Thursday, March 28, 2019

A Current AIM International Equity Holding: Wheaton Precious Metals, Inc. (WPM, $24.90): “Precious Metals Stream Higher Amid Strong Earnings” By: Nicholas Goehring, AIM Student at Marquette University

 Wheaton Precious Metals, Inc.  (WPM, $24.90): “Precious Metals Stream Higher Amid Strong Earnings - Does this Stock Have a Golden Touch?”
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.


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