- Gold Streams (Sudbury Mines, Salobo Mine, Other Gold Streams, San Dimas Mine - Gold) constitute 73% of the Trefis price estimate for Wheaton Precious Metals's stock.
- Silver Streams (Antamine Mine, San Dimas Mine, Penasquito Mine, Constancia Mine, Other Silver Streams) constitute 24% of the Trefis price estimate for Wheaton Precious Metals's stock.
WHAT HAS CHANGED?
- Effect of Coronavirus
- Since the WHO announced a global health emergency due to coronavirus, stocks of major mining companies have declined. However, WPM saw only a marginal decline from $29/share on Jan. 31 to $28/share on March 29. Since then it had almost doubled to $53 at the end of August 2020. This is mainly due to the rising prices of silver and gold. With industrial and economic activities slowing down due to the virus, prices of precious metals have increased as a safe haven. With all of WPM's revenue being contributed by precious metals, the stock outperformed the market. With gold prices recently seeing some dip the stock price has declined to around $42 in December 2020.
- Q2 2020 Earnings
- WPM reported revenue of $307.3 million in Q3 2020, marking an increase of about 37.4% compared to Q3 2019. Higher revenue was driven by 23% increase in gold revenue, 61% increase in silver revenue, and another 61% increase in palladium sales. Rise in prices of all three commodities was the primary driver of higher revenues. WPM reported adjusted earnings of $0.34 per share in Q3 2020 as against $0.16 in the previous year period. Higher earnings were driven by higher revenue and lower cost of production per unit.
- Growth in precious metal prices going forward
- Gold and silver prices fell over the course of 2015, driven by expectations of an interest rate hike by the Fed. Precious metals as an investment are often viewed as a hedge against inflation and economic weakness. Strengthening U.S. economic growth stoked fears of an interest rate hike by the Fed, which reduced the investment demand for gold and silver, and led to a fall in prices of these metals. Macroeconomic uncertainty caused by the unexpected outcome of the UK's June 2016 EU referendum and the uncertainty regarding North Korea’s nuclear agenda drove prices higher in 2016 and 2017. Though prices have been recovering over the past two years, strengthening economic conditions and low levels of unemployment in the U.S. have set the stage for the Fed to raise interest rates, with four 25 basis point rate hikes done in 2018. However, the trend has reversed with the Fed cutting interest rates thrice in 2019 so far in light of slowdown in world economy. This could translate into an increase in the investment demand for gold and silver, which will boost the upside for precious metal prices in the near term. Additionally, with rising retail and institutional investments in precious metals, prices have increased. Central banks over the world have increased their gold investment in the face of rising global economic uncertainty. For example, March 2019 was the fourth consecutive month when the Chinese central bank increased its net investment in gold. This has led to a sharp rise in price since the beginning of 2019.
- Latest Annual Earnings
- WPM reported revenue of $861.3 million in FY 2019, marking an increase of about 8.5% compared to FY 2018. Higher revenue was driven by 23% increase in gold revenue due to sharp rise in global gold prices and increase in gold volume sold, and 245% jump in palladium revenue due to rise in price realization and growth in volume sold. Silver revenues decreased only 16% in 2019, driven by lower volume sold, partially offset by higher price realization. WPM reported earnings of $0.56 per share in 2019 as against $0.48 in the previous year period. Higher earnings were driven by higher revenue, increase in volume sold and lower interest expense.
- Settlement reached over Canadian tax dispute
- Wheaton Precious Metals Corp. received a proposal letter in July 2015 from the Canada Revenue Agency (CRA), in which the CRA proposed to reassess the company's tax liability for the years 2005-2010. As per the CRA, under the transfer pricing provisions of the Income Tax Act (Canada) pertaining to the income earned by the company's subsidiaries located outside Canada, the company's income subject to taxation in Canada should be increased by US $567 million for the years 2005 to 2010. The company received another notice in January 2016 pertaining to the audit of its international transactions for the years 2011-2013. This unresolved tax-related uncertainty had increased uncertainty pertaining to Wheaton Precious Metals Corp.'s business model. However, In December 2018, WPM reached a settlement with the Canadian Revenue Agency (CRA) which provides for a final resolution of Wheaton's tax appeal in connection with the above case. As per the terms of the settlement, foreign income on earnings generated by Wheaton International will not be subject to tax in Canada, and thus Wheaton does not anticipate any additional cash taxes to arise in respect to the 2005 to 2010 taxation years. This is a great outcome for the company and its shareholders while it removes all the uncertainty about the company's business model.
