Was Wheaton Precious Metals Able To Beat Market Expectations In Q4 2018?

by Trefis Team
Wheaton Precious Metals
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Wheaton Precious Metals (NYSE: WPM), one of the world’s largest precious metals streaming companies, announced its Q4 2018 results on March 20, 2019, followed by a conference call the next day. Though the fourth quarter revenue and EPS were lower on a year-on-year basis, WPM beat the consensus estimates for revenue and EPS for the quarter as well as FY 2018. The company reported revenue of $196.6 million in Q4 2018 (against market expectation of $191.7 million), 18.9% lower than the $242.5 million reported in Q4 2017. The company’s earnings came in at $0.08 per share (against a consensus of $0.06 per share) in Q4 2018, much lower than $0.19 in the year-ago period. Full year revenue decreased by 5.8% to $794 million in 2018. According to Trefis analysis, the lower revenue and earnings were mainly the reflection of a decrease in silver shipments, driven by termination of the old San Dimas silver purchase agreement (SPA), coupled with the ceasing of silver production from Lagunas Norte, Veladero, and Pierina mines. Lower silver revenues were slightly offset by an increase in gold sales and addition of palladium sales as a new revenue stream for the company.

We have summarized the key announcements from the earnings and our outlook for WPM in our interactive dashboard – How did Wheaton Precious Metals fare in 2018 and what is expected over the next two years? In addition, here is more Materials data.

Key Factors Affecting Earnings

Decrease in silver production and price realization: Silver was the biggest drag on WPM’s revenue growth in 2018. Revenue from silver decreased by 18.1% (y-o-y) to $343.6 million in 2018, compared to $419.3 million in 2017, mainly due to an 11.8% decline in silver shipments to 21.7 million ounces in 2018 from 24.6 million ounces in the previous year. Volume decreased as a result of the signing of the new San Dimas agreement in May 2018, under which silver production that was attributable to the company under the old agreement would now be converted to the equivalent gold volume. Additionally, silver production at the company’s Lagunas Norte, Veladero, and Pierina mines ceased effective March 2018. Along with lower volume, silver prices also witnessed a decline on the back of a stronger dollar and rising interest rates in the US.  Going forward, we expect silver revenue to decline marginally in 2019 and remain flat in 2020 driven by lower volumes, partially offset by strengthening of prices as observed over the last three months.

Higher Gold Sales: Gold revenue increased by 4.1% to $441.2 million in 2018 from $423.9 million in 2017, driven by higher volume and better price realization. Gold shipments increased from 337.2 million ounces in 2017 to 349.2 million ounces in 2018, mainly due to additional gold attributable to WPM following the new agreement with First Majestic at San Dimas, coupled with WPM’s acquisition of a new gold stream at Stillwater, and higher production at Salobo and Constancia mines. Additionally, though gold prices witnessed a lot of volatility in 2018 due to rising interest rates, prices saw some strengthening in the fourth quarter, which helped WPM increase its price realization for the year. We expect gold prices to rise further in 2019 (as the trend has been over the last three months) on the back of higher retail and institutional investment in the yellow metal, with many Central Banks buying gold as a hedge against rising economic uncertainty. Simultaneously, we expect volume to rise further over the next two years as WPM would benefit from a full year under the new San Dimas agreement, slightly offset by lower-grades at Salobo due to mine sequencing (most pronounced in the first quarter of 2019).

Benefits from Palladium: Palladium is a new addition to WPM’s revenue streams with the company having entered into an agreement with Sibanye-Stillwater to acquire palladium at an agreed ratio of total production at the site. Palladium added $9.2 million to the company’s revenue in 2018. Palladium production is expected to increase going forward as the Company has its first full year of production from the Stillwater stream, which was acquired in July of 2018. Prices are expected to remain elevated in the near-term, in line with the recent increase.

Higher Margins: Net income margin increased sharply to 53.8% in 2018 from 6.8% in 2017. However, this rise was driven by a one-time gain from the termination of the previous San Dimas silver purchase agreement, which amounts to approximately $245.7 million. This gain was partially offset by higher interest expense on the back of rising interest rates and increased amount drawn under WPM’s revolving credit facility. Over the next two years, we expect margins to decline to about 32%, in the absence of any large non-recurring benefit, offset by higher volume and better price realization.

What Lies Ahead?

We expect the declining silver production to be completely offset by rising gold output, which would be driven by the new San Dimas agreement and Stillwater acquisition. Additionally, the company has announced the expansion of its Salobo III mine, thus ramping up its total gold production. With the addition of Palladium to its portfolio, WPM is expected to reap benefits of this diversification as palladium prices have increased sharply in the last couple of months. Additionally, in June 2018, WPM entered into an agreement to acquire from Vale an amount of Cobalt at an agreed ratio of Voisey’s Bay cobalt production. Though deliveries under the contract are scheduled to begin in 2021, we believe that the company’s aggressive push towards diversification rather than being a traditional silver-gold miner, would help in enhancing investor confidence as the stock’s risk goes down. With the Fed’s latest statement dimming the likelihood of any rate hikes in 2019, prices of precious metals are expected to strengthen further. Thus, rising production of gold and palladium along with a positive pricing environment, expansion projects in the pipeline, and the company’s focus on diversifying its portfolio and risk-mitigation, is expected to support WPM’s stock price going forward.

We have a price estimate of $27 for WPM’s share price, which is higher than its current market price.


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