Wheaton Precious Metals — Teeing up to hit long-term targets

Wheaton Precious Metals (TSX: WPM)

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Research: Metals & Mining

Wheaton Precious Metals — Teeing up to hit long-term targets

Wheaton Precious Metals’ (WPM’s) Q323 profits exceeded our prior forecasts by US$4.0m (or 3.4%) at the pre-tax level and by US$4.2m (or 3.6%) at the post-tax level, driven by very strong production performances at Salobo and Constancia in particular. Production during the quarter amounted to 154,800oz gold equivalent ounces (GEOs) compared to our prior estimate of 151,919oz, as a consequence of which our FY23 production forecast remains within the company’s 600–660koz GEO guidance range, while our adjusted EPS forecast has changed by less than 1% (notwithstanding the cessation of lead and zinc concentrate production at Aljustrel until Q225).

Lord Ashbourne

Written by

Lord Ashbourne

Director of Content, Mining

Wheaton-Precious-Metals_resized

Metals & Mining

Wheaton Precious Metals

Teeing up to hit long-term targets

Q323 results

Metals and mining

14 November 2023

Price

C$59.31

Market cap

C$26,867m

C$1.3801/US$, US$1.2227/£

Cash (US$m) at end-September
(excluding US$6.2m in lease liabilities)

833.9

Shares in issue

453.0m

Free float

100.0

Code

WPM

Primary exchange

TSX

Secondary exchange

LSE, NYSE

Share price performance

%

1m

3m

12m

Abs

3.1

(1.8)

18.7

Rel (local)

1.8

1.7

21.1

52-week high/low

C$69.72

C$48.66

Business description

Wheaton Precious Metals (WPM) is the world’s pre-eminent ostensibly precious metals streaming company, with over 30 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

Q423/FY23 production & sales

February 2024

Q423/FY23 results

March 2024

Q124 results

May 2024

Q223 results

August 2024

Analyst

Lord Ashbourne

+44 (0)20 3077 5700

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

Wheaton Precious Metals’ (WPM’s) Q323 profits exceeded our prior forecasts by US$4.0m (or 3.4%) at the pre-tax level and by US$4.2m (or 3.6%) at the post-tax level, driven by very strong production performances at Salobo and Constancia in particular. Production during the quarter amounted to 154,800oz gold equivalent ounces (GEOs) compared to our prior estimate of 151,919oz, as a consequence of which our FY23 production forecast remains within the company’s 600–660koz GEO guidance range, while our adjusted EPS forecast has changed by less than 1% (notwithstanding the cessation of lead and zinc concentrate production at Aljustrel until Q225).

Year end

Revenue
(US$m)

PBT*
(US$m)

EPS*
(c)

DPS
(c)

P/E
(x)

Yield
(%)

12/21

1,201.7

592.1

132

57

32.6

1.3

12/22

1,065.1

497.7

112

60

38.4

1.4

12/23e

955.3

462.6

110

60

39.0

1.4

12/24e

1,385.8

664.5

146

62

28.3

1.4

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

Set up to benefit from a ‘flush through’ effect in Q423

Ounces produced but not yet delivered to Wheaton increased by 24koz GEOs in Q323 to 2.89 months of production. This is at the upper end of WPM’s target range, but sets it up to benefit from a notable ‘flush through’ effect in Q423.

Material mid- to longer-term growth profile

In September, Edison revised its longer-term gold prices higher by an average of US$199/oz, or 10.5%. This will complement WPM’s organic growth pipeline of five brownfields projects in the process of expansion and six greenfields projects in the course of development and has increased our estimate of operational cash flows in FY26 from US$2.71/share to US$2.88/share and our estimate of EPS from US$1.90/share to US$2.07/share as annual production heads towards 900koz GEOs per annum (cf 600.9koz in FY23e).

Valuation: Up 10.6% to C$82.44 in FY26

Using a capital asset pricing model (CAPM)-type method, whereby we discount cash flows at a nominal 9% per year, our ‘terminal’ valuation of WPM in FY26 has risen by 10.6% to US$59.74 (C$82.44) per share, assuming zero subsequent long term growth in real cash flows, and to US$49.82 (C$68.75) per share at the start of FY24. Alternatively, assuming no purchases of additional streams (which we think unlikely), we calculate a value per share for WPM of US$62.78 or C$86.64 or £51.35 in FY26, based on a 30.4x historical multiple of contemporary earnings. In the meantime, WPM’s shares are trading on near-term financial ratios that are lower than those of its peers on at least 55% of common valuation measures if Edison forecasts are used. Stated alternatively, if WPM were to trade at the average multiples of its peers, we calculate that its share price should be US$45.15, or C$62.31, currently (based on Edison forecasts and average consensus multiples).

Q323 results

Wheaton’s Q323 production of 154,800oz GEOs and sales of 119,030oz GEOs were 2.3% higher and 1.3% lower than our prior expectations, as a result of which WPM recorded revenue for the quarter that was 1.0% lower than our forecast. However, this was more than balanced by lower than expected costs of sales and centralised expenses to result in a positive variance of US$4.0m (or 3.4%) at the pre-tax level and one of US$4.2m (or 3.6%) at the post-tax level.

A complete analysis of WPM’s underlying financial and operating results relative to both Q223 and Edison’s prior expectations is provided in the exhibit below:

Exhibit 1: WPM Q323 results*

US$000s
(unless otherwise stated)

Q422

Q123

Q223

Q323e

Q323

Change

(%)

Variance

(%)

Variance

(units)

Silver production (koz)

5,352

4,927

4,417

3,257

3,363

-23.9

3.3

106

Gold production (oz)

70,099

73,037

85,083

103,240

105,436

23.9

2.1

2,196

Palladium production (oz)

3,869

3,705

3,880

3,871

4,006

3.2

3.5

135

Cobalt production (klb)

128

124

152

204

183

20.4

-10.3

-21

Silver sales (koz)

4,935

3,749

4,437

2,624

2,965

-33.2

13.0

341

Gold sales (oz)

68,996

62,605

75,294

81,078

74,426

-1.2

-8.2

-6,652

Palladium sales (oz)

3,396

2,946

3,392

3,483

4,242

25.1

21.8

759

Cobalt sales (klb)

187

323

265

204

198

-25.3

-2.9

-6

Average realised Ag price (US$/oz)

21.52

22.85

24.13

23.56

23.73

-1.7

0.7

0.17

Average realised Au price (US$/oz)

1,725

1,904

1,986

1,926

1,944

-2.1

0.9

18

Average realised Pd price (US$/oz)

1,939

1,607

1,438

1,253

1,251

-13.0

-0.2

-2

Average realised Co price (US$/lb)

22.62

15.04

13.23

15.16

13.87

4.8

-8.5

-1.29

Average Ag cash cost (US$/oz)

5.00

5.07

5.01

5.50

5.10

1.8

-7.3

-0.40

Average Au cash cost (US$/oz)

475

496

461

442

444

-3.7

0.5

2

Average Pd cash cost (US$/oz)

357

294

261

226

223

-14.6

-1.3

-3

Average Co cash cost (US$/lb)

***16.52

***3.30

3.20

2.73

2.66

-16.9

-2.6

-0.07

Sales

236,051

214,465

264,972

225,432

223,137

-15.8

-1.0

-2,295

Cost of sales

Cost of sales, excluding depletion

61,730

51,964

58,642

51,599

49,808

-15.1

-3.5

-1,791

Depletion

53,140

45,000

54,474

46,872

46,435

-14.8

-0.9

-437

Total cost of sales

114,870

96,964

113,116

98,470

96,243

-14.9

-2.3

-2,227

Earnings from operations

121,181

117,501

151,856

126,961

126,894

-16.4

-0.1

-67

Expenses and other income

– General and administrative**

19,773

18,874

16,640

16,436

14,678

-11.8

-10.7

-1,758

– Foreign exchange (gain)/loss

– Interest paid/(received)

1,377

1,378

1,352

1,454

1,407

4.1

-3.2

-47

– Other (income)/expense

(3,935)

(7,387)

(8,811)

(8,431)

(10,688)

21.3

26.8

-2,257

Total expenses and other income

17,215

12,865

9,182

9,460

5,397

-41.2

-42.9

-4,063

Earnings before income taxes

103,966

104,636

142,675

117,502

121,497

-14.8

3.4

3,995

Income tax expense/(recovery)

222

205

91

250

30

-67.0

-88.0

-220

Marginal tax rate (%)

0.2

0.2

0.1

0.2

0.0

-75.3

-87.7

0

Net earnings

103,744

104,431

142,584

117,252

121,467

-14.8

3.6

4,215

Average no. shares in issue (000s)

452,070

452,370

452,892

452,892

452,975

0.0

0.0

83

Basic EPS (US$)

0.229

0.231

0.315

0.259

0.268

-14.9

3.5

0.01

Diluted EPS (US$)

0.229

0.230

0.314

0.259

0.268

-14.6

3.5

0.01

DPS (US$)

0.15

0.15

0.15

0.15

0.15

0.0

0.0

0.00

Source: WPM accounts, Edison Investment Research. Note: Change is Q323 cf Q223 (excluding exceptional items). Variance is actual cf forecast. *Excluding impairments, impairment reversals and exceptional items (unless otherwise indicated). **Forecasts now include stock-based compensation costs. ***Cobalt inventory is held on WPM’s balance sheet at the lower of cost and net realisable value; cash cost per pound of cobalt sold are therefore affected by changes in the valuation of inventory quarterly. Totals may not add up owing to rounding.