- Termination of the existing San Dimas agreement and new streaming agreement with First Majestic
- In May 2018, Wheaton Precious Metals terminated its existing San Dimas purchase agreement and entered into a new purchase agreement with First Majestic with respect to San Dimas. The new agreement will reduce the company's silver output share from San Dimas and increase its access to the mine's gold output.
- Agreement with Stillwater
- In July 2018, WPM announced that it has agreed to acquire from Sibanye-Stillwater an amount of gold and palladium equal to fixed percentage of production from Stillwater and East Boulder mines. WPM will pay an upfront cash consideration of $500 million upon closing of the precious metals stream. The transaction will add to Wheaton's existing high-quality portfolio, while also providing the company with long-term production and exploration upside potential and immediate production and cash flow. WPM received its first delivery from Stillwater in Q3 2018, with expected production in the second half of 2018 projected to be approximately 5.4k ounces of gold and 10.4k ounces of palladium.
POTENTIAL UPSIDE & DOWNSIDE TO TREFIS PRICE
Below are key drivers of Wheaton Precious Metals Corp.'s value that present opportunities for upside or downside to the current Trefis price estimate for Wheaton Precious Metals Corp.:
Silver and gold prices
- Average Realized Price Per Ounce: Precious metals are viewed as safe-haven assets from an investment point of view. Investments in these metals are primarily made from the point of view of hedging against macroeconomic and geopolitical uncertainty. Thus, any unforeseen disruption such as a sudden outburst of the uncertainty prevailing in the Korean peninsula or the continued uncertainty pertaining to U.S. - China trade relations leads to a surge in the investment demand for precious metals and consequently, the prices of these commodities. If such a macroeconomic/geopolitical disruption materializes and prices rise by 5% relative to our current estimates by the end of the forecast period (accompanied by a 100 basis point increase in margins), it would result in an upside of around 6% to our price estimate.
Tax liability for the company
- Wheaton Precious Metals Corp. Tax Rate: Wheaton Precious Metals Corp. currently does not incur any significant income taxes as it carries out its operations from its wholly-owned subsidiary Silver Wheaton Cayman, registered in the Cayman Islands, where the company is exempt from income tax laws. The company's tax rate may increase gradually as governments around the world crack down on tax havens and loopholes. Should this happen and the company's tax rate increases to 25% from 2018 onward, it would present a downside of about 25% to our price estimate.
Wheaton Precious Metals Corporation is the world's largest silver streaming company. The company currently has fourteen silver purchase agreements and two precious metals agreements, where in exchange for an upfront payment, it has the right to purchase all or a portion of, the silver production at a low fixed cost, from high-quality mines located in politically stable regions.
Based on the 2019 report, attributable production totaled 22.6 million ounces of silver, 22,000 ounces of palladium, and 406,700 ounces of gold.
We have divided the company into ten divisions, based on the streaming contracts it currently holds.
SOURCES OF VALUE
Salobo mine is the most valuable division
The Salobo mine consists of Wheaton Precious Metals Corp.'s 75% interest in the gold by-product produced from Vale's Salobo copper mine, located in Brazil. It accounted for nearly 76% of Wheaton Precious Metals Corp.'s gold shipments in 2018. The signing of a streaming agreement for an additional 25% of the life of mine gold production from the Salobo mine in August 2016, over and above the pre-existing agreement for 50% life of mine gold production, has significantly boosted the division's shipments. The sharp rise in shipments will drive the value of this division.
Fixed rate contracts provide some visibility
Wheaton Precious Metals Corp.'s business model is to provide some of the necessary capital to other mining companies via an upfront payment to assist in the construction of mines. In return, the company gets a portion of the silver or gold produced as a by-product for a specified period (generally the life of the mine) at a fixed cost. Most of the companies assisted by Wheaton Precious Metals Corp. produces silver as a by-product of their mining operations. Accordingly, it is a mutually beneficial arrangement for the participating companies.
On average, Wheaton Precious Metals Corp. pays about $4-6 per ounce of silver procured from the mining companies. This fixed price is subject to change based on inflationary factors. The company does not have to pay for any additional development costs for any projects after the initial payment. Wheaton Precious Metals Corp. sells silver at spot market prices and does not hedge.
Rising demand from emerging markets
China is the world's largest consumer of precious metals. There is robust growth in demand for precious metals. For example, India & China's jewelry demand increased by 12% and 3%, respectively in 2017 and investment demand from each of the country grew by 2% and 8%, respectively. The growing demand from increasingly affluent middle classes in emerging economies, such as China and India, will provide support to prices of precious metals in the medium to long-term.