RGLD - Wheaton Precious Metals: The Quarterly Dividend Is Too Low

2023-06-30 18:23:10 ET

Summary

• Wheaton Precious Metals Corp. generated revenues of $214.47 million during 1Q23, down 30.2% year-over-year. The adjusted income was $104.43 million, or $0.23 per share.
• The company produced 141,831 GEOs in 1Q23, down from the prior-year quarter’s 165,555 GEOs, but sold only 117,383 GEOs.
• I recommend buying Wheaton Precious Metals stock between $42.3 and $41.20, with possible lower support is $39.55.

Introduction

The Canadian company Wheaton Precious Metals Corp. ( WPM ) released its first-quarter 2023 results on May 4, 2023.

Note: This article updates my previous article published on December 4, 2022, and on March 13, 2023 . I have been following WPM quarterly results since Sep. 2018 .

WPM has 19 operating mines and 13 development projects throughout the Americas.

1 - A quick snapshot of the first quarter of 2023

The company generated revenues of $214.47 million during 1Q23, down 30.2% year-over-year. The adjusted income was $104.43 million , or $0.23 per share. The results were in line with analysts' expectations.

Wheaton Precious Metals reported an operating cash flow of $135.10 million in the first quarter of 2023, compared with $210 million in the first quarter of 2022.

The company produced 141,831 GEOs in 1Q23 , down from the prior-year quarter's 165,555 GEOs, but sold only 117,383 GEOs.

The average annual production for the five and ten-year periods is expected to be approximately 810K and 850K GEOs.

CEO Randy Smallwood said in the conference call:

we achieved a key milestone in this first quarter as Wheaton's total stream cashflow to date has now exceeded 100% of its total upfront investments deployed since inception. This achievement highlights our disciplined and accretive growth to our approach to capital deployment, in particular, given that our portfolio still has over 30 years of mine life remaining based on reserves in addition to a healthy resource base.

2 - Stock performance

Wheaton Precious Metals and Franco-Nevada ( FNV ) form my long-term core streamers. WPM is up 12% on a one-year basis, outperforming FNV, Sandstorm Gold (SAND), and Royal Gold ( RGLD ).

3 - Investment Thesis

WPM is one of my long-term investments in the royalties & streams segment with Franco-Nevada. I also own a small long-term position with Sandstorm Gold that I trade more frequently.

Wheaton Precious Metals Corp. is highly correlated to the gold price, representing 55.6% of the total revenues in 1Q23.

The gold price turned bullish starting March 2023 after the FED decided to pause interest rates hiking.

Unfortunately for gold, Jerome Powell indicated that it would be necessary to hike interest rates probably twice more in 2023 due to a resilient economy fueling higher inflation than desired, shattering hope for a rate cut for 2023 and potentially H1 2024.

This warning hurt gold significantly, as shown in my chart below.

However, I see gold holding between $1,875 - $1,950 in 4Q23 and potentially turning bullish after that and crossing $2,100 per ounce in 2024.

In conclusion, the gold sector is highly volatile and unpredictable. Thus, the best strategy to respond to such a trend is regularly trading short-term LIFO, at least 30%-40% of your long-term position.

This dual strategy has been my dominant strategy in my marketplace, "The Gold and Oil Corner." It is the most rewarding strategy to maximize your profit while reducing risks significantly.

Wheaton Precious Metals: Financials And Production History ending in 1Q23

Source: Company release .

Note: WPM sold its 117,383 GEOs at $1,827 per ounce in 1Q23, a much lower amount than produced.

CFO Gary Brown said in the conference call:

Sales volumes amounted to over 117,000 GEOs, a decrease from the first quarter of the prior year, primarily due to the cessation of production from 777 Yauliyacu and Keno Hill in 2022, coupled with relative changes to ounces produced but not yet delivered, or PBND.

Analysis: Revenues, Earnings Details, Free Cash Flow, Debt, And Gold Production Details

1 - Revenues: Wheaton Precious Metals posted $214.47 million in revenue for 1Q23

The adjusted net earnings were $104.431 million , or $0.23 per share, down 33.9% YoY. The cash operating margin was $1,384 per GEO sold , a decrease of 7% compared to the first quarter of 2022. The decrease was due to the lower revenue, partially offset by a lower cost of sales.

Cash from operating activities for the first quarter of 2023 was $135.10 million compared to $210.54 million in the prior year.