As a result, Wheaton’s adjusted EPS exceeded both Edison’s forecast for the quarter and the prior market consensus:

Exhibit 2: WPM Q323 actual EPS forecasts cf Edison and consensus (US$/share)

Q123

Q223

Q323e

Q323

Variance

(%)

Edison forecasts

0.231

0.315

0.259

0.268

+3.5

Mean consensus

0.231

0.315

0.254

0.268

+5.5

High consensus

0.231

0.315

0.280

0.268

-4.3

Low consensus

0.231

0.315

0.230

0.268

+16.5

Source: Refinitiv, Edison Investment Research. Note: As at 8 November 2023.

At the level of the individual mines, Constancia, Zinkgruvan, Neves-Corvo, Marmato, Sudbury and Stillwater all outperformed our prior expectations in terms of production, while Los Filos and Aljustrel underperformed.

Compared with the prior year period, Constancia and Sudbury benefited from a rising grade profile, while San Dimas, Antamina and Voisey’s experienced a falling one (albeit this was counteracted in the case of San Dimas by higher mill throughput). Most striking was production at Salobo, where production of gold attributable to WPM was a) at its highest since Q419, b) close to record levels and c) almost exactly where it was predicted to be, given the level of copper production reported by Vale in the quarter as Salobo III continues to ramp up, as shown in the graphs below:

Exhibit 3: Gold production attributable to WPM from Salobo, Q316–23

Exhibit 4: Salobo copper production vs. gold production attributable to WPM, Q316–23

Source: Wheaton Precious Metals, Edison Investment Research

Source: Wheaton Precious Metals, Vale, Edison Investment Research

Exhibit 3: Gold production attributable to WPM from Salobo, Q316–23

Source: Wheaton Precious Metals, Edison Investment Research

Exhibit 4: Salobo copper production vs. gold production attributable to WPM, Q316–23

Source: Wheaton Precious Metals, Vale, Edison Investment Research

Entering Q423:

Newmont has since begun the safe ramp-up of operations at Penasquito, having announced a definitive agreement to end the strike there on 13 October. Newmont expects to reach full operating capacity by end-Q423, albeit we estimate that there could be a lag of up to eight weeks before sales catch up with production.

Full mining activities are continuing in the Pampacancha pit at Constancia (15.4% of sales in Q223), as a result of which gold production rose to a record level in Q323 and silver production to pre-COVID levels. Note that production of gold, in particular, is now expected to remain at elevated levels at Constancia until at least FY25 (see ‘Constancia site visit overview’, below).

Exhibit 5: Production of gold and silver attributable to WPM from Constancia, Q414–Q323 (oz and koz)

Source: Wheaton Precious Metals, Edison Investment Research. Note: As reported.

Voisey’s Bay (1.3% of sales in Q223) is continuing to mine lower-grade material during its ongoing transition between the depletion of the Ovoid open-pit mine and ramp-up to full production of the Voisey’s Bay underground project. Production in the third quarter was also affected by maintenance at the Long Harbour refinery (from May to July) that was longer than in 2022. Vale reports that physical completion of the Voisey’s Bay underground mine extension was 88% at the end of Q323 (cf 85% at end-Q223 and 83% at end-Q123), with Reid Brook’s bulk material handling system near mechanical completion, and the commissioning of sub-systems currently taking place. Vale achieved its first ore production from the Reid Brook deposit, the first of two underground mines to be developed at Voisey’s Bay, in Q221. Eastern Deeps, the second deposit, has now also started to extract development ore from the mine and has begun its main production ramp-up in H223 as anticipated.

On 12 September, it was announced that as a result of low zinc prices, the production of zinc and lead concentrates at Aljustrel would be halted until Q225. However, it will continue with the production of copper concentrates.

Ounces produced but not yet delivered

At 29.4%, the degree of under-sale of gold in Q323, relative to production, was materially higher than the prior historical average of 6.8% (from Q112 until Q223) and a record in terms of ounces, albeit 79% of the sales shortfall (or 24,601oz out of 31,010oz) could be accounted for by the shortfall at Salobo as sales lagged the ramp-up of Salobo III. By contrast, the 11.8% under-sale of silver relative to production was exactly in line with its prior historical average and contributed to a notable run down in silver ounces produced but not sold (see below).

Exhibit 6: Over/(under) sale of silver and gold as a percentage of production, Q112–Q323

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

As a result, while gold ounces produced but not delivered increased by more than a third (or 26,520oz) to 99,923oz, silver ounces produced but not delivered decreased by 15.5% to just 1.1Moz.

Consequently, we calculate that gold and silver ounces produced but not yet delivered as at end-September now amount to 3.33 and 0.76 months of full-year production (cf 2.67 and 0.79 months as at end-Q223 previously), respectively, and compare with WPM’s target levels of two to three months for gold and palladium and two months for silver (see below).

Exhibit 7: WPM ounces produced but not yet delivered, Q316–23 (months of production)

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

General and administrative expenses

At the time of its Q422 results, WPM provided guidance for non-stock general and administrative (G&A) expenses of US$47–50m or US$11.75–12.50m per quarter for FY23 (cf US$47–49m in FY22, US$42–44m in FY21 and US$40–43m in FY20), including all employee-related expenses, charitable contributions, etc, but excluding performance share units (PSU) and equity settled stock-based compensation. In the event, at US$10.3m, non-stock G&A expenses in Q323 were 12.0% below the bottom of the range implied by WPM’s official guidance:

Exhibit 8: WPM general and administrative expenses, Q221–Q323 (US$000s)

Item

Q321

Q421

FY21

Q122

Q222

Q322

Q422

FY22

Q123

Q223

Q323

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

4,283

4,618

18,244

5,345

5,061

4,629

4,187

19,222

5,021

4,749

4,591

Other (inc. depreciation, donations and professional fees)

5,173

6,818

23,475

4,871

5,784

5,137

7,112

22,905

6,456

7,407

5,751

Non-stock based G&A

9,456

11,436

41,719

10,216

10,845

9,766

11,299

42,127

11,477

12,156

10,342

Guidance

10,500–11,250

11,717–13,717

42,000–44,000

11,750–12,250

11,750–12,250

11,750–12,250

11,750–12,250

47,000–49,000

11,750–12,500

11,750–12,500

11,750–12,500

PSU* accrual

2,824

4,203

14,004

8,560

110

(1,491)

7,035

14,214

5,855

2,625

2,604

Equity settled stock-based compensation

1,315

1,315

5,262

1,342

1,498

1,568

1,439

5,846

1,542

1,859

1,732

Stock-based G&A

4,139

5,518

19,266

9,902

1,608

77

8,474

20,060

7,397

4,484

4,336

Total general & administrative

13,595

16,954

60,985

20,118

12,453

9,843

19,773

62,187

18,874

16,640

14,678

Total/Non-stock based G&A (%)

+43.6

+48.3

+46.2

+96.9

+14.8

+0.8

+75.0

+47.6

+64.5

+36.9

+41.9

Source: WPM, Edison Investment Research. Note: *Performance share units. Totals may not add up owing to rounding.

Given the performance of WPM’s shares during the quarter, stock-based G&A expenses in Q223 were well within the error of estimation implied by the regression analysis between the two (as shown in Exhibit 9, below):

Exhibit 9: Graph of historical share price change (US$/share) versus stock-based G&A expenses (US$000s), quarterly, Q419–Q323

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

The analysis of stock-based G&A expenses over the past 16 quarters relative to the change in WPM’s share price (also in US dollars) continues to exhibit a close Pearson product-moment (correlation) coefficient between the two of 0.78, which remains 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) and this therefore continues to remain the basis of our quarterly and full-year forecasts for G&A expenses in Exhibit 14.

