Wheaton Precious Metals: Why Did The Stock Double In 4 Years?

by Trefis Team
Wheaton Precious Metals
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Wheaton Precious Metals (NYSE: WPM) stock price has increased 2x from $13/share in July 2015 to $26/share in July 2019. The increase in WPM’s stock price was primarily driven by higher revenues and a sharp rise in margins, which has turned the company from a loss-making entity (in 2015) into a high-margin business in 2018. Revenue growth and strong margins are expected to continue in 2019 as well. A positive outlook has driven a sharp rise in the company’s price-to-sales multiple.

You can view the Trefis interactive dashboard – Why Wheaton Precious Metals’ Stock Climbed 2x In 4 Years? – to better understand the stock trend along with analysis of the company’s revenue, margin, and multiples. In addition, here is more Materials data.

Expanding Revenue Base

  • Wheaton Precious Metals Revenues have increased at a CAGR of 7%, from $679 million in 2015 to $794 million in 2018, adding $145 million to its revenue base.
  • Revenues are expected to further rise to $867 million in 2019, which would mark an addition of $218 million to the total revenue base over four years (2015-2019).
  • Higher revenue is likely to be driven by healthy growth in the gold and palladium division, along with a modest rise in silver sales.

Revenue Driver 1: Gold

  • Gold revenue has steadily increased over recent years with an increase in shipments and price level.
  • Segment revenue is expected to reach about $468 million in FY 2019, on the back of higher shipments and a favorable pricing environment.
  • This would lead to the company doubling its gold revenues from 2015 to 2019.
  • Gold volume is expected to increase in the near term, following the acquisition of a new gold stream at Stillwater, and the New San Dimas agreement under which silver production that was attributable to the company under the old agreement would now be converted to the equivalent gold volume.
  • Price realization is set to improve with a rise in global gold prices following higher retail and institutional investment in the yellow metal in the face of rising economic uncertainty.

Revenue Driver 2: Palladium

  • Palladium is a new addition to WPM’s revenue streams since Q3 2018, with the segment adding $9.2 million in FY 2018.
  • 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.

Improvement In Profitability

  • WPM’s profitability has seen a complete turnaround, with the net income margin increasing from -25% in 2015 to 53.8% in 2018. Despite the absence of unusual gain on sale (unlike 2018), margins are expected to be high at 26% in 2019, led by higher revenues, increased production, and the absence of major impairment charges.
  • Cost of Goods Sold (COGS) as % of revenue was volatile in recent years due to fluctuation in production output. The metric is expected to slightly decline in 2019 due to lower depletion rates and higher production.
  • SG&A expense as % of revenues was significantly higher in 2018, compared to 2015 levels, with it expected to increase further in 2019, led by higher salary, benefits, and professional fees, due to expansion and increased headcount.
  • Drop in recoverable value at Pascua-Lama and Sudbury led to high impairment costs in 2015 and 2017. Impairment was nil in 2018 and is expected to remain so in 2019 as well.
  • Finance cost as % of revenue has continuously risen due to increasing interest rates and higher debt burden.
  • WPM recorded a profit of $245.7 million from the sale of San Dimas Silver Purchase Agreement, which led to a spike in margins for the year. As observed historically, other income is expected to be negligible in 2019.
  • Effective tax rate also saw an increase in 2018, due to reversals of previous claims. The rate is expected to remain stable in the near term.

Higher Multiple

  • WPM’s price-to-sales (P/S) multiple has improved from 8.1x in July 2015 to 14.2x in July 2019.
  • Similarly, the company’s global peers such as Newmont-Goldcorp, Freeport-McMoRan, and Barrick Gold have also seen their multiple increase during these four years.
  • However, as of July 2019, WPM commands a higher multiple compared to its major peers, driven by the company’s strategy to reduce its focus on silver and move toward gold (which is expected to perform much better in the near term), and significant improvement in margins, led by the success of the company’s cost reduction efforts, expansion plans, and new purchase agreements.

Higher multiple and a positive outlook bodes well for WPM’s stock and fundamentals. As per Wheaton Precious Metals Valuation by Trefis, we have a price estimate of $30 per share for WPM’s stock.


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