How Could The New San Dimas Agreement And Palladium Sales Affect WPM’s Q1 2019 Results?

by Trefis Team
Wheaton Precious Metals
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Wheaton Precious Metals (NYSE: WPM) is set to release its Q1 2019 results on May 08, 2019, followed by a conference call with analysts. Though WPM’s revenue witnessed a lot of volatility throughout 2018, total revenues marked a decline on a y-o-y basis in the last two quarters of the year. Lower revenue was mainly the reflection of a decrease in silver shipments, driven by the termination of the old San Dimas silver purchase agreement, and lower price realization due to decline in global price levels for gold and silver, partially offset by the addition of palladium sales as a new revenue stream for the company in 2018. We expect total revenue to increase by 7%-8% (y-o-y) in Q1 2019, primarily driven by higher gold volume and benefits from addition of palladium sales to total revenue, to be partially offset by a decrease in silver shipments.

We have summarized the key expectations from the announcement in our interactive dashboard – How is Wheaton Precious Metals expected to fare in Q1 2019 and what is the full year outlook? In addition, here is more Materials data.

A Quick Look at WPM’s Revenue Sources

WPM reported $794 million in total revenues in FY 2018. This included 3 revenue streams:

  • Gold Revenue: $441 million in 2018 (contributed 56% of total revenues in 2018). This includes sale of gold from various mines such as Salobo, Sudbury, Constancia, and San Dimas.
  • Silver Revenue: $344 million in 2018 (contributed 43% of total revenues in 2018). This includes sale of silver from mines such as Constancia, Antamina, Penasquito, and other silver interests.
  • Palladium Revenue: $9 million in 2018 (contributed 1% of total revenues in 2018). This includes palladium sales following WPM’s agreement with Sibanye-Stillwater.

Key Factors To Watch For In Q1 2019

A] Revenue Trend

Gold Revenue

  • Gold revenue has largely trended higher over recent quarters, except in Q3 2018, mainly driven by increasing shipments, partially offset by declining gold prices.
  • Gold production and shipments have steadily increased in the recent quarters, 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.
  • We expect gold volume to continue to increase in 2019, driven by the full year effect of the new San Dimas agreement and higher production at other sites.
  • After decreasing from its highs in Q1 2018 due to US-China trade tensions and increasing interest rates in the US, gold prices have increased since Dec. 2018, with higher retail and institutional investment in the face of rising global economic uncertainty. However, the price level is still lower than the highs achieved in Q1 2018.

Silver Revenue

  • Silver revenue has been decreasing over recent quarters due to a decline in volume and lower price realization.
  • 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, along with silver production ceasing at the company’s Lagunas Norte, Veladero, and Pierina mines.
  • Silver prices declined throughout 2018 due to rising interest rates and a stronger dollar.
  • Price levels have improved since January 2019, however, they are still expected to be lower than in Q1 2018.

Palladium Revenue

  • 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.
  • Price realization is expected to improve as global prices of palladium are expected to remain elevated in the near-term, in line with the recent increase.

B] Expenses and Profitability

Net income margin increased sharply in Q2 2018 due to a large one-time gain recorded by the company during the quarter. Margins remained lower in the following two quarters due to higher interest cost, increase in effective tax rate, and lower volume and revenue.

  • Interest Expense: Interest expense has continuously increased over recent quarters, with it witnessing a sharp increase in the latter half of 2018, mainly driven by increasing interest rates and higher amount drawn under WPM’s revolving credit facility. Interest expense in expected to be higher in Q1 2019 due to higher debt outstanding
  • Non-recurring gains/(loss): WPM signed a new San Dimas agreement in May 2018. It recorded a significant one-time gain on disposal of the previous San Dimas SPA, amounting to $245.7 million in Q2 2018, which led to a jump in margins for the quarter.
  • Effective Tax Rate: Effective tax rate increased sharply in Q4 2018, due to higher tax payout related to a settlement reached with Canada Revenue Agency regarding an international tax dispute. Tax expense is expected to decrease on a sequential basis in Q1 2019.

Margins are expected to be lower in Q1 2019 (on a y-o-y basis), driven by higher interest cost.

Full Year Outlook

  • For the full year, total revenue is expected to increase by 8.4% to $860.7 million in 2019. Higher revenue is expected to be driven by an increase in gold shipments and a rise in global price levels for silver and gold. Additionally, 2019 will be the first full year of palladium sales which would lead to a further rise in the top line.
  • Net income margin is expected to decrease from 53.8% in 2018 to about 32% in 2019, in the absence of large one-time gains during the year (unlike in 2018) and higher interest burden, partially offset by rising production.

Trefis has a price estimate of $27 per share for WPM’s stock.


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