FY25 marks the start of a multi-year growth profile

WPM has shown itself to be one of the major beneficiaries of the funding stasis for mining projects in western world financial markets by entering into a recent precious metals purchase agreement (PMPA) with Montage Gold for its Koné mine in Côte d’Ivoire, which was a key component in a package that fully funded the project and allowed it to develop rapidly. In conjunction with other similar projects, we are forecasting that WPM’s attributable production will grow to 915.9k gold equivalent ounces (GEOs) in FY30 (cf 633.5k GEOs in FY24).

Valuation: Still trending up

Using a capital asset pricing model-type method, whereby we discount cash flows at a nominal 9% per year, our terminal valuation of WPM amounts to US$70.22 ( C$99.68) in FY30 (cf FY27 previously), assuming zero subsequent long-term growth in real cash flows (which we think unlikely). If we instead assume 7.7% pa long-term growth in cash flows (ie the average compound annual growth rate in the price of gold from 1967 to 2024), our current valuation of WPM in FY24 more than doubles to US$174.20/share, or C$247.28/share. As such, at an implied rate of 5.5% per year, WPM’s share price currently appears to be discounting future compound annual average increases in cash flows per share from FY30 only slightly in excess of the long-term average rate of US dollar inflation of 4.0% from 1967 until 2024. However, an alternative interpretation is that the market is assuming currently prevailing precious metals prices up to and including FY30 and compound annual average increases in WPM’s cash flow per share of just 4.6% pa thereafter. Otherwise, assuming no purchases of additional streams, we calculate a value per share for WPM of US$57.30 (or C$81.34, or £45.44) in FY27, based on a historical multiple of 30.8x contemporary earnings (albeit at a gold price of only US$2,239/oz). At current prevailing prices, our equivalent EPS estimate in FY27 rises by 47.3% and our valuation by a similar amount, to US$84.49/share (or C$119.13/share, or £67.00).

Q424 production and sales results

WPM’s production and sales announcement of 18 February revealed FY24 gold output of 397,742oz and silver output of 20,657koz, but gold sales of 332,701oz and silver sales of 16,072koz. In general, therefore, production was greater than our prior expectations (as well as being ahead of guidance for the year), but sales were slightly behind, suggesting that there was little or no ‘flush through’ effect in the final quarter of the year – demonstrating, among other things, how unpredictable this effect can be. Exhibit 1, below, summarises Wheaton’s actual production and sales for the period as well the effect that variances of these measures from our prior expectations has had on our earnings expectations for both Q424 and FY24.

Note that, for the purposes of the above analysis, we have shown Q224 on an underlying basis, with the global minimum tax (GMT) attributable in Q124 but reported in Q224 adjusted back out into Q124 (which is also the basis of our implied re-stated Q124 numbers).

Exhibit 2 compares our updated EPS forecasts with those of the market and demonstrates that they remain within the range of consensus expectations:

Wheaton reported that its production outperformance was driven by stronger-than-expected production at Salobo and Constancia, partially offset by lower-than-expected production from San Dimas and Zinkgruvan. On 28 January, Vale reported that Salobo had produced 58,900t of copper in the quarter – a 26.4% increase relative to Q324. Historically, there has been a very strong correlation between copper produced by Vale and gold attributable to Wheaton from Salobo. Given this level of copper output therefore, we would expect gold attributable to Wheaton to be in the order of 83,610oz – which would be a record for Wheaton and materially higher than the 54,750oz that we had previously forecast as a result of mining in a lower grade area of the pit (although we did argue that we saw the risks/opportunities within this context to be largely skewed ‘to the upside’).

At the same time, we suspect that Salobo was largely responsible for the 26,518oz shortfall in gold sales versus production in Q4 – since (a) the difference between production and sales at Salobo has occasionally been quite material in the past and also quite volatile and (b) because no other gold mine in Wheaton’s portfolio could support such a material difference between the two. As such, we suspect that Salobo probably sold c 57,110oz Au attributable to Wheaton during the quarter (cf production of 83,610oz). Note that, in a generally rising price environment, we anticipate this will also have had an (albeit modest) adverse impact on prices received on Wheaton’s sales and this has been taken into account in our forecasts in Exhibit 1.

Ounces produced but not yet delivered (PBND)

Overall, gold sales were 26,518oz, or 23.2%, below production, which was close to the top end (ie a high level of under-sale) of the average historical under-sales rate of 7.2% (±17.1% standard deviation) since Q112. Silver sales were 1,265koz, or 22.7%, below production and were similarly close to the top end of the long-term average under-sales rate of 12.6% (±11.0% standard deviation) since Q112.