FY23 and five-year and 10-year guidance

At the time of its 21 February production and sales announcement, Wheaton also provided detailed production guidance for FY23 (for the first time), as well as for the five years from FY23–27 (inclusive) and the 10 years from FY23–32 (inclusive). These remain unchanged and compare with Edison’s forecasts over the equivalent periods, as follows:

Exhibit 10: WPM precious metals production – Edison forecasts cf guidance

FY23e

FY23–27 average*

FY23–32 average

Previous Edison forecast

Silver production (Moz)

17.2

Gold production (koz)

357.8

Cobalt production (klb)

683

Palladium production (koz)

15.3

Gold equivalent (koz)

602.3

802

819

Current Edison forecast

Silver production (Moz)

16.9

Gold production (koz)

360.0

Cobalt production (klb)

663

Palladium production (koz)

15.5

Gold equivalent (koz)

600.9

796

814

WPM guidance

Silver production (Moz)

20.0–22.0

Gold production (koz)

320–350

Cobalt & palladium production (koz AuE)

22–25

Gold equivalent (koz)

600–660

810

850

Source: WPM, Edison Investment Research forecasts. Note: *Edison forecasts include Salobo III from FY23, Rosemont/Copper World from FY27 and Antamina extension from FY28.

The decline in Edison’s gold equivalent forecasts in FY23–27 and FY23–32 arise almost solely as a result of the cessation of zinc and lead concentrates at Aljustrel from September 2023 until Q225. Otherwise, WPM’s updated five-year and 10-year guidance is based on standardised pricing assumptions of US$1,850/oz gold, US$24.00/oz silver, US$1,800/oz palladium and US$18.75/lb cobalt. Of note in this context is an implied gold/silver ratio of 77.1x, which compares with its current ratio of 87.2x, but a long-term average of 61.5x (since gold was demonetised in August 1971). At the standardised prices indicated, our gold equivalent production forecast of 600.9koz gold equivalent (AuE) for FY23 self-evidently lies within WPM’s guidance range of 600–660koz AuE.

Otherwise, readers will note that Edison’s medium-term production forecasts are within 2% of WPM’s guidance for the period FY23–27 and within 5% of its longer-term guidance for FY23–32, which we regard as an acceptable range of variance, given the time horizons involved. Note that both Edison’s and Wheaton’s estimates necessarily exclude potential future stream acquisitions (of which there are likely to be a number in the time frame indicated).

Growth opportunities

Short-term opportunities

Constancia

As per Hudbay’s recent earnings releases, full mining activities have resumed in the Pampacancha pit since February, as a result of which we are forecasting that gold production attributable to Wheaton from Constancia will remain at elevated levels into FY25 (see ‘Constancia site visit overview’, below).

San Dimas

Since First Majestic’s acquisition of Primero in January 2018, it has been developing a long-term mine and mill optimisation plan for San Dimas, including:

an additional leach tank with safety screen,

modernisation of the general plant control and monitoring capabilities,

debottlenecking and optimisation of the crushing circuit for consistent operation,

upgrading the tailings filtration plant,

modernisation of the Merrill-Crowe and smelting operations,

an estimated 40% reduction in ore drive development dimensions allowing for reduced dilution and reductions in costs associated with standard ground support, and

pillar recoveries from the Tayoltita, Santa Rita and Noche Buena mines to add a further c 300tpd (12%) to throughput.

Voisey’s Bay

Physical completion of the Voisey’s Bay mine extension is reported, by its operator, Vale, to be 88% complete, while the underground project is in the process of ramping up to full production. Within that:

The paste system commissioning has concluded, with performance testing ongoing.

Reid Brook’s bulk material handling system is near to mechanical completion, with the commissioning of sub-systems currently taking place.

Assembly of the bulk material handling at Eastern Deeps continues.

Stillwater

Production of palladium and gold at Stillwater (operated by Sibanye-Stillwater) will increase under the influence of the Fill-the-Mill project at East Boulder as well as the Blitz project scheduled for FY24.

Medium-term opportunities

In the medium term, Wheaton has six brownfields projects that are progressing on their route to production:

In November 2022, Aris Mining released the results of the Marmato Lower Mine expansion pre-feasibility study, involving the development of a new underground mine and a 4,000tpd ore processing facility to add to the existing 1,250tpd Marmato Upper Mine, and on 12 July 2023 announced that it had received approval from Colombia’s Corporación Autónoma Regional de Caldas for its Environmental Management Plan, which permits the go-ahead of the Marmato Lower Mine. The Lower Mine project is estimated to cost c US$280m in initial capex and tender bids for key long lead procurement items such as mills, crushers, feeders, thickeners, the oxygen plant, gold room and filters are already reported to be in the market. Orders are in the process of being placed and the new 4,000tpd mill is scheduled for mechanical completion in Q325.

On 16 May 2023, Wheaton announced the purchase of a stream from Lumina’s Cangrejos project in Ecuador. Under the terms of the stream, WPM will pay Lumina a total upfront cash consideration of US$300m in tranches, in return for 6.6% of the payable gold from the project until 700,000oz gold have been delivered, whereupon the stream will be reduced to 4.4% of the payable gold production for the life of the mine. Attributable production from the mine is forecast to average over 24,000oz gold pa for the first 10 years of production and over 24,500oz gold pa for the full 26-year life of the mine. WPM will make ongoing payments for the gold ounces delivered equal to 18% of the spot price of gold until the uncredited deposit is reduced to nil and 22% of the spot price of gold thereafter. For the purposes of our modelling, we have assumed that first production from the Cangrejos mine will occur in FY29. In the meantime, Lumina has recommenced drilling at the project, with nine rigs currently at site, initiating both geotechnical and infill resource definition programmes, which it expects to complete towards the end of the year, with the aim, inter alia, of converting probable mineral reserves to proven status. Drilling will also produce fresh material for the next round of metallurgical test work to support its ongoing full feasibility study, which is expected to be completed in Q125. To date, assays received are reported to be tracking those predicted by the pre-feasibility study (PFS) ‘extremely well’.

B2Gold has confirmed that site construction at Goose is ongoing and that the project’s first ice road has successfully transported all of the materials required to complete building envelopes in 2023. As such, the project remains on schedule for mill completion and first gold in Q125. In the meantime, B2Gold is initiating an exploration programme to further define untapped potential and unlock further opportunities for growth. Plans for underground mining development have been accelerated to increase average gold production to over 300koz pa in the first five years of mining. Underground mining is also now scheduled to mine and backfill the full Umwelt crown pillar earlier in the mine life, which is expected to contribute a further c 150koz of gold production to the life of mine plan. As of 18 September:

Construction capex remains in line with the company’s June 2023 estimate of C$800m.

Concrete and steel work in the mill area are progressing ahead of schedule.

Phase 1 of the accommodation complex has been opened.

Preparations for the company’s second, 2023/24 ice road are well under way; in contrast to previous years, this will involve an earlier start to the road’s construction, which will contribute to de-risking the trucking season. In addition, construction will begin from the middle of the road and work outwards in either direction, which should allow it to be completed earlier than in previous years.

The purchase of materials and supplies needed to support the 2024 construction campaign has been completed and all materials have been provided to the ports for the 2023 sealift.

11,000m of drilling over 44 drill holes (average 250m per hole) have been completed to date in 2023 at Back River for the purpose of testing the Umwelt and Llama deposits down plunge for resource confirmation and resource expansion.

On 9 March, Artemis received its last major permit ahead of major construction work for its Blackwater mine in the form of a BC Mines Act Permit. It also closed the associated US$385m project loan facility. Subsequently, in May, it reported that site works were under way with over 280 hectares logged and cleared including priority infrastructure areas such as the mine haul road network and water management structures. Where required, the existing road network has also been upgraded to allow access for heavy construction equipment to key infrastructure locations. A laydown area has been completed to accommodate the construction fleet, maintenance facilities and construction offices and a construction camp has also been completed, including the installation and commissioning of a wastewater treatment plant, expanding the site capacity to 420 people. The initial fleet is expected to be delivered in Q423 and to be ‘shovel ready’ in H224. On 4 July, Artemis announced receipt of the Fisheries Act Authorization for development of Blackwater, which will facilitate the start of construction of water diversion structures and dams in the Davidson Creek valley, which runs through the basin of the Blackwater tailings storage facility. On 14 June, Wheaton amended its Blackwater Gold Precious Metals Purchase Agreement (PMPA) with Artemis. Under the terms of the amended agreement, Wheaton is now entitled to purchase an amount of gold equal to 8% of payable gold production until 464,000oz have been delivered (cf 279,908oz previously), with this threshold increasing should there be a delay in the anticipated timing of deliveries. Once the threshold has been achieved, WPM’s attributable gold production will drop to 4% of payable gold production – now estimated by Edison to be in FY40 cf FY35 previously – for the life of the mine. In exchange for the amendment, Wheaton has committed to pay an additional upfront cash consideration of US$40m, payable in four instalments, with the first payment of US$10m having been made on 15 June. In conjunction with this amendment, Artemis announced that it is to commit to additional investment in its Phase 1 development in order to facilitate the potential fast-tracking of its Phase 2 expansion. After a brief hiatus in July on account of the wildfires in British Columbia, Artemis announced that it had returned to full construction on 3 August. As of 24 October:

The project remains fully funded and within guidance for initial capex and on schedule for first gold in H224.

