2023-05-03 04:51:32 ET
Summary
- Wheaton Precious Metals Corporation is well-positioned to capitalize on the run-up in gold prices.
- Near-term COMEX gold futures are trading north of $2,000 per troy ounce as of this writing.
- The company had a pristine balance sheet with no debt on the books and ample cash on hand as of the end of December 2022.
- Wheaton Precious Metals runs a high-margin streaming business, and its production base is expected to grow significantly in the medium term.
- In the current commodity pricing environment, Wheaton Precious Metals offers investments ample capital appreciation upside.
Wheaton Precious Metals Corp. ( WPM ) is a metals streaming firm based in Vancouver, Canada, with an intriguing business model and ample capital appreciation upside. The company secures deals with miners across the globe that generally involve agreeing to an upfront payment and future payments based on an ounce or pound of metal received in return for a certain amount of output from a mine over a specified period, with the cost of those future supplies set by a formula. Wheaton Precious Metals can make out like a bandit when the spread between the price it needs to pay to acquire those metals versus the going market rate widens. The outlook for Wheaton Precious Metals is favorable as near term COMEX gold futures are trading north of $2,000 per troy ounce as of this writing.
Please note that shares of Wheaton Precious Metals trade in the US, Canada, and the UK.
Broadly speaking, what Wheaton Precious Metals offers is a way for miners to manage their development costs, financing needs, and future operating expenses in return for an agreement that generally allows Wheaton Precious Metals to acquire metals (namely gold, silver, palladium, and cobalt) at attractive prices (well below market prices). The company then sells those metals for a nice profit. In the upcoming graphic down below, the firm highlights the nature of its global streaming deals as of the end of December 2022.
An overview of Wheaton Precious Metals' global streaming deals. (Wheaton Precious Metals - 2022 Annual Information Form)
Production Rebound
At the end of December 2022 , Wheaton Precious Metals had 28 long-term purchase agreements with 22 miners. These agreements covered 20 operational mines, 12 mines under development at various stages, and three mines that were under care and maintenance or closed with these assets located in 13 different countries. As noted previously, these agreements cover gold, silver, palladium, and cobalt supplies with the first three reported in ounces and cobalt reported in pounds.
Wheaton Precious Metals is well-diversified in terms of where it sources its metal supplies. (Wheaton Precious Metals - 2022 Annual Information Form)
Wheaton Precious Metals runs a high margin business. In 2022, its GAAP gross margin stood at 53.1% and its GAAP operating margin stood at 48.1%. The company recorded a sizable gain on the disposition of mineral stream interests along with other non-operating income last year, but what I'm most interested in is its underlying performance. The firm reported that its GAAP revenue and GAAP operating income dropped in 2022 versus 2021 levels, primarily due to declines in metals received through its streaming deals. However, the company secured four new streaming deals last year which along with mines currently under development coming online should help ensure Wheaton Precious Metals continues to be well supplied over the coming years (the firm expects its production base will rebound sharply in the medium-term).
Wheaton Precious Metals runs a high-margin business. (Wheaton Precious Metals - 2022 Annual Report)
Last year , Wheaton Precious Metals produced (via its streaming deals) 638,111 gold equivalent ounces (roughly 45% of which was gold), down 15% year-over-year. The company sold 617,450 gold equivalent ounces in 2022 (roughly 47% of which was gold), down 6% year-over-year. Wheaton Precious Metals expects to produce 600,000-660,000 gold equivalent ounces in 2023, over half of which is expected to be represented by gold. Its exposure to the recent run up in gold prices is needle-moving.
Farther out, aided by recent streaming deals and new mines entering operation, Wheaton Precious Metals expects its production rates will improve considerably. From 2023-2027, the firm estimates it will produce 810,000 gold equivalent ounces per year on average and from 2023-2032, the company estimates it will produce 840,000 gold equivalent ounces per year on average. While its output dipped in 2022, the company has a plan in place to revive its production base over the medium-term which highlights one of the reasons why Wheaton Precious Metals is an attractive enterprise.
Financial Strength
Wheaton Precious Metals needs to maintain its financial strength so it has the opportunity to secure favorable streaming deals when the opportunity arises. At the end of December 2022, the company had $696 million in cash and cash equivalents on hand (its long-term equity investments would be considered strategic assets) with no debt on the books (neither short- or long-term debt). The company's balance sheet is pristine, and furthermore, Wheaton Precious Metals has a $2.0 billion revolving credit line due July 2027 as its disposal that was undrawn as of the end of last year.
Due to its streaming business model, Wheaton Precious Metals' cash flow statement can be a messy read. The company does not have much in the way of capital expenditures to consider, though it does need to secure new streaming deals on a continuous basis to ensure that its production levels remain steady. Effectively this creates lumpy cash flow outlays, making it difficult to determine what its normalized free cash flows look like (defining free cash flow as net operating cash flow less capital expenditures).
In 2022, Wheaton Precious Metals generated $743 million in net operating cash flow, spent $153 million on mineral stream interests and early deposit mineral stream interests combined, another $23 million on the acquisition of long-term investments, and paid $237 million covering its dividend obligations. The firm's net operating cash flows fully covered its activities that involved securing additional streaming rights, investing in long-term opportunities, and its dividend obligations last year.
Wheaton Precious Metals is a free cash flow generating powerhouse. (Wheaton Precious Metals - 2022 Annual Report)
Wheaton Precious Metals' asset-light business model makes it a free cash flow generating powerhouse (its free cash flows roughly mirror its net operating cash flows due to its minimal capital expenditure requirements). The company is well-positioned to reward dividend growth seeking investors, with its quarterly dividend growing from $0.05 per share in August 2016 to $0.15 per share as of March 2023. With that in mind, what I'm most interested in is its capital appreciation upside.
Downside Risks
The biggest risk to Wheaton Precious Metals is the inherently volatile nature of commodity prices. Its balance sheet is rock-solid, it has minimal capital expenditure requirements, and the firm's operating expenses are modest which allows for Wheaton Precious Metals to carry hefty operating margins and generate substantial free cash flows in almost any operating environment. However, should the price of precious metals tank, especially gold, its ability to reward investors would deteriorate significantly. Currently, the commodity pricing landscape is favorable for Wheaton Precious Metals, though should things change, there is not much the company can do but wait.
Another downside risk the company contends with involves operatorship risk at its partners. Should its partners (mining firms) face production problems at operational mines or construction hurdles at mines under development, that would weigh negatively on Wheaton Precious Metals' production base and the pace of its sales in unit terms. With that in mind, given the diverse nature of the company's streaming deals (the company has deals with almost two dozen miners the stretch across over a dozen countries), Wheaton Precious Metals should be able to maintain its production base under most circumstances.
Concluding Thoughts
Wheaton Precious Metals is one of best companies out there in the mining space largely because of its intriguing business model, financial strength, and exposure to attractive metals. The company offers modest dividend growth upside, with shares of WPM yielding ~1.2% as of this writing, and significant capital appreciation upside in the current commodities pricing environment, aided by the expected rebound in Wheaton Precious Metals' production base over the coming years.
On May 4 , Wheaton Precious Metals will publish its first quarter 2023 earnings report after the market close. It will be interesting to see what management has to say now that gold prices are booming higher.
For further details see:
Gold At $2,000 Troy Ounce Means Wheaton Precious Metals Is Worth Considering