mbbirdy
The Q1 Earnings Season is nearly over and one of the most recent companies to report its results was Wheaton Precious Metals (NYSE:WPM). Overall, the company reported solid results with revenue, adjusted earnings, and cash flow up meaningfully year-over-year, benefiting from higher production from Salobo, Constancia and Penasquito, as well as higher gold prices. And while 2024 is not expected to be as robust a year as initially expected with Aljustrel heading offline temporarily, Wheaton is positioned to see significant growth in annual gold-equivalent ounce [GEO] production starting later this year once the Blackwater Project heads online. In this update, we'll dig into the Q1 2024 results, recent developments and where the stock's updated low-risk buy zone lies:
Penasquito Mine - Google Earth
Wheaton Precious Metals Q1 Sales & Attributable Production
Wheaton Precious Metals ("Wheaton") released it Q1 results last week, reporting quarterly production of ~93,400 ounces of gold, ~5.5 million ounces of silver and ~4.4 million ounces of palladium, in addition to 240 pounds of cobalt. This compared very favorably to the year-ago period with a 28% increase in attributable gold production, a 7% increase in attributable silver production and a 21% and 93% increase in palladium and cobalt production, respectively. The result was that attributable gold-equivalent ounce [GEO] production soared by ~19% to ~160,100, while GEOs sold improved 31% to ~143,200 GEOs. Wheaton's results benefited further from a record average realized gold price of $2,070/oz, with 64% of its revenue coming from gold in the period.
Wheaton Precious Metals Attributable Gold Production by Mine - Company Filings, Author's Chart
Looking at attributable gold production, Salobo was the star performer with Wheaton's attributable production from the mine up 41% year-over-year to ~61,600 ounces on the back of higher throughput offset by lower grades related to mine sequencing. The increase in throughput is related to the third concentrator line coming online and Salobo III reached ~90% of throughput in Q1 while Salobo I and II both saw higher throughput as well according to Vale (VALE). Wheaton noted that it will be required to pay the remaining balance on the expansion payment once throughput is above 35 million tonnes per annum for a period of 90 days, with the most recent payment of $370 million to Vale for the first phase of Salobo III made in Q4 2023.
Salobo Mine - Google Earth
As for other gold assets, Wheaton benefited from higher attributable production at Sudbury due to higher throughput, Stillwater saw higher production due to higher throughput and grades year-over-year (as well as an increase in palladium production) and Constancia also saw higher grades and recoveries with mining in the higher-grade zones of the Pamacancha satellite deposit. Just as importantly, Constancia extended its mine life a further three years to 2041 helping Wheaton to maintain a higher for longer production profile when combined with over ten new assets that are set to come online over the next several years (including Goose, Platreef, Blackwater, Curipamba, Cangrejos, Curraghinalt, Fenix, Mineral Park, Copper World and Marathon PGM). Unfortunately, the higher production at these assets was partially offset by lower output at San Dimas (~7,500 vs. ~10,800 attributable gold ounces).
Wheaton PM - Quarterly Silver Production by Mine - Company Filings, Author's Chart
Moving over to silver production, Wheaton saw a significant increase in silver production highlighted by the spike in the green bar above with Penasquito coming off its strike that impacted stream deliveries last year. In fact, Wheaton saw its best quarter from Penasquito in years with attributable production of ~2.64 million ounces of silver and Constancia also had a solid quarter with ~640,000 ounces of attributable silver delivered to Wheaton under the 100% silver stream. Unfortunately, this was partially offset by lower silver production from Aljustrel, Antamina and no further deliveries from Minto where operations were suspended in May of last year. Still, the higher production from key assets more than offset the weaker performers, with Wheaton's silver production up sharply year-over-year.
Looking at Wheaton's financial results, the company reported quarterly revenue of ~$296.8 million (+38% year-over-year), adjusted earnings of $163.6 million (57% year-over-year) and operating cash flow of ~$219.4 million (+62% year-over-year). These solid results were driven by higher GEO sales and higher realized gold prices, offset by lower palladium prices in the period. This helped to end the quarter with ~$306 million in cash and no debt despite making upfront cash payments of ~$462 million related to royalty/stream interests and the company bolstered its balance sheet further with the sale of its ~35 million shares in (HL) post quarter-end for ~$177 million. And given that these shares were delivered at much lower prices in September 2022 as part of the Keno Hill PMPA termination, Wheaton did a solid job maximizing its return by waiting to dump its position at much higher prices than Q3 2022 levels.