Overall construction was 45% complete.

Earthworks have continued with over 90% of access roads needed for Phase 1 construction now operable. Construction of the site water management facilities, including the water management pond and Davidson Creek diversion, is well advanced.

Process plant construction was reported to be progressing well, including the mill building foundation preparation, reagents building, ball mill pedestals, carbon in leach (CIL) tanks, primary, secondary and tertiary crusher structures and the reclaim tunnel civil works. Hydro testing of the first CIL tank has also been completed.

The run-of-mine (ROM) wall was more than 75% complete as at end-September; civil works relating to the ROM dump slab civil works were scheduled to have commenced ‘shortly thereafter’.

The construction fleet has been expanded to include 60t and 100t rigid frame haul trucks and 150t excavators in order to provide more material movement capability. Initial deliveries of the owner mining fleet are reported to be well advanced, including 400t hydraulic backhoe excavators and three 240t rigid frame haul trucks which are in various stages of assembly. Fleet assembly is expected to be sufficiently advanced by year-end to allow pre-stripping and earthworks support in 2024. The majority of the remainder of the fleet is scheduled to arrive in H124.

Key mechanical equipment packages are in various stages of delivery, including the primary, secondary and tertiary crushers and associated dry screens, while the wet plant vibrating screens, ADR plant, gravity concentrators and intensive leach reactor are all on site. The major ball mill components, including the shell and head segments, were in transit and are expected to have arrived by now.

The electrical machinery control centre is complete and will undergo factory testing in early Q423.

In the meantime, contracts are being finalised for explosives supply, mine fleet tyre supply and the assay laboratory, while proposals for the oxygen plant and water treatment plants are in the final stages of being evaluated. Right-of-way clearing and construction of the 135km 225kV transmission line was scheduled to begin in Q423.

Finally, a study to evaluate the benefits of advancing the Phase 2 expansion earlier than contemplated is reported to be progressing well and its findings are expected to be released in early 2024.

Generation Mining received the final environmental approvals for its Marathon palladium-copper project in northern Ontario in November 2022. In March 2023, it released the results of an updated feasibility study showing an after tax NPV6 of C$1.16bn and a project internal rate of return of 26%, ahead of executing a mandate letter to arrange a senior secured project finance facility of up to US$400m to fund the construction and development of the project (a key milestone). This year, it has secured key provincial permits related to species at risk, tree harvesting and water quality, etc, so that early construction works can commence. In November 2023, it announced that Ontario had accepted and filed its closure plan for Marathon (another major milestone). Construction is now anticipated to start imminently and production in Q3–Q425, to which end it has already purchased a ball mill and an unused surplus SAG mill.

Adventus Mining signed the investment contract for the Curipamba project with the Ecuadoran government in December 2022. To date in 2023, it has advanced detailed engineering and procurement activities and completed the first of two phases of the required environmental and social impact assessment, managed and overseen by the government. However, on 1 August, the Constitutional Court of Ecuador admitted for processing an unconstitutionality claim filed by the indigenous group CONAIE and other plaintiffs against Presidential Decree 754, signed by the president of Ecuador on 31 May, which regulates environmental consultation for all public and private industries and sectors in Ecuador – not limited to the metals and mining sector. As a result, the Constitutional Court ordered the provisional suspension of the decree until it can resolve the claim, which will require the government of Ecuador to present argument, within 15 working days, to evidence the constitutionality of the decree for the consideration of the Constitutional Court. The immediate effect of the suspension is that no medium- or high-impact projects, from any sector or industry in the country, including the Curipamba project, will be able to obtain an environmental licence until the Constitutional Court resolves the issue. The government of Ecuador has stated that it will employ all measures at its disposal to respond to the Constitutional Court. On 7 September, in a follow-on writ, the Constitutional Court declared the process a priority and set a public hearing for 18 September. Historically, the court can be expected to issue a resolution within two to three months following the start of any public hearing. Such a ruling is expected to provide clarifications to the decree and the corresponding final step in the environmental consultation process and environmental licence. Once the environmental consultation process is restarted, the timing for final environmental and social impact assessment approval for the project could be as short as two months, with construction activities commencing shortly thereafter. As part of this process, on 2 October, Adventus announced that the Curipamba project has been issued a favourable ‘Certificate of No Affect of Water’ by the Ministry of Environment and Water (a significant milestone) that allows the planned and designed projected infrastructure to be constructed in an area with the presence of surface and ground water sources. In light of this, Adventus and its partners have updated execution plans for the potential start of construction activities to H224, while continuing to advance and finalise detailed engineering, secondary permits, as well as a financial investment via strategic discussions with third parties. In the meantime, its management team reports that it has identified, and continues to evaluate, several significant improvements to the project that are expected ‘to improve project economics inclusive of cost inflation factors’.

On 24 October 2023, Wheaton announced the purchase of a stream from Waterton’s Mineral Park mine in Arizona. Under the terms of the stream, WPM will pay Waterton a total upfront cash consideration of US$115m in four tranches, in return for 100% of the payable silver from the mine. Attributable production is forecast to average over 690koz silver pa for the first five years of production and over 740koz Ag pa for the official 12-year life of the mine – although Wheaton believes that the potential life of the mine is materially longer as a consequence of the reconfiguration of the mill layout to efficiently process 50ktpd (cf 35ktpd previously). WPM will make ongoing payments for the silver ounces delivered equal to 18% of the spot price of silver until the uncredited deposit is reduced to nil and 22% of the spot price of silver thereafter. The mine itself exploits a copper-molybdenum-silver porphyry deposit with a long mining history in the Cerbat Mountains in the north-west of Arizona and represents one of the largest copper reserves in the US and the world, with an estimated 809Mt ore at a grade of 1.9g/t Ag containing c 49.2Moz Ag. Wheaton had a previous stream over the mine when it was owned and operated by Mercator Mineral Park Holdings of British Columbia in 2003. However, the mine closed in December 2014 when the company filed for bankruptcy. It was subsequently acquired by the Origin Mining Company (a subsidiary of Waterton) in January 2015. Note that Waterton also owns the Elko Mining Group and Carlin Resources LLC in Nevada. It is fully funded and is investing approximately US$600m to execute Phase 2 of its operating plan at Mineral Park to bring the site to over 100Mlb CuE annually and fully modernise the operation after construction is completed by the end of Q125. While detailed production forecasts for Mineral Park are not readily available, for the purposes of our forecasting, we are assuming commercial production from the start of FY26 and (tentatively) estimate the following initial cash flows attributable to WPM from its investment:

Exhibit 11: Mineral Park estimated gross cash flows, FY23–37 (US$000s)

Year

2023

2024

2025

2026

2027

2028

2029

2030

2031

2032

2033

2034

2035

2036

2037

Gross cash flows

-25,000

-50,000

-40,000

13,777

14,333

14,910

15,511

16,136

18,872

19,633

20,424

20,211

21,025

21,873

22,754

Source: Edison Investment Research

Long-term opportunities

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 at the time, depending on the grade of the material processed, WPM was to have made a payment to Vale for this expansion, subject to a 90-day completion test, which WPM estimated was to have been in the range US$550–670m in FY23–25, in return for which it was to be entitled to its full 75% attributable share of expanded gold production.