Below is shown the revenue per metal for the last four quarters (Cobalt production started in 1Q21):

The gold price increased sequentially to $1,904 per Au ounce , while the silver price increased to $22.85 per Ag ounce . Palladium was $1,607 per ounce , and Cobalt was $15.04 per ounce. The gold price per GEO was $1,827.

Please see the chart below:

Warning: Palladium price has dropped significantly in 2Q23. However, while it is a loss for WPM, it will not be too large, considering that revenue from Palladium represents roughly 2% of the total.

2 - Free cash flow was estimated at $102.80 million in 1Q23

On March 31, 2022, the trailing 12-month free cash flow ("FCF") was $660.02 million, and the first quarter of 2023 was $102.80 million.

The Board of Directors declared a quarterly dividend of $0.15 per common share or a yield of 1.41%. The dividends are linked to operating cash flows (see image below).

Considering the balance sheet strength, I believe the quarterly dividend is too low and should be doubled at the minimum.

Warning: Wheaton Precious Metals is a Canadian company, and dividends are subject to Canadian tax (15%) taken directly for non-Canadian investors, reducing the amount paid to investors outside Canada. In some cases, it can be different. Please, contact your broker.

3 - Available capital, no debt, and $2 billion in liquidity

On March 31, 2023, Wheaton Precious Metals had cash and cash equivalents of $799.70 million and no debt outstanding under its Revolving Facility, which is excellent backing from a long-term investor's perspective. Cash position has been growing steadily since 1Q22 ($376.16 million).

The company has a $2 billion revolver facility extended to July 18, 2027. Total liquidity of nearly $2.8 billion.

The chart below shows a significant net cash position:

4 - Production in gold equivalent ounce and trend details

This quarter's gold equivalent production was 141,831 GEOs compared to 165,555 GEOs last year, a significant drop. Furthermore, Wheaton sold only 117,383 GEOs this quarter due to the cessation of production from 777 Yauliyacu and Keno Hill in 2022, coupled with relative changes to ounces produced but not yet delivered.

Wheaton's metals production in 1Q23 was:

1. 73,037 Au ounces.
2. 4.927 M Ag ounces.
3. 3,705 Pd ounces.
4. 124 Lbs of Cobalt.

5 - 2023 Guidance unchanged from last quarter.

Wheaton's estimated attributable production for 2023 is forecast to be 320K to 350K ounces of gold, 20 to 22 million ounces of silver, and 22K to 25K gold equivalent ounces ("GEOs") of other metals, resulting in the production of approximately 600K to 660K GEOs.

Furthermore, Mining Operations Wes Carson said in the conference call:

Wheaton's estimated attributable production in 2023 is forecast to be 320,000 to 350,000 ounces of gold, 20 million to 22 million ounces of silver, and 22,000 to 25,000 GEOs of other metals, resulting in the production of approximately 600,000 to 660,000 GEOs.

For the five-year period ending in 2027, the company estimates that average production will amount to 810,000 ounces. And for the 10-year period ending in 2032, the company estimates that average annual production will amount to 850,000 GEOs.

This includes organic growth of over 40%, with total production from our current portfolio increasing to over 900,000 GEOs by 2027.

Technical Analysis and Commentary

Note: The chart is adjusted for the dividend.

WPM forms a descending channel pattern with resistance at $44 and support at $41.5.

Descending channel patterns are short-term bearish in that a stock moves lower within a descending channel, but they often form within longer-term uptrends as continuation patterns. Higher prices usually follow The descending channel pattern but only after an upside penetration of the upper trend line.

The dominant strategy I regularly promote in my marketplace, "The Gold and Oil Corner," is to keep a core long-term position and use about 30%-40% to trade LIFO while waiting for a higher final price target for your core long-term position above $50 .

Trading LIFO allows you to sell your most recent purchases, assuming a profit while keeping your long-term position until it is up enough to consider selling it.

The trading strategy is to sell about 30%-40% of your position between $43.9 and $45 with potential higher resistance at $46.9.

I believe it is safe to accumulate Wheaton Precious Metals Corp. stock between $42.3 and $41.20, with possible lower support is $39.55 .

Warning: The TA chart must be updated frequently to be relevant. It is what I am doing in my stock tracker. The chart above has a possible validity of about a week. Remember, the TA chart is a tool only to help you adopt the right strategy. It is not a way to foresee the future. No one and nothing can.

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