12 in FY23 (previously US$2.04 with the increase almost exclusively attributable to a higher cobalt price) would ordinarily imply a potential value per share for WPM of US$63.64 or C$80.42 in that year. However, the graph above suggests the current year multiple has been on a broadly upward trend between FY12 and FY19, on which basis we would argue that a multiple in excess of 40x (as evidenced by FY18 and FY19) could be supported in the event of a return to favour of precious metals and precious metals stocks (not least given the fact that these years were not subject to the extraordinary trials and tribulations experienced in FY20). In this case, applying a 40.7x earnings multiple (the average of FY18, FY19 and FY20) to our updated EPS forecast of US$2.12 in FY23 implies a potential value per share for WPM in that year of US$86.30 or C$109.05 (note this analysis implicitly assumes metals prices in FY24 would be experiencing the same sort of increases relative to FY23 that they did in FY20 relative to FY19 and the average multiple would probably then contract again in FY24 as EPS ‘caught up’ with the share price). Even at such share price levels, however, a multiple of over 40.7x would still put WPM’s shares on a discount (albeit small) relative to Franco-Nevada (see Exhibit 13).

In the meantime, from a relative perspective, it is notable that WPM has a lower valuation than the average of its royalty/streaming ‘peers’ on seven out of nine valuation measures if Edison forecasts are used and six out of nine if consensus forecasts are used. On an individual basis, it is cheaper than its peers on 77% (28 out of 36) of the valuation measures observed in Exhibit 13 if our estimates are adopted or 58% (21 out of 36) of the same valuation measures if consensus forecasts are adopted.

Exhibit 13: WPM comparative valuation vs 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

41.7

41.1

43.4

0.8

0.8

0.9

29.0

28.0

29.1

Royal Gold

30.2

29.0

32.1

1.1

1.2

1.3

17.0

16.4

17.4

Sandstorm Gold

42.1

41.7

40.6

0.9

0.9

0.9

15.5

16.4

16.5

Osisko

34.7

32.8

27.6

1.3

1.4

1.4

18.3

16.5

14.6

Average

37.2

36.2

35.9

1.0

1.1

1.1

19.9

19.3

19.4

WPM (Edison forecasts)

33.2

28.2

20.5

1.3

1.5

1.8

22.6

20.0

15.4

WPM (consensus)

32.7

30.9

31.8

1.3

1.3

1.4

23.0

21.3

20.8

Implied WPM share price (US$)*

48.78

55.86

76.16

55.29

59.79

73.69

38.41

42.08

54.83

Source: Refinitiv, Edison Investment Research. Note: Peers priced on 22 February 2022. *Derived using Edison forecasts and average consensus multiples.

Financials: US$372.5m in net cash and growing

At 30 September, WPM had US$372.5m in cash on its balance sheet with no debt outstanding under its US$2bn revolving credit facility, such that (including a modest US$3.1m in leases) it had US$369.4m in net cash overall. Over the course of FY21 (until end-Q321), it generated cash from operating activities at an average rate of US$216.6m per quarter and accumulated net cash at an average rate of US$121.1m per quarter. Coupled with its revolving credit facility, it will therefore easily have the capacity to fund its recent investments in Exhibit 10 (which, anyway, will not fall due together, but will be payable over a number of years).

Exhibit 14: Financial summary

US$'000s

2016

2017

2018

2019

2020

2021e

2022e

2023e

Year end 31 December

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

891,557

843,215

794,012

861,332

1,096,224

1,201,350

1,364,005

1,692,619

Cost of Sales

(254,434)

(243,801)

(245,794)

(258,559)

(266,763)

(284,014)

(303,271)

(349,247)

Gross Profit

637,123

599,414

548,218

602,773

829,461

917,335

1,060,734

1,343,371

EBITDA

 

 

602,684

564,741

496,568

548,266

763,763

854,286

987,418

1,270,055

Operating Profit (before amort. and except.)

 

 

293,982

302,361

244,281

291,440

519,874

596,729

701,694

954,864

Intangible Amortisation

0

0

0

0

0

0

0

0

Exceptionals

(71,000)

(228,680)

245,715

(156,608)

4,469

3,934

0

0

Other

(4,982)

8,129

(5,826)

217

387

128

0

0

Operating Profit

218,000

81,810

484,170

135,049

524,730

600,791

701,694

954,864

Net Interest

(24,193)

(24,993)

(41,187)

(48,730)

(16,715)

(5,558)

(4,699)

1,215

Profit Before Tax (norm)

 

 

269,789

277,368

203,094

242,710

503,159

591,171

696,995

956,079

Profit Before Tax (FRS 3)

 

 

193,807

56,817

442,983

86,319

508,015

595,233

696,995

956,079

Tax

1,330

886

(15,868)

(181)

(211)

(448)

(1,000)

(1,000)

Profit After Tax (norm)

266,137

286,383

181,400

242,746

503,335

590,851

695,995

955,079

Profit After Tax (FRS 3)

195,137

57,703

427,115

86,138

507,804

594,785

695,995

955,079

Average Number of Shares Outstanding (m)

430.5

442.0

443.4

446.0

448.7

450.1

450.5

450.5

EPS - normalised (c)

