Wheaton Precious Metals Corp. (TSX: WPM)  is one of the largest precious metals streaming companies across the globe, with twenty-four operating mines and eight development stage projects. The group’s production profile is aided by a portfolio of low-cost, long-life assets, including a gold stream on Vale’s Salobo mine and a silver stream on Newmont's Peñasquito mine.

Investment Rationale:

• Virtually Debt Free Balance Sheet: Despite operating in a capital-intensive sector, the company is virtually debt-free, which indicates prudent capital management and is a key positive. The above indicates that the company has funded its capital investments through its cash flows, which is mentioned worthy. Moreover, a debt-free balance sheet indicates higher financial flexibility.
  

• Industry beating margin profile: The company commands a higher margin than its peers, which is a key positive and indicates higher operational efficiency. Notably, the company reported its gross margin and EBITDA margin at 55% and 70.8%, respectively, in Q2FY21, higher than the industry median of 49.3% and 40.7%, respectively. The group’s operating margin and net margin stood at 49.4% and 50.3%, respectively, higher than the industry median of 27.2% and 15.8%, respectively.

• Superior liquidity profile: The company has a strong working capital management and reported its current ratio of 9.49x in Q2FY21, which is significantly higher than the industry median of 2.80x. Moreover, cash cycle days stood only 2.6 days, as compared to the industry median of 56.2 days. The above indicates that the company is efficient to convert its investments in inventory and other resources into cash flows.

• Ample Liquidity: The company has ample liquidity of USD 235 million of cash and cash equivalents at the end of Q2FY21 along with ~USD 2 billion of revolving term loan, which is sufficient to fund its working capital requirements and capital investments.

• Increase in dividend distribution: Despite the ongoing sluggish economic scenario, the company reported a higher dividend distribution of USD 103.549 million in H1FY21, increased significantly from USD 83.003 million in pcp. The above is impressive as most of the companies are reducing their dividend distribution in order to retain liquidity.
  

• Bullish outlook of Gold: International Gold price has remained in an uptrend since October 2021 due to rising bond yield, coupled with the weakness in the dollar index. Moreover, being a defensive asset class, gold is gaining traction due to the overvalued equity market. Recently, we have seen a growing interest in the Gold ETF segment, which implies that investors are pouring their investments in the same. Continuation of the above trend would support the company’s sales volume in the coming days.
  

• Diversified High-quality asset base: The company operates through twenty-four operating mines, while its mining assets are strategically located in Canada, Mexico, Brazil etc. Most of the assets are classified under the high-margin segment, as these mines operate in the lowest half of their cost curve. Moreover, these mines do not require any additional cost during their mine exploration and expansion, which is a key positive, as it leads to a low-cost structure. Notably, the company has an impressive mine life reserve of more than thirty years, which indicates long term available mineral deposits.

• Encouraging FY21 production outlook: For FY21, the company expects to produce 370,000 to 400,000 ounces of gold, which is higher than 367,419 ounces in FY20. Silver production is estimated in between 22.5 to 24.0 million ounces, higher than 22.89 million ounce in FY20. Total production of gold equivalent ounces (GEOs) is expected in between 720,000 to 780,000 GEOs, which is significantly higher than 671,713 GEOs in FY21.

Q2FY21 Financial Highlights:

• Strong revenue growth: WPM announced its quarterly results, wherein the company posted its revenue of USD 330.393 million, jumped from USD 247.954 million in the previous corresponding period (pcp). The growth was driven by elevated commodity prices, which resulted in higher realization rates.
• Elevated Gross margin: The company reported its gross margin at USD 181.640 million, as compared to USD 124.082 million in pcp. The growth was supported by higher income, partially offset by an increase in cost of sales (USD 148.753 million v/s USD 123.872 million in pcp).
• Improved costs metrics: The quarter was marked by lower general & administrative expenses (USD 18.465 million v/s USD 21.799 million in pcp), lower finance costs (USD 1.357 million v.s USD 4.636 million in pcp) and a marginal slid in the other expenses.
• Growth in the bottom line: Net earnings soared to USD 166.124 million, from USD 105.812 million in the previous corresponding period (pcp).

Q2FY21 Income Statement highlights (Source: Company Report)

Risks: The performance of the company is highly correlated to the international metal prices, and volatility in the same would lead to lower realization price and subsequently dampen the company’s performance.

Top-10 Shareholders

Top ten shareholders of the company together hold approximately 27.94% stake, with Van Eck Associates Corporation and Capital World Investors are the major shareholders in the company with an outstanding position of 4.99% and 4.18%, respectively.

Source: REFINITIV, Analysis by Kalkine Group 

Valuation Methodology (Illustrative): Price to Earnings- Based Valuation

Note: Premium (discount) is based on our assessment of the company’s growth drivers, economic moat, competitive advantage, stock’s current and historical multiple against peer group average/median and investment risks.

Stock Recommendation:

During the first half of FY21, the company produced 385k GEOs, led by strong performance in silver, which is in line with the GEO guidance of 720-780k GEOs provided in FY21. On a long-term basis, the company expects its 5-year and 10-year average production at ~810,000 GEOs and ~830,000 GEOs, respectively, which indicates a strong production outlook in the coming years, driven by sustainable growth in the company’s operations coupled with an impressive product pipeline. We have valued the stock using the price to price to earnings-based relative valuation method and have arrived at a double-digit upside (in percentage terms).  For the said purposes, we have considered peers like Franco-Nevada Corp, Yamana Gold Inc etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of WPM at the last traded price of CAD 51.02 on October 27, 2021.

*Depending upon the risk tolerance, investors may consider unwinding their positions in a respective stock once the estimated target price is reached.

One-Year Technical Price Chart (as on October 27, 2021). Source: REFINITIV, Analysis by Kalkine Group

*The reference data in this report has been partly sourced from REFINITIV.

*Recommendation is valid on October 28, 2021 price as well.

Disclaimer

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