As a result, we estimate that gold ounces PBND may have increased to c 122,676oz, or 3.88 months of estimated FY24 production, which compares with WPM’s target levels of two to three months of PBND for gold and palladium production. We estimate that silver ounces PBND may have increased to c 4.0Moz, or 2.33 months of estimated FY24 production, which compares with WPM’s target level of two months for silver production.

General and administrative expenses

At the time of its Q423 results, WPM provided guidance for non-stock G&A expenses of US$41–45m, or US$10.25–11.25m per quarter, for FY24, which represents a decline relative to US$47–50m in FY23 and US$47–49m in FY22 and is on a par with guidance of US$42–44m for FY21 and US$40–43m for FY20.

Stock-based G&A expenses are harder to estimate. However, they broadly correlate with movements in WPM’s share price (in US dollars) between quarters, as shown in Exhibit 7, below:

Given Wheaton’s share price performance in Q424, we would expect the stock-based G&A charge to fall back to the area described by the oval in Exhibit 7 (albeit this is against the historical precedent whereby the charge in the final quarter of the year tends to be higher), such that the total G&A charge for the year is US$65.5m, of which the stock-based component will account for US$19.9m (30.4%).

FY24 and future forecasts cf guidance

On 20 February 2024, WPM provided detailed production guidance for FY24 and beyond, which has now been updated for FY25 and beyond in Wheaton’s 18 February announcement. Both are summarised below relative to the known outcome for FY24 and our forecasts for FY25 and thereafter:

Production is forecast by Wheaton to increase by approximately 40% over the next five years to 870,000 GEOs, owing to growth at multiple assets including Antamina, Aljustrel and Marmato, as well as development assets currently in construction, including Blackwater, Mineral Park, Goose, Platreef, Fenix, Kurmuk and Koné, and pre-development assets including El Domo and Copper World. From 2030 to 2034, attributable production is forecast by Wheaton to average over 950,000 GEOs annually and incorporates additional incremental production from pre-development assets including Santo Domingo, Cangrejos, Kudz ze Kayah, Marathon and Kutcho in addition to the Mt Todd, Black Pine and DeLamar royalties. Not included in Wheaton’s long-term forecast and instead classified as ‘optionality’, is potential future production from nine other assets including Pascua-Lama and Navidad, in addition to expansions at Salobo beyond the Salobo III mine expansion project and future stream purchases.

WPM’s guidance for FY24 and beyond is based on standardised pricing assumptions of US$2,000/oz gold, US$23.00/oz silver, US$1,000/oz palladium, US$1,000/oz platinum and US$13.00/lb cobalt. For FY25 and beyond, it is based on standardised pricing assumptions of US$2,600/oz gold, US$30.00/oz silver, US$950/oz palladium, US$950/oz platinum and US$13.50/lb cobalt. Of note is the updated implied gold/silver ratio of 86.7x. This compares with the previous ratio of 87.0x (ie little changed) and also the 89.0x current ratio in the market. However, they all compare with the longer-term average of 60.1x since gold was demonetised in August 1971.

At the updated standardised prices indicated, our production forecast of 631.2koz gold equivalent (GEO or AuE) for FY25 is self-evidently within Wheaton’s guidance range of 600–670k GEOs. However, our sales forecast is slightly more conservative, at 581.3k GEOs (cf 532,468k GEOs in FY24).

Otherwise, readers will note that our longer-term production forecasts are within 6% of WPM’s longer-term guidance, which is well within the recent average quarterly under-sales rate of 10.6% (±6.8%) since Q121.

FY25 forecasts

At the time of our last update note, published on 11 December 2024, our base case EPS forecast (at relatively depressed long-term precious metals’ prices) was US$1.23/share. However, we noted that, at then prevailing prices, this would increase to US$1.67/share. Given our subsequent revisions to production expectations (in particular that Salobo production in FY25 will be ‘consistent’ with FY24) – and also the subsequent moves in precious metals prices – we have now substantially upgraded both of these numbers to those shown in Exhibit 10, below:

This updated adjusted basic EPS forecast of US$1.953 per share is towards the top end of the range of brokers’ expectations for FY25.

Within this context, it is worth noting, that the discrepancy between brokers’ expectations for FY25 and ‘Sum Q1–Q425e’ (especially at the bottom end of the range) suggests that it is different brokers compiling quarterly forecasts from those compiling annual forecasts.

Valuation

Absolute

WPM is a multi-asset company that has shown a willingness and desire to buy streams in the past to maintain production and maximise shareholder returns. As a result, rather than our customary method of discounting maximum potential dividends over the life of operations back to FY25, in the case of WPM, we discount forecast cash flows back over six years (three years previously) to the start of FY25 and then apply an ex-growth terminal multiple to forecast cash flows in that year (FY30) based on the appropriate discount rate.

