Wheaton Precious Metals Corp

Wheaton Precious Metals Corp (TSX: WPM) is a precious metal streaming company. The company has entered into over 20 long-term purchase agreements with 17 different mining companies, for the purchase of precious metals and cobalt.

Key highlights

• Generated record revenue in Q2 2021: The group once again delivered strong results in the second quarter with record sales volumes in the first half of 2021. It recognized a revenue of USD 330 million in Q2 2021, representing a 33% increase from the previous corresponding period, primarily due to higher average realized gold equivalent price and increased number of gold equivalent ounces sold.
  

• Increasing free cash flows: On the back of agile management, record revenues and higher average realization price of metal In Q2 2021, the company generated an operating cash flow of USD 216 million, with the USD 65 million increase relative to the comparable period of the prior year.

• Future guidance on production: In 2021, the company expects to produce 370,000 to 400,000 ounces of gold, 22.5 to 24.0 million ounces of silver, and 40,000 to 45,000 gold equivalent ounces (“GEOs”) of other metals, for a total of 720,000 to 780,000 GEOs. It estimates that average production will be 810,000 GEOs over the five years ending in 2025, while for the ten years ending in 2030, its average annual production will amount to 830,000 GEOs.

Source: Company 

• Industry beating margins: The resilient business and management’s solid determination along prudent steps helped in leaping the industry median margins on many fronts in Q1 2021, which is a key positive. The chart below gives a glimpse of this.

• Increasing quarterly dividend: Recently, the company declared its third quarterly cash dividend payment for 2021 of USD 0.15 per common share, an increase of 50% relative to the comparable period in 2020 and representing the fourth quarterly dividend increase in a row, which is praiseworthy.
  

Financial overview of Q2 2021

Source: Company 

• In Q2 2021, the company reported higher revenue at USD 330.3 million against USD 247.9 million in the previous corresponding period. Higher revenue was mainly due to a 24% increase in the average realized gold equivalent price, coupled with a 7% increase in the number of gold equivalent ounces sold.
• The gross profit stood at USD 181.6 million, against USD 124.0 million in Q2 2020. The company witnessed a drop in its total cost of sales at 45% V/s 49.9%, which helped grow gross profit.
• Income from operations stood at USD 163.2 million in the reported period against USD 102.3 million in pcp.

• The company’s net income in the reported period came at USD 166.1 million, against USD 105.8 million in pcp. The rise in net income was mainly due to higher gross profit, lower cost of sales, lower finance cost and income tax recovery.
  

Risks associated with investment

The Company’s financial performance is mostly dependent on the price of gold, which directly affects their profitability and cash flow. Any drawdown in the gold prices would impact the group’s performance.

Valuation Methodology (Illustrative): EV to Sales 

Stock recommendation

In the second quarter, the business produced outstanding performance and is on pace to meet its 2021 forecast of 720,000 to 780,000 gold equivalent ounces. Wheaton produced record revenue and cash flow of USD 655 million and USD 449 million in the first half of 2021, thanks to record sales volumes. This solid performance reflects the underlying strength of its diversified, high-quality portfolio, and has resulted in an increase to the dividend for the fourth quarter in a row, an increase of 50% over the prior year, which is appreciable. Additionally, it leaps the industry median margins on many fronts in Q2 2021, which is a key positive.  Therefore, based on the above rationale and valuation, we recommend a “Buy” rating on the stock at the closing price of CAD 54.38 on August 18, 2021. We have considered Franco-Nevada Corp, Osisko Gold Royalties Ltd. as the peer group for the comparison.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on August 18, 2021). Source: REFINITIV, Analysis by Kalkine Group 

First Majestic Silver Corp.

First Majestic Silver Corp. (TSX: FR) is a mining company, which produces metals like silver and gold and has mines in Mexico. The company is also pursuing several exploration and development activities across the North American region.

Key Highlights:

• Strong Operating results: Despite the ongoing downturn, the company reported impressive mine operations, wherein the company posted higher ore processed of 1,440,457 tonnes in H1FY21, reflecting a jump of 54% on y-o-y basis. In H1FY21, silver and gold production stood higher by 24% and 47% on y-o-y basis to 6,182,050 ounces and 70,418 ounces, respectively, reflecting a strong production growth, which is a key positive. The growth was supported by improved production from the three operating Mexican mines. Additionally, the company also made progress in diamond drilling activity and reported 93,159m of drilling in H1FY21, reflecting 84% growth over the previous corresponding period.
• Demand for Silver is likely to stay strong: The company derives its majority of revenue from silver mining, while the demand for the above metal is likely to stay elevated in the coming days, supported by increased demand from the manufacturing of higher electric cars across the globe. Within the car segment, silver is likely to be used in wireless charging, infotainment, augmented realty heads-up-display etc. Moreover, rise in solar carports is likely to support the demand for Photovoltaic Solar Panels, wherein silver is used as a raw material. Hence, we remain optimistic on the demand scenario of silver in the coming days, and the company is highly poised to take advantage of the growing demand.

Q2FY21 Financial Highlights:

• FR impresses with its quarterly result, wherein the company posted revenue of USD 154.073 million compared to USD 34.855 million in the previous corresponding period. The increase was driven by higher revenue from both silver and gold segment.
• Mine operating earnings stood at USD 29.423 million as compared to a loss of USD 7.762 million in Q2FY20. The growth was primarily driven by higher revenue, partially offset by a higher mine operating cost.
• Operating earnings stood at USD 16.354 million as compared to a loss of USD 27.387 million in pcp. The quarter witnessed a surge in general and administrative expenses and share-based payments, while mine holding costs remained lower than the previous corresponding period.
• The company turned profitably and reported net earnings of USD 15.599 million, as compared to a net loss of USD 9.968 million in pcp.

Source: Company Report

Valuation Methodology (Illustrative): Price to Cash Flow

Risks: The group’s performance is dependent on the price of underlying commodities, in which it deals in. Hence, volatility in commodity price would affect the group’s revenue and cash flow.

Stock Recommendation:

The company expects silver equivalent production to stay strong in the second half of FY21 at 14.8M to 16.4M AgEq oz, reflecting a ~44% growth over H1FY21. For FY21, the company expects its production of 25.7 to 27.5 M AgEq oz. Total capital investments for FY21 is estimated at USD 205.3 million, including USD 84.2 million for sustaining requirements and USD 121.1 million for expansionary projects. Moreover, the company would continue with underground development activities within the diamond segment, which looks positive for the company. We have valued the stock using the Price to CF based relative valuation method and have arrived at a double-digit upside (in percentage terms) upside. For the said purposes, we have considered peers like MAG Silver Corp, Altius Minerals Corp etc. Considering the aforesaid facts, we recommend a ‘Buy’ rating on the stock of FR at the closing price of CAD 15.29 on August 18, 2021.

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

Technical Analysis Summary

One-Year Technical Price Chart (as on August 18, 2021). Source: REFINITIV, Analysis by Kalkine Group

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

Disclaimer

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