Wheaton Precious Metals: Not Much To Like

About: Wheaton Precious Metals Corp. (WPM)
by: Gold Mining Bull

Wheaton Precious Metals recently reported its Q2 2019 quarterly results.

The company reported a 38% decline in adjusted net earnings and a 19% decline in operating cash flow.

Wheaton should continue to perform well on gold price strength but may underperform its peers going forward.

I break down Wheaton's earnings report.

Wheaton Precious Metals: Not Much to Like


Data by YCharts

Wheaton Precious Metals' (WPM) stock has rallied over the past month or so along with gold and silver prices, but I believe that its poor financial results, released on Thursday, will likely lead to an underperformance of its peers. Shares were down 3% in after-hours trading Thursday.

The company stated in its news release that it "generated over $100 million in operation cash flow and had attributable production of over 100,000 ounces." These statements may be true but paint a rosy picture of a company that had a bad quarter.

For Q2, it reported attributable production of 100,600 ounces of gold, 4.8 million ounces of silver, and 5,700 ounces of palladium; gold production rose by 11% but silver output fell by 19.1% (compared to Q2 2018).

Wheaton reported a net loss of $124.7 million or ($.28) per share, mainly due to a $166 million impairment charge on its Voisey's Bay cobalt stream (a deal I was highly critical of). That deal has not worked out well at all so far, with cobalt prices plunging more than 50% since then.

(WPM's cobalt deal was completed in June 2018; cobalt prices over the past year. Credit: InvestmentMine)

Operating cash flow was $109 million or $.25 per share, down by 19% year-over-year.

The streamer was negatively impacted by issues at the Peñasquito mine in Mexico this past quarter.

Operations at the mine were suspended for 49 days due to an illegal blockade (which was lifted in mid-June). It produced just 0.7 million ounces of attributable silver, a decrease of approximately 45% relative to Q2 2018.

(Wheaton's five-year forecast. Source: WPM investor presentation)

The company also received some bad news on one of its development assets.

Hudbay Minerals cannot proceed with construction at this time on the Rosemont mine following a permitting ruling from the courts. Wheaton has the right to buy 100% of the gold and silver produced at Rosemont for $230 million.

On the bright side, Wheaton has not paid anything for the stream because of how it's structured (payments are made when it receives permits and has spent a certain amount on construction). But, this was expected to be a key growth driver for Wheaton, and now it is up in the air.

As for its balance sheet, Wheaton ended the quarter with just $87 million in cash and cash equivalents compared to $1.09 billion in bank debt, while it has $1.1 billion available under its revolving credit facility.

I think it has some room to complete new deals, but may be conservative here with gold prices trading north of $1,500 (there are likely not that many good deals available).

One positive to note: 2019 production guidance was maintained, while its mix of metal output was updated. It's seeing real strong output from Salobo, as well as the San Dimas gold stream.

Wheaton is guiding for 385,000 ounces of gold, up from 365,000 ounces originally forecast because of higher output from the Salobo mine and 22.5 million ounces of silver, which is down from 24.5 million ounces due to the temporary shutdown at Peñasquito.

Wheaton is still producing strong operating cash flow and will have enough cash flow to repay its bank debt while paying its dividend. But that doesn't mean the stock is worth buying here. I think there are better opportunities in the gold/silver sector.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.