In this case, our estimate of WPM’s terminal cash flow in FY30 is US$3.38/share. Assuming 4% growth in nominal cash flows beyond FY30 (ie 0% growth in real cash flows) and applying a discount rate of 9% (being the expected long-term required nominal equity return), our terminal valuation of the company at end-FY30 is US$70.22, or C$99.68, per share.

However, this valuation is inherently conservative in that it assumes a (nominal) gold price of US$2,274/oz in FY30 and zero growth in (real) cash flows thereafter. This is inconsistent with the gold price, which has risen at a compound average annual growth rate of 7.7% per year from 1967 to 2024, a simple average annual growth rate of 9.8% per year (cf a compound average inflation rate over the same period of 4.0%) and a compound average real annual growth rate of 3.6% per year.

It is also inconsistent with WPM’s longer-term historical performance, wherein operational cash flows have increased at a compound average annual growth rate of 19.6% pa for the 18 years between FY05 and FY23, while its operational cash flows per share have increased at a compound average annual growth rate of 13.2% pa.

If we instead assume that cash flows per share increase at a compound average annual growth rate of 7.7% (ie the average compound average annual growth rate in the gold price from 1967 to 2024, cf 4.0% above), then our terminal valuation of WPM increases manyfold to US$278.19/share, or C$394.90/share, and our current valuation to US$174.20/share, or C$247.28/share.

Stated alternatively, WPM’s current share price of C$99.12 appears to be discounting future compound annual average increases in cash flow per share of just 5.5% pa from FY30, which is only slightly higher than the long-term average rate of US inflation of 4.0% pa from 1967 to 2024 (inclusive).

A summary of these valuations with respect to their cash flow growth rate assumptions is as follows:

An alternative interpretation is that the market is assuming currently prevailing precious metals’ prices up to and including FY30, in which case WPM’s share price of C$99.12 could be said to be discounting compound annual average increases in cash flows per share thereafter of just 4.6% per annum.

Historical

Excluding FY04 (part-year), WPM’s shares have historically traded on an average P/E multiple of 30.8x current year basic underlying EPS, excluding impairments (cf 49.8x Edison and 47.3x LSEG Data & Analytics consensus FY24e currently, see Exhibit 16).

Applying this 30.8x multiple to our (ostensibly unchanged) EPS forecast of US$1.86 in FY27 implies a potential value per share for WPM of US$57.30 or C$81.34 in that year. However, it is also notable that Edison’s forecast metals prices in that year currently are only US$2,239/oz Au and US$25.32/oz Ag. At current prices, our EPS forecast of US$1.86/share in FY27 instead rises to US$2.74/share, in which case our equivalent valuation would rise to US$84.49, or C$119.13, per share. Moreover, as can be observed from the graph above, during periods of precious metal price appreciation, WPM can command current year P/E ratios as high as 45.0x (eg 2019).

Relative

In the meantime, WPM is maintaining its premium rating relative to its peers, albeit it appears good value within the context of future dividend expectations, especially in FY25 and FY26:

Readers will note Edison’s relatively high FY26 P/E ratio, which arises from our relatively low precious metals forecasts of US$2,105/oz Au and US$24.34/oz Ag. As noted previously, if metals prices remain at current levels, our FY26 EPS estimate instead rises to US$2.52/share, in which case the corresponding P/E ratio would be 27.7x, which is at a marked discount to consensus.

Financials: US$688.4m in net cash at end-Q3

As at 30 September, WPM had US$694.1m in cash on its balance sheet and no debt outstanding under its US$2bn revolving credit facility. Including a modest US$5.7m in lease liabilities, it, therefore, had US$688.4m in net cash after generating US$254.3m in operating cash flow, disbursing US$31.2m in investing activities and paying out US$70.0m in dividends.

In addition, WPM had long-term investments, in the form of equity share holdings and warrant holdings, in listed companies in the sum of US$103.1m as at end-September (cf US$88.1m as at end June), equivalent to US$0.23/share.

For FY23, WPM generated US$750.8m from operating activities, before consuming US$646.6m in investing activities and paying out US$265.1m in dividends. In FY24, we estimate that it will generate US$995.8m from operating activities, before consuming a net US$587.5m in net investing activities and paying out an increased US$281.1m in forecast dividends under the influence of its new, progressive dividend policy. However, readers should note that the timing of PMPA payments is uncertain and, inasmuch as investments are advanced or delayed, it is possible that WPM could register either a larger or smaller net cash position on its balance sheet by the year-end than that forecast. However, all other things being equal, in the absence of any major new asset acquisitions (notwithstanding its recently announced PMPAs with Koné and Fenix), we do not expect WPM to require recourse to its debt facilities in the foreseeable future.