Record Gold Sales And Palladium Revenue Stream Helps Wheaton Precious Metals To Beat Consensus In Q1 2019

Wheaton Precious Metals (NYSE: WPM) released its Q1 2019 results on May 8, 2019. The company reported revenue of $225.1 million in Q1 2019, marking a growth of 12.9% over Q1 2018, driven by a 64% increase in the number of gold ounces sold and addition of palladium as a revenue segment, partially offset by a 32% decrease in the number of silver ounces sold and lower price realization for gold and silver compared to Q1 2018. Adjusted earnings came in at $0.13 per share in Q1 2019, lower than $0.16 per share in Q1 2018. Lower earnings were primarily a reflection of higher cash costs, increase in general and administrative expenses, along with higher interest cost.

We have summarized the key announcements in our interactive dashboard – How did Wheaton Precious Metals 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 Takeaways

A] Revenue Trend

Gold Revenue

• Gold revenue increased by 61.6% in Q1 2019 (y-o-y), driven by an increase in shipments, partially offset by lower prices.
• Increase in shipments was driven by higher gold production, led by 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 the Salobo and Constancia mines.
• 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 decreased by 36.7% (y-o-y) in Q1 2019, driven by lower shipments and price realization.
• Silver volume declined by 32.3% in Q1 2019 due to lower production, as a result of signing 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 in 2018.
• Though 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 lower than in Q1 2018.

Palladium Revenue

• Palladium is a new addition to WPM’s revenue streams since Q3 2018, with the segment adding $9.2 million in FY 2018.
• WPM reported revenue of $7.5 million for Palladium sales in Q1 2019.
• Since FY 2019 would be the first full year of production from the Stillwater stream, we expect palladium production to be significantly higher than 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

Total expenses increased by 27.9% (y-o-y) in Q1 2019 due to higher interest cost and increase in general and administrative expenses. On a sequential basis, expenses declined by 11.6% in Q1 2019, on the back of significantly higher effective tax rate in Q4 2018.

• Interest Cost: Interest expense witnessed a sharp increase in the latter half of 2018, driven by higher debt outstanding and rising interest rates. Interest expense increased further in Q1 2019, due to higher amount drawn under WPM’s revolving credit facility.
• General & Administrative Expenses: General and administrative cost increased significantly in Q1 2019 on y-o-y basis, mainly driven by higher outlay related to the company’s performance share units plan, and increased cost related to the new mining streams.
• Effective Tax Rate: Effective tax rate was marginally higher (y-o-y) in Q1 2019. However, on a sequential basis, the rate decreased sharply on the back of higher tax payout in Q4 2018, related to a settlement reached with Canada Revenue Agency regarding an international tax dispute.

Net income margin of 25.5% in Q1 2019 was lower on y-o-y basis due to higher interest burden and general costs related to additional mines acquired. On a sequential basis, margin saw a sharp improvement due to tax credit received as against a high tax expense in Q4 2018.

Full Year Outlook

• For the full year, total revenue is expected to increase by 8.4% to $860.8 million in 2019. Higher revenue is expected to be driven by an increase in gold shipments and 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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