After the end of Q422, however, Wheaton and Vale agreed to amend the Salobo PMPA to adjust the expansion payment terms to provide increased flexibility for the ramp-up of the expansion, while also maintaining an incentive for Vale to maximise grade on an annual basis. The expansion payment will now be phased, with Wheaton making an initial payment once actual throughput is expanded above 32Mtpa and a second payment if actual throughput is expanded above 35Mtpa by 1 January 2031. The total cumulative payments will range from US$283m to US$552m, depending on the timing of the production increases. Where before Edison had been forecasting that Wheaton would make one payment of US$370m in FY24, when the 32Mtpa test is completed, followed by a further one of US$140m in FY25, when the 35Mtpa test is completed, we now believe (in line with Wheaton’s disclosures on ‘other contractual obligation and contingencies’ in its management discussion & analysis) that it will make its first US$370m payment in FY23. In addition, Wheaton will be required to make annual payments of between US$5.1m and US$8.5m for a 10-year period following payment of the expansion payments if the Salobo mine maintains a high-grade mine plan.

These payments compare 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.

Once full capacity at Salobo III has been completed, however (NB expected in FY24), WPM believes that reserves and resources at the mine could support a further 33% capacity increase, from 90ktpd to 120ktpd (denoted Salobo IV). Notwithstanding its long-term underground potential, WPM believes such an expansion could be supported by open-pit mining alone. Under the terms of its agreement with Vale, there would be no additional payment due from WPM in respect of the Salobo IV expansion.

Rosemont/Copper World

Rosemont/Copper World is in the vicinity of a number of large porphyry-type producing copper mines and will be one of the largest copper mines in the US, with initial output of c 92,000t copper per year (c 98 of total US copper production), potentially rising to c 101,000tpa. Total by-product production of silver attributable to WPM is estimated to be c 1.6Moz Ag pa for Phase I, followed by c 2.4Moz Ag pa for Phase II.

The evolution of the project from Rosemont to Copper World

In March 2019, Rosemont/Copper World’s operator, Hudbay, 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 (ACOE), which was effectively the final material administrative step before the Rosemont 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).

A legal challenge, launched in July 2019, has since delayed the project. However, Hudbay has continued to explore in and around the area of the mine and, on 22 September 2021, announced the intersection of additional high-grade copper sulphide and oxide mineralisation predominantly located on its wholly owned patented mining claims (denoted Copper World). To date, seven deposits have been identified at Copper World with a combined strike length of over 7km and, on 15 December 2021, Hudbay announced a maiden mineral resource at Copper World of 272Mt in the indicated category and 142Mt in the inferred category, both at an average grade of 0.36% copper. The mineralisation consisted 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. As a consequence, it was determined that approximately 33Mt of inferred mineral resources at the Bolsa deposit, which were previously 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 explore the gap between the Bolsa and Rosemont deposits. Note that the Copper World discovery is included in WPM’s area of interest under its PMPA with Hudbay.

A new development plan

As a result of these discoveries, Hudbay adjusted its plan to develop the district. Among other things, it has now acquired a private land package totalling approximately 4,500 acres to support an operation on private lands. The initial technical studies for Copper World were incorporated into a preliminary economic assessment (PEA) investigating the development of the Copper World deposits in conjunction with an alternative plan for the Rosemont deposit, which was announced to the market on 8 June 2022, and proposed a two-phase mine development plan. The first phase of the mine plan required only state and local permits and demonstrated a 16-year mine life. The second phase then extended the mine life to 44 years and incorporated an expansion onto federal lands to mine the entire Rosemont and Copper World deposits. Under any circumstances, the second phase of the mine plan will be subject to the federal permitting process and the company expects that it will be able to pursue the federal permits within the constraints imposed by the courts’ most recent legal decisions if any subsequent appeals are not successful.

On 24 May 2022, Hudbay received a favourable decision from the US District Court for the District of Arizona on all issues relating to the development of Copper World, including that Copper World and Rosemont are not connected under the National Environmental Policy Act (NEPA) and, therefore, that the ACOE does not have an obligation to include Copper World as part of its NEPA review of Rosemont. The District Court also granted Hudbay’s motion to dismiss the Copper World preliminary injunction request filed by the plaintiffs in the two lawsuits challenging the Section 404 Clean Water Act permit for Rosemont on the basis that the lawsuits were moot after the company surrendered its 404 permit back to the ACOE in April 2022. Within this context, the ACOE has never determined that there are jurisdictional waters of the US on the Copper World site and Hudbay has independently concluded through its own scientific analysis that there are no such waters in the area. In this respect, Hudbay believes the District Court’s decision, together with the 12 May 2022 decision, clarifies the permitting path for Copper World, including the requirements to receive federal permits for the second phase only (ie years 16 to 44 of the project) under existing mining regulations and no requirement for a 404 (water) permit. In May, Hudbay also received a favourable ruling from the US Court of Appeals for the Ninth Circuit that reversed the US Fish and Wildlife Service’s designation of the area near Copper World and the former Rosemont project as jaguar critical habitat. While this ruling does not affect the state permitting process for Phase I of Copper World, it is expected to simplify the federal permitting process for Phase II of the project. In the meantime, Hudbay continues to expect to receive the two remaining state permits required (an Aquifer Protection Permit and an Air Quality Permit) in H223.

PEA and PFS completed ahead of potential project sanctioning in 2024

Resources were reported to have expanded materially to 792Mt in the measured category, 381Mt in the indicated category and 262Mt in the inferred category at the time of Hudbay’s PEA at an average 0.40% copper grade. In April 2022, the company commenced early works at Copper World with initial grading and clearing activities at site and, in January, it received an approved right-of-way from the Arizona State Land Department that will allow for infrastructure such as roads, pipelines and powerlines to connect the properties in the company’s private land package. Shortly afterwards, it also announced the receipt of confirmation from the Army Corps of Engineers that its previous surrender of the Section 404 Clean Water Act permit for the former Rosemont project had been formally accepted and revoked, as requested.

On 8 September 2023, Hudbay announced the results of its enhanced PFS for Phase I of Copper World (requiring state and local permits only). The main findings of the study were as follows:

A post-tax net present value (8%) of US$1.1bn and a post-tax internal rate of return of 19.2% over an extended mine life of 20 years (cf 16 years in the PEA of June 2022) at a copper price of US$3.75/lb.

Average annual copper production over the first 10 years of approximately 92,000t at cash costs and sustaining cash costs of US$1.53/lb and $1.95/lb Cu, respectively.

An 18% increase in total copper production and higher mill head grades.

Lower initial capex of c US$1.3bn (cf US$1.9bn in the previous preliminary economic assessment), owing to the deferral of the construction of a concentrate leach facility to year four of the project, with the potential to be fully funded from operating cash flows or to benefit from future government incentives for critical minerals processing.

A simplified project flow sheet including a 60,000tpd sulphide concentrator that will produce copper concentrate as a final product until the addition of a concentrate leach facility and a solvent extraction and electrowinning (SX/EW) plant in year five that will allow the project to produce copper cathodes. The production of copper cathodes will reduce the project’s carbon footprint and make Copper World the third-largest domestic copper cathode producer in the US, as well as improving the country’s green energy independence with ‘Made in America’ copper. Moreover, total greenhouse gas (GHG) emissions are expected to be 14% lower than an operation that produces only copper concentrate.

Significant benefits for the community and local economy via the payment of more than US$850m in US federal and state taxes and the creation of an estimated 400 direct and 3,000 indirect jobs.

Copper World is one of the highest grade open-pit copper projects in the Americas with proven and probable mineral reserves of 385Mt at 0.54% Cu.

Mineral resources (inclusive of mineral reserves) of 1,200Mt in the measured and indicated categories at 0.42% Cu, which confirms the upside at Copper World with an intended Phase II expansion of mining activities onto federal land to further enhance project economics and extend the mine life well beyond 20 years.

Hudbay will now complete a definitive feasibility study as well as receiving all required state and local permits over the next 12 months, while simultaneously evaluating a variety of financing options, including a potential minority joint venture partner, prior to project sanction potentially as early as 2024. As a consequence, Edison is continuing to forecast the start of mining at Copper World in FY27 in the form of pre-stripping activities. However, we have put back our estimate of the first production of gold and silver doré from Rosemont/Copper World to FY32 to coincide with the installation of the SX/EW plant in year five of the project’s life. Readers should nevertheless note that any acceleration in the process of being granted federal permits could allow Hudbay earlier access to higher-grade areas of the orebody, especially at Rosemont. In the meantime, it is continuing exploration and technical work at site.

Antamina

In April 2022, Antamina announced a US$1.6bn investment (now estimated at US$2.0bn) that will lengthen the mine’s useful life from 2028 to 2036. Currently, the mine is carrying out a third and final ‘public participation’ with residents of the northern Andean region of Ancash, where the mine is located, and is awaiting a response from the local authority, Senace, regarding the company’s request to modify its environmental impact assessment (EIA) to allow the mine to extend its operating life by eight years. Production and the mine’s operational footprint would remain the same and it hopes to achieve mine extension approval this year. The mine, which is co-owned by Glencore, BHP, Teck and Mitsubishi Corp, is Peru’s largest, and the world’s second-largest, copper mine.

