Why you should buy Wheaton Precious Metals shares
Wheaton Precious Metals (WPM) is the biggest precious metals streaming company in the world and an important holding for Talaria.
WPM makes a very high margin and generates strong cashflows with few of the risks associated with traditional mining companies.
The share's valuation is attractive assuming flat gold/silver prices. Any increase in the price of gold/silver gives an additional boost to valuation.
What Wheaton does?
Wheaton invented the precious metals streaming business model. It conceived the idea in 2004 when exploring ways to fund its San Dimas gold mine in Mexico.
Under a streaming agreement, the streaming company provides an upfront payment to acquire the right to future deliveries of a predefined percentage of metal production of a mining operation.
Once a mine becomes operational, the streaming company pays the mining company an ongoing payment for each ounce of metal delivered, usually well below the market price of the metal.
The price can be set as a fixed sum (say, $400/oz gold) or as a percentage (25% of the prevailing gold price).
Strategy and outlook
Precious metals streaming comes with several major advantages over traditional gold/silver mining.
Perhaps the most crucial is that streamers take no cost overruns risk of the mining operation.
Also important is that streamers make significantly higher margins - the break-even price per ounce of gold for WPM is only $400 compared with $1200-$1300 for Newmont, the largest global gold miner.
This results in significant leverage to increasing precious metals prices. And finally, any future expansions of existing mines come with all the benefits of larger volumes at no extra cost.
Wheaton has a large and diversified portfolio of mine streaming contracts including more than 20 that are in operation and many more that are under development.
A large majority are in North and South America and counterparties include some of the largest global mining companies (Glencore and Vale to name two).
Over 90% of these mines fall in the lowest half of the cost curve, implying less chance of cost-driven production disruptions. And the portfolio has a collective estimated remaining life of 40 years.
Wheaton reached revenues of $1.1 billion in 2022, with a compound annual growth rate of 7% since 2014. Growth has been driven predominantly by the increase in gold and silver prices over the period while production has remained flat since 2016.
The next decade will be very different. With close to half of the more than 30 mines currently under development there is a significant ramp up in expected production.
We forecast Gold Equivalent Ounce (GEO) production to reach 900,000 oz by 2026, up from 660,000 oz in 2022. Even if gold and silver prices remain flat, revenues are poised to increase by 36%.
No additional dollars need to be spent to unlock this ramp-up in production. WPM has already paid for it by making upfront payments of over $US2 billion since 2018 (this represents over a third of total streaming contracts on the balance sheet).
WPM makes a very high EBITDA margin.
Two factors drive this. One, streaming contracts set the purchase price of the metal at a level typically between just 20% and 25% of the spot price, locking in a significant gross margin with virtually guaranteed positive profitability.
Two, the remaining cost base is extremely lean - there are hardly any Selling and Marketing expenses, and WPM employs only 41 full-time staff, a staggering $25 million of revenue per employee.
Bold though it may be, we see no risk to the margin going forward. The Free Cash Flow (FCF) generation closely approximates EBITDA. There is not any net debt. There are no large and complex movements in working capital.
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