Wheaton Precious Metals — Honing Q321 forecasts

Wheaton is to release its Q321 results on Thursday 4 November after the market close in Toronto. A conference call to discuss the results will then be held on Friday 5 November, starting at 11:00am ET (8:00am PT, 3:00pm GMT).

Ahead of the publication of the actual results, we have adjusted our forecasts for the quarter to reflect both updated commodity prices plus a number of operating considerations that we understand to have been the case at Wheaton’s partners’ mines. A summary of the commodity price changes (which have also affected our forecasts for Q421), is as follows:

A summary of the operating conditions we understand to have been the case at Wheaton’s partners’ mines is as follows:

By contrast, we do not expect the recent incident at the Totten mine at Sudbury, in which 39 miners were trapped underground after a scoop bucket detached and blocked the main transport shaft, to have had any material or longstanding effect on either production or sales. In addition, we had already anticipated a modest tapering of performance at Antamina and Penasquito (to do with moving the primary crusher and pit sequencing, respectively) after each reported unexpectedly strong performances in H1.

We have also adjusted our general and administrative (G&A) charge for the quarter to reflect WPM’s shares finishing the quarter at a price of C$47.68 (or US$37.60) compared with US$44.04 at the end of the previous quarter – a decline of US$6.43 – which alters our estimate of stock-based G&A (see our note Solid Q221 results set up H221, published on 18 August 2021, for more details).

In the light of the above developments, our updated forecasts for WPM for FY21 are as shown in Exhibit 2. The forecasts assume operations will continue throughout the remainder of the year without major interruptions. Apart from precious metals prices, the principal remaining risk to our forecasts relates to the extent to which sales differ from production and therefore the extent to which inventory (in the form of ounces produced but not yet delivered to WPM) either increases or decreases throughout the remainder of the year.

Readers should note that, consistent with past practice, for the purposes of FY21 we are assuming production and sales are closely aligned and there is little or no change in the level of ounces produced but not yet delivered. Within this context, our basic EPS forecast of US$1.36/share for FY21 is towards the bottom of the range of analysts’ estimates of US$1.36–1.58/share (source: Refinitiv, 6 October 2021).

In the meantime, our basic EPS forecast of US$2.05/share for FY22 (cf US$2.14/share previously) compares with a consensus of US$1.56/share within a range of US$0.57–2.14/share (source: Refinitiv, 6 October 2021). In this case, our estimate is, once again, predicated on an average gold price during the year of US$1,892/oz and an average silver price of US$30.78/oz, which assumes, among other things, the silver price will revert to the long-term correlation that it has exhibited with gold since the latter was demonetised in 1971. If both metals remain at current levels (US$22.23/oz Ag and US$1,749/oz Au at the time of writing), our forecast for WPM’s EPS in FY22 then moderates to US$1.48 per share and our forecast for its DPS to US$0.64/share (from US$0.77 current FY22 DPS forecast).

At the time of its Q420/FY20 results, WPM provided production guidance of 720–780koz AuE for FY21 and five-year average (2021–25) production guidance of 810,000oz AuE per year and maiden 10-year average (2021–30) guidance of 830,000oz AuE per year. This compares with our updated forecasts, as follows:

WPM’s updated five-year guidance and its 10-year guidance are based on standardised pricing assumptions of US$1,800/oz gold (Au), US$25.00/oz silver (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 78.7x and a long-term average of 61.5x since gold was demonetised in August 1971.

Readers will note that our FY21 silver production forecast remains above the top end of WPM’s guidance range. After producing 13.5Moz Ag in H121, WPM’s mines will only be required to produce at a rate of 5.3Moz Ag per quarter for the remaining two quarters of the year to achieve the top end of WPM’s guidance range of 22.5–24.0Moz Ag for FY21. This compares with a long-term average quarterly production rate of 6.6Moz per quarter since Q112. Conversely, our gold production forecast remains slightly below the bottom end of WPM’s guidance range. After producing 168.0koz Au in H121, WPM’s mines would have to produce at a rate of 101.0koz Au per quarter for the remaining two quarters of the year to achieve the bottom end of WPM’s guidance range of 370–400koz Au for FY21. While this is certainly possible (WPM’s gold mines produced at an average rate of 102.4koz per quarter in the period Q318–Q419), we think it may prove demanding, given the strike action at Sudbury in Q3 (see our note, Solid Q221 results set up H221, published on 18 August 2021) and the delay in Salobo’s recovery from lingering coronavirus-induced disruptions, in particular. Self-evidently, however, at the standardised prices indicated, our gold equivalent production forecast of 748koz gold equivalent (AuE) is close to the middle of WPM’s guidance of 720–780koz AuE.

Otherwise, readers will note that our (updated) production forecasts are within 3.1% of WPM’s guidance for the period FY22–30.

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.0x current year basic underlying EPS, excluding impairments (cf 27.4x Edison or 25.4x Refinitiv consensus FY21e, see Exhibit 6).

Applying this 30.0x multiple to our EPS forecast of US$2.06 in FY23 (previously US$2.16) would ordinarily imply a potential value per share for WPM of US$61.99 or C$78.32 in that year (cf US$64.92 or C$81.86 previously). However, the graph above suggests the current year multiple has been on a broadly upward trend between FY12 and FY19, on which basis we would argue that a multiple in excess of 40x (as evidenced by FY18 and FY19) could be supported in the event of a return to favour of precious metals and precious metals stocks (not least given the fact that these years were not subject to the extraordinary trials and tribulations experienced in FY20). In this case, applying a 40.7x earnings multiple (the average of FY18, FY19 and FY20) to our updated EPS forecast of US$2.06 in FY23 implies a potential value per share for WPM of US$84.06 or C$106.22 in that year (cf US$88.03 or C$111.24 previously). Note this analysis implicitly assumes metals prices in FY24 would be experiencing the same sort of increases relative to FY23 that they did in FY20 relative to FY19 and the average multiple would probably then contract again in FY24 as EPS ‘catch up’ with the share price. Even at such share price levels, however, a multiple of over 40.7x would put WPM’s shares on little more than peers such as Franco-Nevada (currently trading on 36.08x current year earnings, see Exhibit 6).

In the meantime, from a relative perspective, it is notable that WPM has a lower valuation than the average of its royalty/streaming ‘peers’ on eight out of nine valuation measures if our forecasts are used or seven out of nine valuation measures if consensus forecasts are used. On an individual basis, WPM is cheaper than its peers on 83% (30 out of 36) of the valuation measures used in Exhibit 6 if our estimates are adopted or 72% (26 out of 36) of the same valuation measures if consensus forecasts are adopted. Among other things, this could possibly indicate the market has more conservative precious metal pricing expectations than we do in FY22 and FY23, in particular.