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 (WPM’s carrying value of Pascua-Lama) 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 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).

A Chilean court ordered Pascua-Lama to close in 2020. However, Barrick is advancing a high-level study into the project, which is thought to be nearing completion. The study is understood to be focusing on the fact that a substantial portion of the resource could be processed by leaching or agitated leaching, which would require only modest modifications to the circuit already built. This raises the possibility that the orebody could be developed in a different manner and Barrick’s goal is to demonstrate a viable project to both the Chilean and Argentinian governments. If successful, it would then pursue permitting options (and, in particular, water permits) and build out a new model for the project’s development, in which case an investment decision on Pascua-Lama could be made as early as 2024.

Other potential future growth opportunities

Wheaton reports that its development team remains ‘exceptionally busy’ evaluating new streams and that it has experienced an ‘influx’ of new opportunities over the course of the past few months. In general, WPM expects to be conducting due diligence processes on approximately 10–12 projects at any one time, which it expects to narrow to three to four target projects over approximately 12 months. Most of the opportunities currently being evaluated by WPM are reported to be the precious metal by-product streams of base metal mines in the US$100–300m size range, although there are also reported to be some more advanced, high-margin, purely precious metals mines included in the evaluation process and some opportunities in excess of US$400m. In the first instance, WPM would fund any such transactions via the US$2bn available under its revolving credit facility, plus the US$833.9m in cash that it has on its balance sheet (at end-Q323) 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, being:

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

the 30% of the gold output at Constancia (operated by Hudbay) that is not currently subject to any streaming arrangement.

Constancia site visit overview

From 27–30 September the operator of the Constancia mine in Peru, Hudbay Minerals, hosted a site visit for analysts attended by the author of this report, among others. Constancia is a significant stream for Wheaton and we estimate that it will account for c 14.1% of its sales in FY23.

A summary of our observations from the visit is as follows:

Constancia, located in Peru’s south-eastern Andes at an altitude of c 4,100m above mean sea level, entered production in 2014, with commercial production declared in Q215. The deposit is classified as a copper-molybdenum porphyry, with an estimated life of 16 years and a low cash cost (US$1.18/lb estimated by Hudbay in FY23e). Its ramp-up was recognised by BHP as being ‘best in class’ and its mill has consistently operated above its original design capacity.

The close and constructive working relationship between Hudbay management and Wheaton management was immediately and obviously apparent.

Productivity benchmarking results at Constancia exceed its peer-group average and it ranks in the first quartile for both asset and labour productivity. Operations are characterised by:

A sophisticated mine-port centralised control system, using both video cameras and radar in real time, with the control room located at the mine camp, rather than the mine site. Among other things, this system has been credited with reducing severe truck accidents by six times since it was introduced.

A good preventative maintenance programme and an excellent warehousing performance (allowing the benefits of the maintenance programme to be realised).

An innovative water management system (including dust suppression) to the extent that it renders heavy rain a ‘challenge’ rather than a problem.

Good inventory management.

Constancia has now finished Stage 4 of its mine plan and has started pre-stripping for Stage 5 at the Constancia Norte pit.

Notwithstanding nine years of historical mining, the mine’s reserve tonnage is close to that reported in its original NI 43-101 technical report in 2014 as a result of subsequent exploration success, while reconciliations between pre- and post-mining estimates of contained metal are generally reported to be within 5% of one another.

Total material moved is anticipated to increase from 74Mt in 2022 to 80–85Mt in future years as a consequence of an expansion in the mining fleet.

After mining through a geological fault, the opportunity exists to re-steepen the walls of the main Constancia pit. In addition a technical evaluation of the viability of adding an additional phase to the current mine plan at Constancia is under way.

Exhibit 12: View of Pampacancha pit

Exhibit 13: View of main Constancia pit

Source: Edison Investment Research. Note mining activity around ‘black’ skarn rocks in the centre of the photograph (marked).

Source: Edison Investment Research

Exhibit 12: View of Pampacancha pit

Source: Edison Investment Research. Note mining activity around ‘black’ skarn rocks in the centre of the photograph (marked).

Exhibit 13: View of main Constancia pit

Source: Edison Investment Research

Constancia’s current 16-year mine life is based on proven and probable reserves only. In the short term, this will incorporate a pushback at the high-grade Pampacancha pit in Q1–Q224, albeit the stripping ratio in FY24 is forecast by Hudbay to be only 1.2 to one and to trend downwards throughout the course of the year. Unlike the main Constancia deposit, the copper grade at the Pampacancha skarn is reported to be approximately three times higher than at the Constancia pit (porphyry) deposit, at c 1.8% Cu cf 0.62% Cu. By contrast, the gold grade uplift (of particular significance to Wheaton) is estimated to be up to 10 times that at the main pit. Approximately 80% of material processed in H223 will be sourced from the Pampacancha pit and, although it will be blended downwards for the purposes of processing, in the short term, copper production is anticipated to be 1.5–2.0x higher than in H123. The increase in gold output is expected to be higher and to last into FY25.

In the meantime, Hudbay controls a large, contiguous block of mineral rights within trucking distance of Constancia, including the Maria Reyna, Cabillito and Kusiorrco deposits. Surface mapping and geochemical sampling confirms that both Caballito and Maria Reyna host sulphide and oxide-rich copper mineralisation in skarns (similar to Pampacancha), hydrothermal breccias and large porphyry intrusive bodies (similar to the main Constancia deposit). Anecdotal analysis of artisanal activity at the Maria Reyna deposit, in particular, suggests that it is very high grade (estimated by Hudbay to be c 3% Cu) with a strong associated gold by-product credit. Beyond that, the opportunity exists to identify and develop additional skarns.

In order to manage its exploration and development pipeline, Hudbay employs 42 people in its social team and conducts approximately 1,200 meetings with local residents per annum. Surface investigation and the archaeological activities necessary to support drill permit applications have been concluded and the company completed a community surface rights exploration agreement to conduct early field work on high grade satellites within the environs of Constancia in August 2022. Although the Pampacancha precedent would imply a 10-year lead time to conduct drilling and define a resource and a reserve prior to production, this timeline is expected to reduce in the absence of a global pandemic and as a result of a more diligently focused negotiating approach by Hudbay, such that production from Maria Reyna, Caballito and Kusiorrco could contribute to Constancia as early as 2031.

Elsewhere, expansion/extension potential exists via recovery improvements at the plant’s molybdenum and copper circuits, and also underground, where a scoping study in 2021 identified 6.5Mt of material at a grade of 1.2% Cu in the inferred category of resources in two high-grade skarn lenses below the Constancia Norte pit, which could contribute to production from 2029.

FY23 guidance and forecasts

In formulating our quarterly forecasts for WPM for Q423 and for FY23, we have reduced our gold price for the remainder of the year by 1.4%, from US$1,968/oz to US$1,940/oz, our silver price by 4.3%, from US$23.25/oz to US$22.26/oz, and our palladium price by 13.0%, from US$1,104/oz to US$1,033/oz, to reflect current prevailing prices. We have also removed our future production and sales forecasts for Aljustrel. As a consequence, our Q423 and FY23 full financial forecasts are now as follows:

Exhibit 14: WPM FY23 forecast, by quarter*

US$000s
(unless otherwise stated)

Q123

Q223

Q323

Q423e
(prior)

Q423e

FY23e

FY23e
(prior)

Silver production (koz)

4,927

4,417

3,363

4,562

4,187

16,894

17,163

Gold production (oz)

73,037

85,083

105,436

96,414

96,414

359,970

357,773

Palladium production (koz)

3,705

3,880

4,006

3,871

3,871

15,462

15,327

Cobalt production (klb)

124

152

183

204

204

663

683

Silver sales (koz)

3,749

4,437

2,965

3,026

2,645

13,796

13,836

Gold sales (oz)

62,605

75,294

74,426

96,393

96,393

308,718

315,370

Palladium sales (oz)

2,946

3,392

4,242

3,856

3,856

14,436

13,676

Cobalt sales (klb)

323

265

198

204

204

990

995

Avg realised Ag price (US$/oz)

22.85

24.13

23.73

22.99

22.34

23.36

23.43

Avg realised Au price (US$/oz)

1,904

1,986

1,944

1,950

1,936

1,944

1,943

Avg realised Pd price (US$/oz)

