Wheaton Precious Metals Outperformed Barrick Gold – Here’s Why

by Trefis Team
Wheaton Precious Metals
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Wheaton Precious Metals stock (NYSE: WPM) has increased by over 43% so far in 2020, while close rival Barrick Gold stock (NYSE: GOLD) has increased 37% in 2020 so far.  But wait a minute, if we compare the stock price trends for these mining giants over recent years, we can see that WPM’s stock price has increased by a whopping 126% from $19 at the end of 2016 to about $43 as of 2nd July 2020. What is interesting to note is that Barrick Gold’s stock price increased by 63%, i.e. half the increase seen in WPM’s stock, during the same period. This was the case despite Barrick Gold’s revenues increasing by 13.5% between 2016 and 2019, compared to 3.4% decline in WPM’s revenues during the same period. In such circumstances, what is driving WPM’s significantly superior stock performance vis-à-vis GOLD?  It is the profitability and revenue mix for these companies. Our dashboard Wheaton Precious Metals vs. Barrick Gold: Does The Stock Price Movement Make Sense?  has the underlying numbers.

Sure Barrick Gold’s revenue increased by 13.5% from $8.6 billion in 2016 to $9.7 billion 2019 while WPM’s revenue saw a marginal decline of 3.4% during this period. But this rise in GOLD’s revenue came in 2019 due to the acquisition of Randgold Resources. As the same time, WPM’s net income margins have consistently been higher than GOLD’s. In 2019, WPM reported an adjusted net income margin of 29% compared to GOLD’s margin of close to 9%. This is mainly due to high grade ores and WPM dealing in precious metals with lower unit cost. Superior profitability has helped WPM command a much higher P/E multiple over the years, with its current P/E multiple standing at 77x, much higher than 52x for Barrick Gold. Along with margins, one major factor that led to WPM’s superior performance is the difference in revenue mix for both mining giants.

How Do Businesses Of Wheaton Precious Metals & Barrick Gold Compare?

Let’s have a closer look at the core business prospects. Barrick Gold’s operations include gold and copper mining. WPM’s operations include mining of gold, silver, and palladium.

Barrick Gold’s revenues are deeply concentrated with gold, with the yellow metal contributing almost 95% of the total revenues in 2019. With the acquisition of Randgold Resources and the Nevada JV (with Newmont), this contribution is likely to go up to 96% in 2020. In comparison, about 63% of WPM’s revenue came from gold. But the key here is that WPM has successfully altered its business to focus more on gold, with the share of gold in total revenue increasing significantly from 46% in 2016 to 63% in 2019. This is expected to go up to 66% in 2020. WPM entered into 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. A slowdown in economic and industrial activities and expectations of a global recession following the outbreak of coronavirus this year has increased gold’s value as a hedging instrument. Global gold prices have increased from about $1,500/ounce at the beginning of 2020 to almost $1,780/ounce currently due to higher demand. With rising investment in the yellow metal by major central banks and expectations of interest rates heading south, gold prices already saw a sharp rise in 2019. This trend was further boosted by the current Covid-19 crisis.

Barrick Gold gets 4%-5% of its revenue from copper. In contrast to gold, the effect of the current crisis has been completely opposite on copper prices, which declined from $2.80/pound at the beginning of 2020 to $2.10/pound in March 2020, before recovering to over $2.50/pound currently, which is still lower than the pre-Covid price. This drop was mainly due to expectations of lower demand from automobile and construction players as the economic activity slows down. In contrast, WPM has no exposure to copper. In fact, WPM gets its full revenue (100%) from precious metals, the prices of which have increased during the current pandemic. Additionally, WPM gets 93% of its revenues from the Americas, while Barrick Gold is more geographically diversified with about 50% of its revenue coming from outside America (Africa, Australia, etc.). Thus, the lock down in all major global cities and the resultant supply bottlenecks are expected to have a larger adverse effect on Barrick Gold compared to WPM.

However, as the lock downs are gradually lifted and global supply bottlenecks ease, Barrick Gold is expected to benefit more in the near term due to its geographically diversified and much larger operations along with a projected rebound in copper prices while price of precious metals could decline from current levels post-covid. As per Barrick Gold valuation by Trefis, we have a price estimate of $30 per share for GOLD’s stock, higher than its current market price. With WPM already having risen significantly, we see some downside for WPM stock post the Covid crisis.

While WPM’s stock has performed better than GOLD over recent times, which S&P 500 component stocks have the best chance of outperforming the benchmark index? Our 5 In the S&P 500 That’ll Beat The Index: TWTR, ISRG, NFLX, NOW, V look promising.

For further insight into the mining space, see how rivals Newmont and Freeport-McMoRan compare with each other.


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