Wheaton Precious Metals Quarterly Revenue - Company Filings, Author's Chart
Wheaton Precious Metals Average Realized Gold Price & Cash Costs Per Ounce - Company Filings, Author's Chart
As for Wheaton's margin performance, the company's average realized gold price came in at $2,070/oz vs. cash costs of $430/oz, translating to a ~$1,643/oz average GEO margin in the period or roughly ~79%. This paled compared to royalty/streaming companies with a much higher proportion of revenue coming from royalties like Osisko Gold Royalties (OR) that enjoyed ~97% cash margins, but these are still phenomenal margins for Wheaton that have allowed it to lead the precious metals sector from a margin standpoint with cash costs well below the producer average. And given these strong financial results ahead of what's set to be an even stronger rest of the year with higher gold/silver prices than Q1, it's certainly looking like WPM investors can look forward to another dividend increase at year-end.
2024 & Long-Term Outlook
As for Wheaton's long-term outlook, 2024 may be a flat year with the impact of no sales from Minto, 777, Yauliyacu, and Aljustrel, offset by minor contributions from Platreef and Blackwater which should begin production this year and ramp up to full production in 2025. The result is that Wheaton's 2024 guidance midpoint is ~585,000 GEOs, which is flat vs. ~584,900 GEOs produced in FY2023. That said, the company is expecting to see meaningful growth over the next few years from multiple new assets coming online and Aljustrel restarting next year. And when it comes to progress on these assets, Blackwater remains on track for Q4 2024 production as does Platreef, and Platreef's long-term outlook could see a major upgrade with Ivanhoe (OTCQX:IVPAF) discussing a PEA to potentially push throughput to 10MTPa, significantly above Phase 1 throughput of ~700,000 tonnes per annum, while Phase 2 (4MTPa) is likely to be accelerated with plans to equip Shaft #3 for hoisting.
Wheaton Precious Metals 5-Year Production Outlook - Company Website
Looking at Wheaton's 5-year production outlook above, investors are best served to ignore the flat year in 2024 given that Wheaton should see a massive increase in GEOs looking out to 2028. In fact, Wheaton is guiding for ~800,000 GEOs in 2028 with the bulk of this coming from permitted assets already in construction. Meanwhile, the Curipamba Project is in the hands of a better financed operator following Silvercorp's (SVM) proposed acquisition. Finally, while Rio2 (OTCQX:RIOFF) and the Fenix had a tough two years with production pushed well past its initial planned start date, the project remains back on track and Rio2 now expects the receipt of its principal permits by Q3 of this year.
Recent Developments
Blackwater Project
Artemis Gold (OTCPK:ARGTF) provided an update on its Blackwater Project in British Columbia last month and shared that it 73% complete, tracking within its guidance for capital expenditures and that C$523 million of the C$740 million initial capex midpoint estimate had been spent. Project construction benefited from mild weather in British Columbia in Q1 that has kept the project on track for first gold pour in the second half of this year, and the company expects to complete the construction and commissioning of the initial phase of the mining fleet this quarter. Once in production, this will be one of Canada's largest mines with production upwards of 460,000 ounces per annum for the first five years, rivaling Cote Gold which is owned by IAMGOLD (IAG) and Sumitomo. And with Wheaton holding a 50% silver stream and 8% gold stream, it should see attributable production of ~950,000 ounces of silver and ~37,000 ounces of gold, providing significant near-term growth for both metals.
Artemis Gold Blackwater Project Construction - Company Video
Goose, Curipamba and Fenix Projects
Moving to the Goose Project in Nunavut that is being constructed by B2Gold (BTG), the company noted that all materials required to complete construction were successfully moved across the Winter Ice Road as of the end of April. That said, while mill construction is ahead of schedule, mining is slightly behind schedule, with B2Gold amending its initial production target from Q1 2025 to Q2 2025. The result is that Wheaton will see roughly ~2,000 fewer GEOs next year from this 2.78% gold stream (reduced from 4.15% following the buyback option exercised by B2Gold last year).
Goose Project Construction - B2Gold Website
Shifting across the globe to less harsh climates for construction/operations in Ecuador and Chile, the Curipamba Project is in the hands of a better financed operator following Silvercorp's (SVM) proposed acquisition. Finally, while Rio2 (OTCQX:RIOFF) and the Fenix had a tough two years with production pushed well past its initial planned start date, the project remains back on track and Rio2 now expects the receipt of its principal permits by Q3 of this year.
Global Minimum Tax
As for negative developments, Wheaton confirmed that it is within the scope of the Global Minimum Tax under OECD Pillar Two model rules, where large multinational entities will be subject to a 15% global minimum tax rate. The Canadian Federal Government introduced the Global Minimum Tax Act in its Federal budget bill C-69 in early May, and this will impact Wheaton's effective tax rate going forward when the legislation is enacted. Wheaton stated that the company's wholly-owned foreign subsidiaries which reside in jurisdictions where the GMT will apply would be subject to the proposed Canadian rules retroactively to January 1st, 2024.
