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Sorting Wheaton from the chaff

Gold and silver company only has 40 employees but is worth $22bn. Now it's coming to London, we have a look under the hood
October 22, 2020

It’s almost a riddle: a mining company that doesn’t mine, but still gets its revenue from gold, silver and palladium. London investors will be familiar with the royalty and streaming model because of Anglo-Pacific Group (APF). Wheaton Precious Metals (Ca:WPM) is on a different scale, and will be the second largest precious metal company on the London Stock Exchange when it lists in the coming weeks. 

This is a company with a market capitalisation of around $22bn (£17bn), putting it only behind Polyus Gold (PLZL) in the LSE gold stakes. Looking at mining as a whole, only the majors beat out those two in size. 

Putting the fun in funding

To recap the business model, streaming and royalties companies buy the rights to a proportion of production at a mine. The reason it exists is because miners are always in need of financing. When debt and equity markets get difficult – as they often do in the cyclical sector – alternatives are needed. Selling a royalty before production is a good way to raise money without diluting shareholders or taking on major debt. 

Wheaton’s current major earner is the Salobo mine in Brazil. A copper/gold operation, its owner Vale (Bra:VALE) sold Wheaton 75 per cent of its gold production for $3bn in 2013. In the first half it brought in $124m, and the deal has given Wheaton 1.3m ounces (oz) and $1.2bn in cash flow, as of 30 June.

This is by far the biggest deal the company has made, with its second-largest stream the $900m deal with Glencore (GLEN) for 33.75 per cent of the Antamina mine’s silver production. 

This kind of financing means Wheaton is like a 650,000 gold equivalent oz a year miner with just 40 employees, less operational risk and extremely low costs. This has seen Wheaton’s share price double in the past 18 months as gold has climbed from around $1,300/oz to over $1,900/oz.

A quick look over Wheaton’s half-year 2020 results shows the impact this has had on the company. In the first half, adjusted net earnings doubled on 2019 to $202m while operating cash flows were up 45 per cent to $329m. Gold provided the lion’s share of the $502m in revenue, but silver also contributed $163m, an increase of a quarter. The cash operating margin for the June quarter was a hefty $1,170/oz. 

So Wheaton does well in a bull market – lots of companies exposed to gold are doing well, of course. Pushing out to a five-year time-frame, which includes the last mining downturn, Wheaton has done better than both the VanEck Vectors Gold Miners ETF and the spot gold price. It largely tracked the gold miners, with the outperformance coming mostly in the past 18 months.

Compared to fellow precious metals streamer Franco-Nevada (Ca:FNV), which is slightly larger, Wheaton is ahead in terms of share price growth, on a similar dividend yield, and has a forward price to net asset value ratio of 1.8 to Franco-Nevada’s 1.7, according to FactSet. The world’s biggest gold miner Newmont (Can:NEM) has a P/NAV ratio of 1.4, for comparison’s sake. 

Making hay 

Asked what the company can offer when the gold price does drop off, Wheaton chief executive Randy Smallwood said buying into lower-cost mines meant returns continued even in a downturn. In 2015, when gold went under $1,100/oz, Wheaton had sales of $649m and a net loss of $162m because of a $385m impairment over the low gold price. The 2015 dividend was 20c, an 11 per cent fall on the year before. The shareholder payout has steadily increased since then, and Mr Smallwood said it would likely grow in the years to come as well. 

The question then is what are the drawbacks? The company’s major capital purchases like the Salobo royalty are in the past, it has access to plenty of cash and plenty of analysts see gold hanging around above $1,500 an oz for some time, which is helpful given Wheaton will see production rise in the next year to over 700,000 gold equivalent oz. 

The company’s pitch that it offers far less risk than actual miners is true, but it is still heavily reliant on just a few operations for much of its income. Also, given reserve depletion and the nature of some of the royalty agreements, it needs to keep investing in production. Given the cyclical nature of gold and silver prices, now it is not the time for that. At least, that’s the approach of anyone who thinks the price will start coming down again in the near-term. 

Mr Smallwood has a much more bullish view. “You don't want to be investing near the highs [but] I don't think we're anywhere near the highs of gold and silver and precious metals as a whole,” he told Investors Chronicle. The priorities for the high cash flow currently (2020 consensus free cash forecast is $732m, a 43 per cent increase on 2019) is to pay the dividend, then look at new investments and thirdly put it into debt.

Net debt was $509m on 30 June, 9 per cent of equity. It has another $1.4bn from a revolving debt facility to draw on if any larger streams catch its eye.

During this combined gold and equity bull market, any gold-exposed company is going to look the goods. Wheaton has held onto its hat during a downturn before and would likely do so again, so this will be a strong addition to the London mining cohort.