1,607

1,438

1,251

1,115

1,034

1,310

1,336

Avg realised Co price (US$/lb)

15.04

13.23

13.87

15.16

15.16

14.34

14.60

Avg Ag cash cost (US$/oz)

5.07

5.01

5.10

5.48

5.16

5.07

5.22

Avg Au cash cost (US$/oz)

496

461

444

440

440

457

456

Avg Pd cash cost (US$/oz)

294

261

223

201

186

237

242

Avg Co cash cost (US$/lb)

3.30

3.20

2.66

2.73

2.73

3.23

3.04

Sales

214,465

264,972

223,137

264,911

252,746

955,320

969,780

Cost of sales

Cost of sales, excluding depletion

51,964

58,642

49,808

60,327

57,321

217,735

222,532

Depletion

45,000

54,474

46,435

55,795

54,723

200,632

202,141

Total cost of sales

96,964

113,116

96,243

116,122

112,044

418,367

424,673

Earnings from operations

117,501

151,856

126,894

148,788

140,702

536,953

545,107

Expenses and other income

– General and administrative**

18,874

16,640

14,678

18,799

18,534

68,726

70,750

– Foreign exchange (gain)/loss

0

0

– Net interest paid/(received)

1,378

1,352

1,407

1,454

1,454

5,591

5,639

– Other (income)/expense

(7,387)

(8,811)

(10,688)

(8,659)

(9,901)

(36,787)

(33,288)

Total expenses and other income

12,865

9,182

5,397

11,594

10,087

37,530

43,100

Earnings before income taxes

104,636

142,675

121,497

137,194

130,615

499,423

502,007

Income tax expense/(recovery)

205

91

30

250

250

576

796

Marginal tax rate (%)

0.2

0.1

0.0

0.2

0.2

0.1

0.2

Net earnings

104,431

142,584

121,467

136,944

130,365

498,847

501,211

Average no. shares in issue (000s)

452,370

452,892

452,975

452,892

452,996

452,808

452,762

Basic EPS (US$)

0.231

0.315

0.268

0.302

0.288

1.10

1.11

Diluted EPS (US$)

0.230

0.314

0.268

0.302

0.287

1.10

1.11

DPS (US$)

0.15

0.15

0.15

0.15

0.15

0.60

0.60

Source: WPM accounts, Edison Investment Research. Note: *Excluding impairments, impairment reversals and exceptional items (except where indicated). **Forecasts now include stock-based compensation costs. Totals may not add up owing to rounding.

Our updated adjusted basic EPS forecast of US$1.10 per share for FY23 compares with the market, as follows:

Exhibit 15: WPM FY23 consensus EPS forecasts (US$/share), by quarter

Q123

Q223

Q323

Q423e

Sum Q1–Q423e

FY23e

Edison forecasts

0.231

0.315

0.268

0.288

1.102

1.100

Mean consensus

0.231

0.315

0.268

0.303

1.117

1.095

High consensus

0.231

0.315

0.268

0.330

1.144

1.220

Low consensus

0.231

0.315

0.268

0.270

1.084

1.040

Source: Refinitiv, Edison Investment Research. Note: At 8 November 2023.

Long-term gold price forecasts

In addition to our short-term gold price and production forecasts, on 27 September 2023, Edison updated its long-term gold price forecasts in its report, Shades of the 1970s.

Readers are invited to read the report at their leisure. In the meantime, a summary of our conclusions – while recognising the scope for significant upside – is provided in Exhibit 16, below.

Exhibit 16: Edison gold price forecasts, nominal and real (US$/oz), current cf prior

Year

2024e

2025e

2026e

2027e

2028e

2029e

2030e

Current forecast (nominal US$/oz)

1,896

2,004

2,105

2,239

2,098

2,023

2,274

Current forecast (real, 2023 US$)

1,822

1,851

1,869

1,912

1,722

1,596

1,725

Prior forecast (nominal US$/oz)*

1,892

1,892

1,892

1,892

1,892

1,892

1,892

Prior forecast (real, 2023 US$)

1,819

1,749

1,681

1,617

1,555

1,495

1,437

Increase (nominal, US$/oz)

4

112

213

347

206

131

382

Increase (nominal, %)

0.2

5.9

11.2

18.3

10.9

6.9

20.2

Increase (real, US$/oz)

3

102

188

295

167

101

288

Increase (real, %)

0.2

5.9

11.2

18.2

10.7

6.8

20.0

Source: Edison Investment Research. Note: *See A Golden Future published in June 2020.

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 (most recently over Lumina’s Cangrejos mine in south-west Ecuador). As a result, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY23, in the case of WPM (as with Newmont and Endeavour), we discount forecast cash flows back over four years from the start of FY23 and then apply an ex-growth terminal multiple to forecast cash flows in that year (ie FY26) based on an appropriate discount rate.

Relative to our previous note published on 23 October 2023, a summary of the principal changes to our financial model is as follows:

We have deferred the production of silver attributable to WPM from the Rosemont/Copper World project until the installation of an SX/EW plant in year five of the project’s assumed life in FY32 (cf FY27 previously). We have also updated our life of mine production profile to match that set out in its most recent NI 43-101 technical report.

We have delayed the onset of commercial production at Rio2’s Fenix project by two years until FY26 to reflect the delay experienced in the approval of its EIA. The company expects a decision on the EIA to be made in 2023, to be followed by a 14-month period of construction. Thereafter, we have then assumed a conservatively slow ramp-up throughout FY25 before the project achieves full commercial production at the start of FY26.

We have updated our precious metals prices as shown in Exhibit 16, above.

We have included production attributable to WPM from Mineral Park from FY26, as discussed on page 11 (including Exhibit 11), above.

We have removed our production and sales forecasts for Aljustrel until Q225.

In line with Wheaton’s disclosures on ‘other contractual obligation and contingencies’ in its management discussion & analysis, we have rephased WPM’s payments in respect of the Salobo III expansion to US$370m in FY23 (cf FY24 previously) followed by US$140m in FY25 (unchanged).

As a consequence of these changes, our estimate of WPM’s ‘terminal’ cash flow in FY26 has increased by 6.3%, from US$2.71 per share to US$2.88 per share, as shown below:

Exhibit 17: WPM operational cash flow and related valuation (US$/share), FY23–26

Source: Edison Investment Research. Note: Valuation line assumes cash flow per share growth rate of 4% pa post-FY26 in nominal terms, which equals the average US rate of CPI inflation since 1972 (ie 0% pa growth in real terms).

Readers should note that 88% of the increase in our estimate of FY26 cash flows is attributable to the changes in our long-term metals prices. Otherwise, assuming 4% growth in nominal cash flows beyond FY26 (ie 0% growth in real cash flows) and applying a discount rate of 9% (being the expected long-term required nominal equity return), our ‘terminal’ valuation of the company at end-FY26 is US$59.74 per share (cf US$54.02/share previously), or C$82.44 per share. However, it should be noted that this valuation is inherently conservative in that it assumes 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 7.4% per year from 1967 to 2022, a simple average annual growth rate of 9.6% per year (cf a compound average inflation rate over the same period of 4%) and a compound average real annual growth rate of 3.3% per year.

Exhibit 18: Gold price annual performance, 1968–2022

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 21% pa for the 17 years between FY05 and FY22, while its operational cash flows per share have increased at a compound average annual growth rate of 14% pa.

Historical

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.4x current year basic underlying EPS, excluding impairments (cf 39.0x Edison or 39.6x Refinitiv consensus FY23e currently – see Exhibit 20).

Exhibit 19: WPM’s average historical current year P/E multiples, 2005–22

Source: Average share price data Bloomberg, Edison Investment Research calculations

Applying this 30.4x multiple to our increased EPS forecast of US$2.07 in FY26 (cf US$1.90/share previously) implies a potential value per share for WPM of US$62.78 (cf US$57.71 previously) or C$86.64 in that year.

Relative

From a relative perspective, it is notable that WPM is cheaper than its peers on at least 55% (20 out of 36) of the valuation measures observed in Exhibit 20 if Edison estimates are used or 30% (11 out of 36) of the same valuation measures if consensus forecasts are used.

