Wheaton A Proxy for Gold – Not a Long Term Holding

Wheaton Precious Metals is the world’s largest pure streaming company providing exposure primarily to silver and gold. Wheaton has come a long way from just being a silver focused company to one with a large portfolio comprising of 26 assets and a balanced production profile. The company currently has streaming agreements for 19 operating mines and nine development stage projects. It operates a portfolio of low-cost and long-life assets, with over 30 years of mine-life based on reserves, having high silver and gold production base. 

Wheaton’s assets include a gold stream on Vale’s Salobo mine, silver streams on Glencore’s Antamina mine, and Newmont Goldcorp’s Penasquito mine. Over two-thirds of Wheaton’s production comes from assets that fall in the lowest cost quartile and have over 30 years of mine-life. Gold accounts for more than 60% of the company’s total revenue, followed by silver (more than 30%) and palladium (~5%).

Investment Data

Revenue Growth & Market Exposure

Wheaton Precious Metals changed its name from Silver Wheaton earlier to better reflect the company’s commitment towards precious metals like silver, gold, palladium, and cobalt. The company owns a portfolio of high-quality, low-cost, and long-life assets in politically stable jurisdictions. Wheaton has significant opportunities through both expansion of existing mines as well as those in development. It added two assets to its portfolio, Voisey Bay mine in Canada producing one of the purest cobalt products, and Stillwater and East Boulder in the USA adding both geographic and commodity diversification in the robust palladium market.

Wheaton’s streaming agreement entitles it to procure precious metals from its mining partners for an upfront payment as well as an additional payment upon delivery. Wheaton reduces many of the downside risks faced by traditional mining companies. The company incurs no capital or exploration costs as it does not own these mines. These contracts are typically multi-year agreements wherein operating costs are predictable and contractually set at the time of the stream. Over the last 15 years, Wheaton Precious Metals has partnered with leading global gold miners like Vale, Newmont Goldcorp, Glencore, Hudbay, Barrick, and more. Over the years, Wheaton has maintained sustainable relationships with its streaming partners. The mining companies are also entitled to greater value for their by-product precious metals by entering into a streaming agreement.

Wheaton exceeded its guidance for the eighth consecutive year, with 750 thousand gold equivalent ounces produced in the last year. During 2019, Wheaton produced over 400 thousand ounces of gold, 22.5 million ounces of silver, and 22 thousand ounces of palladium. The company has benefited from increasing gold production and sales in recent years. Wheaton also stands a good chance to benefit from high cobalt demand arising from lithium-ion batteries that are used in the emerging electric vehicles, smartphones, and other electrical devices. Wheaton is expecting production to increase over the next five years at its Penasquito and Constancia mines. 

Relative to the first quarter of the prior year, the latest quarter’s production represented an 8% increase in gold equivalent production with gold production being virtually unchanged while silver and palladium production increasing by 19% and 12% respectively. Revenues also increased by 13% relative to Q1 2019, primarily due to an increase in the realized selling price on a gold equivalent basis. The company is anticipating COVID-19 to have an impact on its second-quarter and 2020 as a whole. Operations at a few of Wheaton’s mines remained suspended as a result of the COVID-19 pandemic. As a result, the company has also withdrawn its production guidance for 2020.

Dividends

Wheaton Precious sports a dividend yield of 0.9%. It last raised its dividend by 11% and has grown dividends at a rate of 19.6% CAGR in the last three years. Wheaton returned more than $160 million in dividends to shareholders and generated over $500 million in operating cash flow in the last year. The company offers its investors both capital and operating cost predictability, and a way to play an increase in precious metals prices. It offers commodity prices upside to its investors with a minimal risk profile. A diversified portfolio further balances the impact of price volatility or weakness in other commodities.

Wheaton enters into multi-year agreements with mining companies which are contractually set at the time of the stream, granting more visibility and reducing risk. Wheaton is known for delivering high cash operating margins in the mining industry. Its cash cost for gold in the latest quarter was roughly $426 an ounce and $4.50 an ounce for silver. Gold is near the $1,700-an-ounce range, and silver is fetching around $18 per ounce. 

Wheaton’s streaming business model enables predictable operating costs and no exploration/ capital costs. Predictable costs and lower risk provides for secure cash flows and sustainable dividends. The company typically returns 30% of its operating cash flows to its shareholders and maintains a high dividend yield when compared to other streamers. It has typically outperformed several gold, silver, precious metals ETFs and mining investments. A low-risk business model, low-cost and long-life mining operations, and a strong record of organic growth paves the way for future dividend hikes. 

Competition

Wheaton Precious Metals competes with the other gold stocks such as Newmont Gold Corp., Franco-Nevada Corp, Agnico Eagle Mines, and Royal Gold. Franco Nevada is the leading gold-focused royalty and streaming company. Newmont is a leading gold producer headquartered in Colorado, while Royal Gold is another precious metals stream and royalty company focusing on gold. Agnico Eagle is a leading gold miner having an extensive experience of more than 60 years.

TickerKeyTickerCompanySectorIndustryScoreQuoteMarket CapP/EFPEEPSYield RawYieldPayoutRatioPaymentsDividendChowderGrowthRatingIncomeRatingTollboothAmbassadorAchieverAristocratKingCountryGraph
TSE:ABXABXBarrick GoldBasic MaterialsGold0.3638.7151.4011.9621.313.240.00970.970.115940.280.009714IntermediateNONONONOCanada1
TSE:FNVFNVFranco-Nevada CorpBasic MaterialsGold0.40214.1040.67166.3921.311.290.00630.631.039741.000.050365IntermediateYESYESYESNOCanada1
TSE:WPMWPMWheaton Precious Metals CorpBasic MaterialsGold0.2472.6724.36197.5921.310.370.00740.741.449940.400.074631IntermediateNONONONOCanada1
TSE:AEMAEMAgnico Eagle MinesBasic MaterialsGold0.45106.3719.1038.7221.312.750.01011.010.390240.800.124555IntermediateNONONONOCanada1
TSE:PAASPAASPan American Silver CorpBasic MaterialsSilver0.2150.057.85244.5421.310.200.00540.541.341240.200.005421IntermediateNONONONOCanada1
TSE:FMFMFirst Quantum Minerals Ltd.Basic MaterialsCopper0.1711.327.800.0021.31-0.790.00090.091.000020.010.000921IntermediateNONONONOCanada1
TSE:TECK.BTECK.BTeck ResourcesBasic MaterialsOther Industrial Metals & Mining0.2213.575.390.0021.31-3.520.01471.471.000040.200.014712IntermediateNONONONOCanada1

Bottom Line

Wheaton Precious Metals is a premier streaming company. Wheaton’s strong cash flows and access to capital and debt ensures the ability to pursue additional acquisitions and successful transactions. The company’s exposure to significant reserves and resources in development assets should drive future production growth. Given, Wheaton’s strong cash generation and available liquidity, it remains well-positioned to fund all outstanding commitments including dividends.

DISCLOSURE: Please note that I may have a position in one or many of the holdings listed. For a complete list of my holdings, please see my Dividend Portfolio.

DISCLAIMER: Please note that this blog post represents my opinion and not an advice/recommendation. I am not a financial adviser, I am not qualified to give financial advice. Before you buy any stocks/funds consult with a qualified financial planner. Make your investment decisions at your own risk – see my full disclaimer for more details.
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