July 12, 2018 - 9:31am EST by
2018 2019
Price: 21.98 EPS 0.585 0.713
Shares Out. (in M): 443 P/E 37.6 30.8
Market Cap (in $M): 9,741 P/FCF 20 19
Net Debt (in $M): 547 EBIT 285 340
TEV ($): 10,315 TEV/EBIT 36 30

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Buy Wheaton Precious Metals for the following upside value drivers:

  • CRA tax case to be addressed alleviating valuation discount realtive to peers

  • Gold/silver ratio rerating driving silver prices higher, and therefore Wheaton Precisou Metals outperformance

  • Market appreciation of significant development portfolio and therefore earnings growth (i.e. Solobo, Rosemont)

  • Position for a potentially stronger precious metals environment amist growing macro economic tension, by a lower-risk, growing precious metals streamer (i.e. reduce operating risk)




Core rationale for the value case and potential upside is as follows:

CRA tax concerns provide a rerating potential of 31%:

  • The dispute with the Canadian Revenue Agency reacts as overhang on the stock. If WPM trades up to its peers (FNV and RGLD) an upside of +31% is possible

  • WPM has a very strong case with CRA and is the primary reason for WPM’s trading discount given WPM’s low-cost, diversified streaming portfolio

  • Cameco tax ruling in next 3-6 months will provide a positive catalyst for WPM’s tax situation


Gold / Silver ratio rerating potential of a further 14%:

  • WPM’s revenue generation is ~50% silver – assuming average historical gold/silver ratio since 2000 of 63x, the implied silver price would be US$20.87/, providing an increase in NAVPS of $2.11 or an upside of 14% upside (based on current P/NAV)

Longer term production growth from development pipeline implies further upside of 26%:

  • San Dimas restructured and ramping up to 3,000tpd in 2020 for 17yr mine life

  • Rosemont might be built in 2021

  • Salobo +12Mtpa in 2023

  • Pascua-Lama

  • Other smaller early stage deals


Gold upside: A scenario with higher gold prices is likely in our view but was not assessed as the base-case reason for the investment

 1.       Business Description

Business Description:

Wheaton Precious Metals Corp. is a well-diversified precious metals streaming company with approximately 20 long-term purchase agreements on both operating and development assets. The company typically purchases silver and/or gold streams from first-quartile cost mines where those metals are not the primary product. Wheaton has a strong balance sheet, significant free cash flow, and significant liquidity to add more streams.   





Low cost producer: WPM has the lowest cost profile amongst its peers:


2018 production guidance weaker than expected on both gold and silver: WPM is guiding to 22.5Mozs of silver and 355kozs of gold. Weaker silver production is largely driven by Antamina of 5.3Mozs, slightly offset by Penasquito of 6.5Mozs. Lower gold production expectations driven by Salobo. Weaker guidance drove share price weakness in Q1 from which it has now recovered.




3.      Capitalization


  • Strong balance sheet provides comfort in any commodity price environment

  • As at 31 March 2018, WPM had US$115.6m in cash (ex-dividend) and US$663.0m of debt outstanding under its US$2bn revolving credit facility (which attracts an interest rate of Libor plus 120-220bp and matures in February 2022), such that it had net debt of US$547m overall

  • Average daily traded value of US$41.5m over the past 3 months

  • Reasonable leverage at ~1.0x net debt/EBITDA LTM

  • FCF generation of US$543.2m in 2018 is expected - +5% FCF yield


5.      Valuation

5.1.            Base Case / Conservative Value