To put the impact in reference, earnings from Wheaton's wholly-owned foreign subsidiaries where the new rules will apply had net earnings of $165 million in Q1, translating to ~$25 million in taxes at the 15% GMT rate. The company stated that it doesn't expect to make any payments before 2026, with it going to be "several years behind the actual tax year before the payment is actually made", according to Gary Brown, Wheaton's VP and Chief Financial Officer. Although this is negative for Wheaton's effective tax rate going forward, the stock was barely impacted by the news as this has been discussed for the past several quarters with Wheaton stating in its Q1 2023 results:
"All we can say is that, based upon the comments made by the Government of Canada that we do -- they do seem to be committed to implementing a GMT, a 15%, global minimum tax rate. That seems to be applicable to 2024 and onwards. Again, there's no legislation at this point. So, there's a lot of work that would need to be done in order to implement that by Jan 1 of next year, but we're assuming that's going to happen. And the vast majority, 90-plus percent of our income is generated outside of Canada. So we expect that, that it would have about a 10% impact to our NAV calculations. Once implemented, that being said, I think the market is well aware of this new tax, and has already reflected that in our valuation."
- Wheaton Precious Metals Q1 2023 Conference Call
Valuation
Based on ~454 million shares and a share price of US$55.00, Wheaton trades at a market cap of ~$25.0 billion and an enterprise value of ~$24.7 billion. This makes it the highest valued precious metals royalty/streaming company, which is attributed to it having the greatest scale of precious metals GEOs among its peer group and one of the higher growth rates among its peers. That said, the outperformance in the stock has pushed the stock to its highest multiple in years, with it trading at ~1.95x P/NAV and over 26x FY2024 cash flow per share estimates. And while a premium is justified given that Wheaton has the highest growth rate looking out to 2029 relative to its larger royalty/streaming peers, the stock is now trading closer to what I believe to be fair value, and actually at a premium to its 5-year and 10-year average cash flow multiples of ~25.5x and ~22.0x cash flow, respectively.
Wheaton Precious Metals Operating Cash Flow & Margins/Valuation vs. Peers - FinBox, FAST Graphs
Using what I believe to be fair multiples of 1.90x P/NAV and 27.0x FY2025 cash flow estimates and a 65/35 weighting to P/NAV vs. P/CF, I see an updated fair value for Wheaton Precious Metals of US$58.50. This points to a 7% upside from current levels, a significantly lower upside relative to peers like Osisko Gold Royalties that also have significant growth looking out to 2028. Hence, while WPM certainly benefits from its scale, a strong track record and a solid growth profile looking out to the end of this decade, I continue to see more attractive bets from a valuation standpoint. One example is Osisko Gold Royalties which is the proud owner of arguably the most valuable gold royalty asset in the sector (Canadian Malartic), still trades at just ~1.10x P/NAV and trades at a more far attractive cash flow multiple of just over 17x FY2024 estimates.
Osisko Gold Royalties - Company Website, Canaccord Capital Markets Precious Metals Research
And while Osisko Gold Royalties may not measure up in scale with roughly one sixth of WPM's production profile, it makes up for this in asset quality with a portfolio mostly focused on royalties which benefit from no step-downs and higher margins, besides benefiting from the best jurisdictional profile among its peers. The last point worth noting is that Osisko Gold Royalties has significant optionality and an extremely deep pipeline that could see its production profile nearly double (100,000 ---> 180,000 GEOs) looking out to 2032, with large-scale peers like WPM struggling to attain this level of growth given the increased level of competition for deals in the space and the headwind from step-downs/higher payment levels on older legacy streams. In summary, I continue to see OR as the far more attractive option among the two names and would not be surprised to see OR outperform over the next 12 months, especially with an upside case of it being taken over by a larger suitor.
Summary
Wheaton Precious Metals had a solid start to the year with sharp increases in revenue and cash flow per share and will enjoy further growth in 2025 with new assets coming online/ramping up like Goose, Blackwater, and Platreef, besides higher production from Salobo and Aljustrel restarting (Q2 2025?). Looking out to 2028, Wheaton is confident it will see annual GEO production grow ~40% to 800,000 GEOs, solidifying WPM's spot by a wide margin ahead of its royalty/streaming peers. Hence, there's a clear path to more financial records and future dividend increases for patient investors, with its fair value set to increase to US$75.00 in 2028 even using what may end up being a conservative $2,200/oz gold price assumption.
That said, the stock is now trading closer to fair value and I believe there are several names that could outperform after spending time in the penalty box during Wheaton's last year of outperformance. So, while I would view any pullbacks below US$45.50 on WPM as buying opportunities, I remain focused elsewhere currently.
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