Exhibit 20: 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

34.2

31.2

31.3

1.1

1.1

1.1

23.9

22.2

22.7

Royal Gold

31.4

25.4

24.7

1.4

1.5

1.5

17.6

14.3

13.7

Sandstorm Gold

49.7

58.8

40.3

1.3

1.3

1.3

11.0

13.1

11.5

Osisko

30.4

29.6

26.4

1.2

1.3

1.3

17.6

16.3

14.6

Average

36.4

36.2

30.7

1.3

1.3

1.3

17.5

16.5

15.6

WPM (Edison forecasts)

39.0

29.3

24.2

1.4

1.4

1.7

27.3

19.2

16.8

WPM (consensus)

39.6

33.0

33.7

1.3

1.2

1.4

28.0

22.5

22.1

Implied WPM share price (US$)*

40.11

53.05

54.39

47.81

48.84

57.69

27.59

36.90

39.95

Source: Refinitiv, Edison Investment Research. Note: Peers priced on 8 November 2023. *Derived using Edison forecasts and average consensus multiples.

Stated alternatively, were WPM to trade at the average multiples of its peers, we calculate that its share price should be US$45.15, or C$62.31, currently, on the basis of Edison’s financial forecasts.

In this context, we note that, whereas Edison’s financial forecasts for Wheaton in years one to three imply improving profitability (based on improving volumes of production and sales superimposed onto rising metals prices), consensus P/E and yield forecasts, in particular, appear to imply a much flatter profitability profile, suggesting that either the market is assuming smaller increases in volumes or a simultaneous decrease in metals prices.

Financials: US$827.7m (US$1.83/share) in net cash

As at 30 September, WPM had US$833.9m in cash on its balance sheet and no debt outstanding under its US$2bn revolving credit facility. As such (including a modest US$6.2m in lease liabilities), it had US$827.7m in net cash overall after generating US$171.1m in operating cash flow, investing US$98.9m and paying out US$67.0m in dividends during the quarter.

Exhibit 21: WPM cash, net cash and operating cash flow, by quarter, Q420–Q323

(US$m)

Q420

Q121

Q221

Q321

Q421

Q122

Q222

Q322

Q422

Q123

Q223

Q323

Cash/(debt)

192.7

191.2

235.4

372.5

226.0

376.2

448.6

494.6

696.1

799.7

828.8

833.9

Net cash/(debt)

6.0

187.7

232.1

369.4

223.2

373.5

446.2

492.5

694.1

797.9

822.3

827.7

Operating cash flow

208.0

232.2

216.3

201.3

195.3

210.5

206.4

154.5

172.0

135.1

202.4

171.1

Source: Wheaton Precious Metals

In addition, WPM has long-term investments, in the form of equity share- and warrant-holdings, in listed companies in the sum of US$200.9m as at 30 September, or the equivalent of US$0.56/share.

In FY23 we estimate that WPM will generate US$713.9m from (net) operating activities, before consuming US$584.5m (cf US$295.7m previously – on account of the rephasing of the initial Salobo III expansion payment into Q423 and the Mineral Park PMPA acquisition) in investing activities and paying out up to US$271.7m in forecast dividends to leave the company with net cash of US$551.8m (cf US$844.7m previously) on its balance sheet as at end-FY23. However, investors should note that the timing of payments relating to the Salobo III, Santo Domingo, Blackwater, Goose, Curipamba, Marathon and Rosemont/Copper World streams is uncertain and inasmuch as investments are delayed, we calculate that it is possible that Wheaton could register a larger cash balance on its balance sheet by the year end. Either way, all other things being equal, in the absence of any major new asset acquisitions, we do not expect that Wheaton will require recourse to its debt facilities in the foreseeable future.

Exhibit 22: Financial summary

$000s

 

2020

2021

2022

2023e

2024e

2025e

Dec

IFRS

IFRS

IFRS

IFRS

IFRS

IFRS

PROFIT & LOSS

Revenue

 

 

1,096,224

1,201,665

1,065,053

955,320

1,385,785

1,566,525

Cost of Sales

(266,763)

(287,947)

(267,621)

(217,735)

(301,970)

(339,093)

Gross Profit

829,461

913,718

797,432

737,585

1,083,816

1,227,432

EBITDA

 

 

763,763

852,733

735,245

668,859

1,015,090

1,158,706

Operating profit (before amort. and excepts.)

 

 

519,874

597,940

503,293

468,227

663,457

802,836

Exceptionals

4,469

162,806

164,214

(13,192)

0

0

Other

387

190

7,680

36,787

0

0

Operating Profit

524,730

760,936

675,187

491,823

663,457

802,836

Net Interest

(16,715)

(5,817)

(5,586)

(5,591)

993

1,650

Profit Before Tax (norm)

 

 

503,159

592,123

497,707

462,636

664,451

804,486

Profit Before Tax (FRS 3)

 

 

508,015

755,119

669,601

486,231

664,451

804,486

Tax

(211)

(234)

(475)

(576)

(1,000)

(1,000)

Profit After Tax (norm)

503,335

592,079

504,912

498,847

663,451

803,486

Profit After Tax (FRS 3)

507,804

754,885

669,126

485,655

663,451

803,486

Average Number of Shares Outstanding (m)

448.7

450.1

451.6

452.8

453.0

453.0

EPS - normalised (c)

 

 

112

132

112

110

146

177

EPS - normalised and fully diluted (c)

 

 

112

131

112

110

146

177

EPS - (IFRS) (c)

 

 

113

168

148

107

146

177

Dividend per share (c)

42

57

60

60

62

74

Gross Margin (%)

75.7

76.0

74.9

77.2

78.2

78.4

EBITDA Margin (%)

69.7

71.0

69.0

70.0

73.3

74.0

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

47.4

49.8

47.3

49.0

47.9

51.2

BALANCE SHEET

Fixed Assets

 

 

5,755,441

6,046,427

6,039,813

6,423,709

6,440,885

6,583,824

Intangible Assets

5,521,632

5,940,538

5,753,111

6,128,896

6,146,072

6,289,011

Tangible Assets

33,931

44,412

30,607

32,377

32,377

32,377

Investments

199,878

61,477

256,095

262,436

262,436

262,436

Current Assets

 

 

201,831

249,724

720,093

561,229

929,458

1,254,666

Stocks

3,265

12,102

13,817

2,248

3,261

3,686

Debtors

5,883

11,577

10,187

5,235

7,593

8,584

Cash

192,683

226,045

696,089

553,746

918,604

1,242,397

Current Liabilities

 

 

(31,169)

(29,691)

(30,717)

(28,586)

(32,625)

(34,405)

Creditors

(30,396)

(28,878)

(29,899)

(27,768)

(31,807)

(33,587)

Short term borrowings

(773)

(813)

(818)

(818)

(818)

(818)

Long Term Liabilities

 

 

(211,532)

(16,343)

(11,514)

(11,514)

(11,514)

(11,514)

Long term borrowings

(197,864)

(2,060)

(1,152)

(1,152)

(1,152)

(1,152)

Other long term liabilities

(13,668)

(14,283)

(10,362)

(10,362)

(10,362)

(10,362)

Net Assets

 

 

5,714,571

6,250,117

6,717,675

6,944,837

7,326,204

7,792,572

CASH FLOW

Operating Cash Flow

 

 

784,843

851,686

749,429

721,871

1,015,757

1,159,070

Net Interest

(16,715)

(5,817)

(5,586)

(5,591)

993

1,650

Tax

(2,686)

(503)

34

(576)

(1,000)

(1,000)

Capex

149,648

(404,437)

(44,750)

(586,362)

(368,809)

(498,809)

Acquisitions/disposals

0

0

0

0

0

0

Financing

22,396

7,992

10,171

0

0

0

Dividends

(167,212)

(218,052)

(237,097)

(271,685)

(282,084)

(337,118)

Net Cash Flow

770,274

230,869

472,201

(142,343)

364,857

323,793

Opening net debt/(cash)

 

 

774,766

5,954

(223,172)

(694,119)

(551,776)

(916,634)

Other

(1,462)

(1,743)

(1,254)

0

0

0

Closing net debt/(cash)

 

 

5,954

(223,172)

(694,119)

(551,776)

(916,634)

(1,240,427)

Source: Company sources, Edison Investment Research


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This report has been commissioned by Wheaton Precious Metals and prepared and issued by Edison, in consideration of a fee payable by Wheaton Precious Metals. 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.

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General disclaimer and copyright

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New Zealand

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United Kingdom

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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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JDC Group (JDC) issued its Q323 report in which its FY23 guidance was adjusted to the lower end of the indicated revenue and EBITDA ranges. This was partly due to the weak economic environment in Germany and partly because JDC may not be able to consolidate Top Ten Group in FY23. Nevertheless, to reach the lower end of the €175–190m revenue guidance, a strong Q4 is needed given the 9M23 realised revenue of €122.9m. However, we believe guidance is realistic given seasonal trends as Q4 is the quarter when clients usually evaluate their insurance portfolios.

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