FY21 and five-year and 10-year guidance
At the time of its Q420/FY20 results, WPM provided production guidance of 720–780koz AuE for FY21 and well as five-year average production guidance of 810,000oz AuE per annum and maiden 10-year average guidance of 830,000oz AuE per annum. At the same time as announcing its Q321 results however, Wheaton took the opportunity to refine its guidance to 735–765koz AuE in FY21, albeit its longer-term guidance remained unchanged. This compares with Edison’s updated forecasts in the wake of the Blackwater announcement, as follows:
Exhibit 5: WPM precious metals production – Edison forecasts cf guidance
|
FY21e |
FY21–25 average |
Implied FY22–25 average* |
FY21–30 average |
Implied FY26–30 average** |
Previous Edison forecasts |
|
|
|
|
|
Silver production (Moz) |
25.8 |
|
|
|
|
Gold production (koz) |
340.6 |
|
|
|
|
Cobalt production (klb) |
2,311 |
|
|
|
|
Palladium production (koz) |
21.7 |
|
|
|
|
Gold equivalent (koz) |
749.4 |
|
819 |
|
804 |
Current Edison forecasts |
|
|
|
|
|
Silver production (Moz) |
25.8 |
|
|
|
|
Gold production (koz) |
340.6 |
|
|
|
|
Cobalt production (klb) |
2,311 |
|
|
|
|
Palladium production (koz) |
21.7 |
|
|
|
|
Gold equivalent (koz) |
749.4 |
|
827 |
|
841 |
WPM guidance |
|
|
|
|
|
Silver production (Moz) |
25.5–26.0 |
|
|
|
|
Gold production (koz) |
330–345 |
|
|
|
|
Cobalt & palladium production (koz AuE) |
45–55 |
|
|
|
|
Palladium production (koz) |
N/A |
|
|
|
|
Gold equivalent (koz) |
735–765 |
810 |
825 |
830 |
850 |
Source: WPM, Edison Investment Research forecasts. Note: *Adjusted for assumed 749.4koz AuE production in FY21. **Adjusted for assumed 810koz AuE production in FY21–25 (inclusive).
WPM’s updated five-year and 10-year guidance is now based on standardised pricing assumptions of US$1,800/oz Au, US$25.00/oz Ag, US$2,300/oz palladium (Pd) and US$17.75/lb cobalt (Co). Of note in this context is an implied gold/silver ratio of 72.0x, which compares with its current ratio of 81.4x and a long-term average of 61.5x (since gold was demonetised in 1971). Readers will otherwise note that the execution of the Blackwater transaction and its inclusion into Edison’s forecasts brings Edison’s longer-term production forecasts to within 1.1% of WPM’s guidance for the period FY22–30.
Other longer-term growth opportunities
On 24 October 2018, Vale announced the approval of the Salobo III brownfields mine expansion, intended to increase processing capacity at Salobo from 24Mtpa to 36Mtpa, with start-up at that point scheduled for H222 and an estimated ramp-up time of 15 months. According to its agreement with Vale, depending on the grade of the material processed, WPM will be required to make a payment to Vale for this expansion, which WPM estimates will be c US$550–650m in FY23, in return for which it will be entitled to its full 75% attributable share of expanded gold production. This compares to WPM’s purchase of a 25% stream from Salobo in August 2016 for a consideration of US$800m (see our note Going for gold, published on 30 August 2016), the US$900m it paid for a similar stream in March 2015 (when the gold price averaged US$1,179/oz) and the US$1.33bn it paid for its original 25% stream in February 2013.
According to Vale’s Q321 performance report, the Salobo III mine expansion is now 81% complete (cf 77% at the end of Q221, 73% at the end of Q121, 68% at the end of Q420, 62% at the end of Q320, 54% at the end of Q220, 47% at the end of Q120, 40% at the end of Q419 and 27% at the end of Q319) and remains on schedule for start-up in H222.
Once Salobo III has been completed, however, WPM believes reserves and resources could support a further 33% capacity increase at Salobo, from 90ktpd to 120ktpd (denoted Salobo IV). In addition to its long-term underground mining potential, WPM believes such an expansion could still be supported by output from the open pit. Under the terms of its agreement with Vale, there would be no additional payment due from WPM in respect of this expansion, although Vale could exercise a right to alter the timing of the incremental payment due for Salobo III.
