WHEATON: A CONSERVATIVE COMPANY WITH GROWTH AHEAD: Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) (US$41.01) recently held an annual “investor day” that took a broad look at the company. Wheaton focuses on streams on high-quality, low-cost, long-life assets. It released a new 10-year guidance of 830,000 average Gold Equivalent Ounces (GEOs), up from its five-year average of 810,000 GEOs. According to the company, only some 2% of all mine finance since 2004 comes from streams; of that, Wheaton, which invented the streaming model, holds 40%. It currently has 24 assets, with strong partners, 65% of whom are investment grade, including Newmont, Barrick, Vale and Glencore. Some 90% of its streams are on mines in the lower 50th percentile of the cost curve, 74% in the lowest 25th percentile.
CEO Randy Smallwood argues that streams have more leverage than royalties because they carry a per-ounce cost. Its streams have provided over $2 billion more cash flow than expected when the deals were done, and the gap is beginning to widen again. Its policy is to distribute 30% of cash flow in dividends, making for a dividend that increases with the gold price—from 5 cents per quarter in 2015 to 15 cents in the last quarter. Of course, this policy can make for a volatile dividend; it was 14 cents in early 2013 before falling for the next two years.
A strong balance sheet and new projects coming online
Wheaton has taken a different tack to its balance sheet than other larger royalty and streaming companies, saying that with interest rates so low, it makes sense to use debt to acquire cash-flowing assets. It is, however, debt free today after paying off debt from its strong cash flow. It has a $2 billion undrawn debt facility, and has not issued equity since 2016.
Wheaton has recovered $8 billion of the total $9 billion it has invested since inception, with remaining assets valued today at $19 billion.
It is diversified between gold and silver, 50% and 41% by revenue this year. Vale’s Salobo is its largest single asset, accounting for 36% of NAV, a little less of revenue. A fire at the mine, with full operations expected to be resumed before month end, may reduce output for the quarter (accounting for about 2% of Wheaton’s overall revenue).
Salobo’s phase 3 expansion is currently underway, expected to be completed by the second half of next year; Wheaton’s final payment of $670 million on the expansion is not due until 2023. In addition to the Salobo expansion, two large near-term projects underway are Pampacancha ramp-up (a satellite of the Constancia mine), and the underground at Voisey’s Bay, which just commenced initial mining.
By country, Brazil accounts for 32% of revenue, Mexico and Peru another 21% each. Right now, its sees opportunities in helping finance mine expansions and M&A, deals which are typically smaller than the large balance sheet repairs for base metal companies of 2013-2016.
Wheaton stock has bounced, along with other gold stocks, 11% since the end-September lows, but it’s still down 15% from its June highs, and trading at a discount to Franco-Nevada. We want to own Wheaton long term, and if you do not own it, you can buy now. Otherwise, we will look for a pullback under $40 again to add positions.
Progress at Fortuna on several fronts
Fortuna Silver Mines Inc. (FSM:NYSE; FVI:TSX; FVI:BVL; F4S:FSE) (US$4.60) reported record production as Lindero continues to ramp up, though still weaker-than-expected results, due to lower throughput at San Jose in Mexico. Lindero in Argentina had improved performance as the Covid situation and restrictions slowly ease. Commissioning of the ADR plant is on track for this quarter, and full-year guidance was reiterated. The company, as expected, announced a positive construction decision for its Séguéla gold project in Cȏte d’Ivoire, acquired when it bought Roxgold. Construction is to commence immediately on what will be the company’s fifth mine.
Fortuna’s stock has been very weak since it announced the acquisition of Roxgold (and before, indeed), falling from $5.55 at the end of June. Although the stock has bounced 20% from its end-September price, it remains undervalued. If you do not own, you can buy now, though we may see prices pull back where I would look to add to positions.
Gladstone boosts dividend
Gladstone Investment Corp. (GAIN:NASDAQ) (US$14.71) increased its monthly distributions for the quarter ahead from 7 cents to 7.5 cents and announced an extra distribution of 9 cents in December. The supplemental distributions come from net capital gains, while the monthly payment comes from interest on loans and other income. That puts the yield for the year ahead at a minimum of 6.7% and likely higher since another supplemental distribution is likely. Hold.
Originally published on Oct 17, 2021.
Adrian Day, London-born and a graduate of the London School of Economics, is editor of Adrian Day’s Global Analyst. His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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