By:
Nicholas Goehring, AIM Student at Marquette University
Disclosure:
The AIM Equity Fund currently holds this position. This article was written by
myself, and it expresses my own opinions. I am not receiving compensation for
it and I have no business relationship
with any company whose stock is mentioned
in this article. All numbers are presented
in USD.
Summary:
• Wheaton Precious Metals (NYSE: WPM) is the world's largest royalty
streaming company of precious metals with streams from 20 mines in 10 countries
across the Americas and Europe.
• 2018 Revenues fell 12%,
but EPS of $0.96 (7x higher than 2017) beat our estimate of $0.65.
• After further diversifying
their streaming portfolio into palladium and cobalt in 2018, management emphasizes
their focus on precious metals over the rest of raw
materials.
• Favorable commodity price
movement and
higher 2019 production levels contribute a strong streaming outlook for the year
to come.
• WPM to shatters its 52-week high, and it continues to climb higher after announcing earnings last Thursday.
Key
points:
The streaming outlook
remains strong throughout 2019. Silver production was down in 2018 from the end
of the San Dimas stream but was in excess of
management’s guidance. In 2019, this decrease
will be partially offset by growing
production in the Penasquito mine. Forecasts for silver this next year should
remain around 24.5 million ounces but should be compensated with higher commodity
prices. Silver is currently up to $15.62/oz.
Gold production increased
to 373,000 oz in 2018 and is expected to be slightly lower in 2019 at 365,000
oz, primarily due to lower grades and slowdowns in production during the expansions
at the Salobo mines, but partially offset by increased production at the San
Dimas mine. Gold prices have moved favorably in the first quarter of 2019 to $1318/oz.
Palladium exceeded expectations in 2018 contributing
nearly 15,000 oz, 10,000 oz more than expected. This production is expected to
increase to 22,000 oz as it will be the
first full year of production form the Stillwater stream that was added to the
portfolio back in July of 2018. Palladium prices have also moved significantly higher
in the first quarter of 2019 to $1579/oz.
It is still uncertain on
the timing of contribution from the Salobo III expansion, but in the latest
earnings call CEO Randy Smallwood held to their original estimate of 2022. He
detailed further into the structure of the contract with Vale and how it not
only incentivizes the mining company to produce sooner, it also protects
Wheaton with a lower disbursement if the project gets delayed into 2023 or 2024.
Based on the timing of the completion of the expansion Wheaton could save up to
50% on the gold streaming contract. Once this project does start contributing,
it is expected to add ~$200 million of
incremental revenues per year. Also, Cobalt
production from the Voisey’s Bay is still
projected to contribute in mid to late
2021.
Although Wheaton has
further diversified from gold and silver by adding palladium and cobalt streams
in the last year, management shielded questions from analysts about further
diversification into oil, gas, and other natural resources. They reaffirmed
their commitment to remaining a purely precious metals company. Management did indicate
that they have some deals in the pipeline
in the $100-$300 million range and are planning on finalizing at least one in
the next 12 months, but this will likely be a metal currently in their portfolio.
What
has the stock done lately?
Since we added WPM to the
AIM International portfolio in early February, the stock has risen ~15%.
Following the strong earnings release last week, the stock rose just over 5%,
breaking through its 52-week high of $22.86 and settling near $24. This rapid
movement makes the price target of $29.53 more attainable and might need to be
adjusted higher later in the year.
Past
Year Performance:
Wheaton had an incredible fourth quarter bringing year-end production to 373,000 oz of gold, 24 million oz of silver,
and 14,600 oz of palladium, exceeding both management guidance and our
estimates for the fiscal year. Although gold prices slumped lower to $1,264 per
oz in Q4 and lower production than FY17,
favorable prices and outstanding of
silver and palladium more than compensated for the decline in gold revenues. Even
though 2018 revenues were down 11.6% YoY to $794 million, the resolution of the
long-standing CRA dispute, no asset
impairments as compared to $229 million in 2017, lower depreciation, and
interest expenses combined to bring the diluted EPS to $0.96, 7x higher than
2017 EPS.
Source:
FactSet
My
Takeaway:
Even though production may be slowing in 2019, favorable commodity
prices should help contribute to top line growth. We will be watching closely
for the addition of new streams in 2019 for continued accelerated growth and
earnings. I believe that management continues to provide conservative production
estimates, and their rising stock price will make it easier for management to add superior low-cost streams to
their portfolio in 2019. WPM is poised
for a fantastic 2019, and the price
target may need to be adjusted higher later in the year.
Source:
FactSet