WPM’s contract with Barrick provided for a completion test that, if unfulfilled by 30 June 2020, would result in WPM being entitled to the return of its upfront cash consideration of US$625m less a credit for any silver delivered up to that date from three other Barrick mines (at which point it would have no further streaming interest in the mine). Given the test was unfulfilled, WPM had the right to an estimated US$252.3m (the carrying value of Pascua-Lama in WPM’s accounts) repayment from Barrick in FY20. Given the long-term optionality provided by the Pascua-Lama project, however, WPM instead opted not to enforce the repayment of its entitlement, but to maintain its streaming interest in the project (which was originally expected to deliver an attributable 1.7–12.0Moz silver pa, averaging 5.2Moz Ag pa, to WPM at a cost of US$3.90/oz (inflating at 1% per year).
Another major longer-term project with which WPM has a streaming agreement for attributable gold and silver production is Rosemont Copper in Arizona.
The proposed Rosemont development is near a number of large porphyry-type producing copper mines and would be one of the largest three copper mines in the United States, with output of c 112,000t copper in concentrate per year and accounting for c 10% of total US copper production. Total by-product production of silver and gold attributable to WPM is estimated to be c 2.7Moz Ag pa and c 16,100oz Au pa.
Rosemont’s operator, Hudbay, has received both a Mine Plan of Operations from the US Forest Service and a Section 404 Water Permit from the US Army Corps of Engineers (in March 2019), which was effectively the final material administrative step before the mine could start development. Subsequently, Hudbay indicated it would seek board approval to start construction work by the end of CY19, which would have enabled first production ‘by the end of 2022’. In the meantime, it started early works to run concurrently with financing activities (including a potential joint venture partner).
On 31 July 2019, however, the US District Court for the District of Arizona issued a ruling relating to a number of lawsuits challenging the US Forest Service’s issuance of the Final Record of Decision effectively halting construction, saying that:
■
the US Forest Service ‘abdicated its duty to protect the Coronado National Forest’ when it failed to consider whether the mining company held valid unpatented mining claims; and
■
the Forest Service had ‘no factual basis to determine that Rosemont had valid unpatented mining claims’ on 2,447 acres and the claims were invalid under the Mining Law of 1872.
In response, Hudbay said it believed the ruling to be without precedent and the court had misinterpreted federal mining laws and Forest Service regulations as they apply to Rosemont. It pointed out that the Forest Service issued its decision in 2017 after a ‘thorough process of 10 years involving 17 co-operating agencies at various levels of government, 16 hearings, over 1,000 studies, and 245 days of public comment resulting in more than 36,000 comments’ and with a long list of studies that have examined the potential effects of the proposed mine on the environment. Hudbay also pointed out that various agencies had accepted the company could operate the mine in compliance with environmental laws. As a result, Hudbay has appealed the ruling to the Ninth Circuit Court of Appeals, which it expects to be successful, not least as a result of there being legal precedents for its waste disposal plan. As per its MD&A for the year ended December 2020, final briefs relating to its appeal were filed in November 2020 and the oral hearing was completed in early February 2021, such that Hudbay expects a ruling from the Ninth Circuit in the near future. Nevertheless, as an alternative, it is also able to adapt its mine and waste plan to accommodate its waste dumps on privately owned, patented land alone, if necessary.
In the meantime, Hudbay has continued to explore in and around the area of the mine and, on 22 September, announced the intersection of additional high-grade copper sulphide and oxide mineralisation on its wholly owned patented mining claims (Copper World). To date, seven deposits have been identified at Copper World with a combined strike length of over 7km. As of 30 June approximately 166 holes had been completed at Copper World, totalling over 91,000 feet, on the back of which Hudbay expects to publish an initial inferred mineral resource estimate for Copper World shortly. These mineral resources will then form the basis for a preliminary economic assessment on the project, expected to be released H122. Note, the Copper World discovery is included in Wheaton’s area of interest under its PMPA with Hudbay.
Once in production, we estimate Rosemont will contribute c 16,750oz gold and 2.7Moz silver to WPM’s production profile in return for an upfront payment of US$230m in two instalments of US$50m and US$180m (neither of which has yet been paid) and this production is included in our financial forecasts from FY25.