 

 

62

63

48

54

112

131

154

212

EPS - normalised and fully diluted (c)

 

 

62

63

48

54

112

131

150

206

EPS - (IFRS) (c)

 

 

45

13

96

19

113

132

154

212

Dividend per share (c)

21

33

36

36

42

57

64

80

Gross Margin (%)

71.5

71.1

69.0

70.0

75.7

76.4

77.8

79.4

EBITDA Margin (%)

67.6

67.0

62.5

63.7

69.7

71.1

72.4

75.0

Operating Margin (before GW and except.) (%)

33.0

35.9

30.8

33.8

47.4

49.7

51.4

56.4

BALANCE SHEET

Fixed Assets

 

 

6,025,227

5,579,898

6,390,342

6,123,255

5,755,441

5,620,911

5,838,437

6,343,496

Intangible Assets

5,948,443

5,454,106

6,196,187

5,768,883

5,521,632

5,378,958

5,596,484

6,101,543

Tangible Assets

12,163

30,060

29,402

44,615

33,931

34,622

34,622

34,622

Investments

64,621

95,732

164,753

309,757

199,878

207,331

207,331

207,331

Current Assets

 

 

128,092

103,415

79,704

154,752

201,831

490,628

684,815

779,158

Stocks

1,481

1,700

1,541

43,628

3,265

2,157

2,449

3,039

Debtors

2,316

3,194

2,396

7,138

5,883

3,291

3,737

4,637

Cash

124,295

98,521

75,767

103,986

192,683

485,179

678,629

771,482

Other

0

0

0

0

0

0

0

0

Current Liabilities

 

 

(19,057)

(12,143)

(28,841)

(64,700)

(31,169)

(46,158)

(48,058)

(52,592)

Creditors

(19,057)

(12,143)

(28,841)

(63,976)

(30,396)

(45,385)

(47,285)

(51,819)

Short term borrowings

0

0

0

(724)

(773)

(773)

(773)

(773)

Long Term Liabilities

 

 

(1,194,274)

(771,506)

(1,269,289)

(887,387)

(211,532)

(16,532)

(16,532)

(16,532)

Long term borrowings

(1,193,000)

(770,000)

(1,264,000)

(878,028)

(197,864)

(2,864)

(2,864)

(2,864)

Other long term liabilities

(1,274)

(1,506)

(5,289)

(9,359)

(13,668)

(13,668)

(13,668)

(13,668)

Net Assets

 

 

4,939,988

4,899,664

5,171,916

5,325,920

5,714,571

6,048,848

6,458,663

7,053,530

CASH FLOW

Operating Cash Flow

 

 

608,503

564,187

518,680

548,301

784,843

873,103

988,580

1,273,100

Net Interest

(24,193)

(24,993)

(41,187)

(41,242)

(16,715)

(5,558)

(4,699)

1,215

Tax

28

(326)

0

(5,380)

(2,686)

(448)

(1,000)

(1,000)

Capex

(805,472)

(19,633)

(861,406)

10,571

149,648

(123,027)

(503,250)

(820,250)

Acquisitions/disposals

0

0

0

0

0

0

0

0

Financing

595,140

1,236

1,279

37,198

22,396

0

0

(0)

Dividends

(78,708)

(121,934)

(132,915)

(129,986)

(167,212)

(256,573)

(286,180)

(360,212)

Net Cash Flow

295,298

398,537

(515,549)

419,462

770,274

487,496

193,450

92,853

Opening net debt/(cash)

 

 

1,362,703

1,068,705

671,479

1,188,233

774,766

5,954

(481,542)

(674,992)

HP finance leases initiated

0

0

0

0

0

0

0

0

Other

(1,300)

(1,311)

(1,205)

(5,995)

(1,462)

0

0

(0)

Closing net debt/(cash)

 

 

1,068,705

671,479

1,188,233

774,766

5,954

(481,542)

(674,992)

(767,845)

Source: company sources, Edison Investment Research


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New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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United Kingdom

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Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

Frankfurt +49 (0)69 78 8076 960

Schumannstrasse 34b

60325 Frankfurt

Germany

London +44 (0)20 3077 5700

280 High Holborn

London, WC1V 7EE

United Kingdom

New York +1 646 653 7026

1185 Avenue of the Americas

3rd Floor, New York, NY 10036

United States of America

Sydney +61 (0)2 8249 8342

Level 4, Office 1205

95 Pitt Street, Sydney

NSW 2000, Australia

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Westcon is Datatec’s technology distribution business, representing 62% of H122 group revenues and 37% of EBITDA. With global demand currently outstripping the market’s ability to supply hardware and solutions, Westcon is transitioning from being a specialist value added distributor to becoming a higher-growth, higher-margin technology provider. This transition unlocks the potential for double-digit y-o-y revenue growth, with our estimated gross profit margins of c 11% and EBITDA margins expected to continue to rise towards 3.0% (H122: 2.2%) in the medium term. We value Westcon at c US$630m on a standalone basis (versus Datatec’s EV of US$685m). In August 2021, Datatec management initiated a strategic review to address this persistent undervaluation. In this note, we focus on Westcon to better explain the business and its market positioning.

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