Wheaton Precious Metals (WPM) recently held an annual “investor day” which took a broad look at the company. Wheaton focuses on streams on high-quality, low-cost, long-life assets, suggests Adrian Day, money manager and editor of Global Analyst.
It released a new 10-year guidance of 830,000 ounces average Gold Equivalent Ounces (GEOs), up from its five-year average of 810,000 GEOs.
According to the company, only some 2% of all mine finance since 2004 comes from streams; of that, Wheaton, which invented the streaming model, holds 40%. It currently has 24 assets, with strong partners, 65% of whom are investment grade, including Newmont (NEM), Barrick (GOLD), Vale (VALE) and Glencore (GLNCY).
Some 90% of its streams are on mines in the lower 50 percentile of the cost curve, 74% in the lowest 25 percentile. CEO Randy Smallwood argues that streams have more leverage that royalties because they carry a per-ounce cost.
Its streams have provided over $2 billion more cash flow than expected when the deals were done, and the gap is beginning to widen again. Its policy is to distribute 30% of cash flow in dividends, making for a dividend that increases with the gold price — from 5 cents per quarter in 2015 to 15 cents in the last quarter.
Of course, this policy can make for a volatile dividend; it was 14 cents in early 2013 before falling for the next two years.
Wheaton has taken a different tack to its balance sheet than other larger royalty and streaming companies, saying that with interest rates so low, it makes sense to use debt to acquire cash-flowing assets. It is, however, debt free today after paying off debt from its strong cash flow. It has a $2 billion undrawn debt facility, and has not issued equity since 2016.
Wheaton has recovered $8 billion of the total $9 billion it has invested since inception, with remaining assets valued today at $19 billion.
It is diversified between gold and silver, 50% and 41% by revenue this year. Vale’s Salobo is its largest single asset, accounting for 36% of NAV, a little less of revenue. A fire at the mine, with full operations expected to be resumed before month end, may reduce output for the quarter (accounting for about 2% of Wheaton’s overall revenue).
Salobo’s phase III expansion is currently underway, expected to be completed by the second-half of next year; Wheaton’s final payment of $670 million on the expansion is not due until 2023.
In addition to the Salobo expansion, two large near-term projects underway are Pampacancha ramp-up (a satellite of the Constancia mine), and the underground at Voisey’s Bay, which just commenced initial mining.
By country, Brazil accounts for 32% of revenue, Mexico and Peru another 21% each. Right now, its sees opportunities in helping finance mine expansions and M&A, deals which are typically smaller than the large balance sheet repairs for base metal companies of 2013-2016.
Wheaton stock has bounced, along with other gold stocks, 11% since the end-September lows, but it’s still down 15% from its June highs, and trading at a discount to Franco-Nevada (FNV). We want to own Wheaton long term, and if you do not own it, you can buy now. Otherwise, we will look for a pullback under $40 again to add positions.
