Is Gold Mining The Primary Growth Engine For Wheaton Precious Metals?

by Trefis Team
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Wheaton Precious Metals
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The gold division became the largest revenue segment for Wheaton Precious Metals (NYSE: WPM) in 2018. Over the last two years, though WPM’s total revenues (shows WPM’s key revenue components) decreased by $97.5 million between 2016 and 2018, while the company’s gold segment saw its revenue base grow by $30 million during the same time. Can WPM’s gold operations continue to command this kind of significance in the near term, or will it be replaced by the newly introduced palladium division? To understand this, please refer to the Trefis interactive dashboard – What Is The Importance Of Gold Mining In Wheaton Precious Metals’ Business? In addition, here is more Materials data.

Segment Revenue Trend

  • Gold revenue has steadily increased over recent years with an increase in shipments and price level.
  • Segment revenue is expected to witness a further increase, with the segment adding over $50 million by FY2020, on the back of higher shipments and a favorable pricing environment.
  • 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 Share

  • Historically, gold has contributed less than half of WPM’s revenue, with over 50% being contributed by silver.
  • However, the share of the segment revenue has continuously increased over recent years, from 46.1% in 2016 to 55.6% in 2018, led by healthy revenue growth and a fall in silver output and prices.
  • Gold revenue share is expected to remain elevated at 53%-54% in the near term.
  • Though this would be a marginal drop compared to 2018 (due to addition of palladium division which could eat into gold and silver share), it would still be the largest contributor of revenue for WPM.

To understand the performance of other operating segments of the company, please refer to the Trefis analysis – Wheaton Precious Metals: How Does WPM Make Money?

Profitability

  • Though gold is currently the largest revenue contributor for WPM, the same cannot be said when it comes to profitability.
  • Gold segment’s gross margins have historically remained below the company’s gross margins. This is mainly due to the company’s margins being boosted by higher profits in WPM’s silver mines.
  • However, owing to higher volume production, mining cost attributable per unit is likely to decrease, and increased price realization per ounce is to help in the expansion of gross margins for gold.
  • Segment’s gross margins are expected to reach WPM’s margin level by 2020, and would thus see an increase in its significance in maintaining WPM’s overall profitability.

Trefis estimates Wheaton to be close to $127 million in revenues over the next two years, out of which, $52 million (41%) is expected to come from gold mining. Additionally, segment margins coming at par with the company’s margins, is expected to drive greater focus toward the gold division, which is likely to be the primary growth engine for WPM in the near future.

As per WPM’s Valuation by Trefis, we have a price estimate of $30 per share for WPM’s stock.

 

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