Under the Spotlight Wall Street: Wheaton Precious Metals (WPM)

Wheaton Precious Metals ($WPM) performs an amazing feat for the world’s fourth largest gold stock. Despite ambitions to increase production 40% by 2028, it doesn’t own mines or command an army of high-vis workers that produce even a single ounce of the precious metal.

And it’s not that Wheaton has cracked the puzzle of alchemy. Rather, the US$27 billion company is a streamer. Forget Spotify ($SPOT) or Netflix ($NFLX) – its ‘streaming’ means putting up cash and letting others do the hard work of mining ounces. 

Each ounce costs the company around US$450. As gold trades at a record high of about US$2,500 an ounce, it’s little surprise Wheaton shares have rallied more than 50% from March lows. 

Deal maker

Wheaton has become one of the largest precious metals streaming companies since its 2004 founding. It has bought shares of production of gold, silver, platinum, palladium and cobalt from 18 mines around the world – in places like Brazil, Mexico, Peru and Canada. Its portfolio has 28 years of proven and probable mine life.

Streaming companies like Wheaton offer miners an upfront payment for a share of production, coupled with additional payments for metal as it is delivered (at a fraction of the spot price). This allows miners who may be looking to develop a project to borrow less or avoid issuing fresh equity that may dilute existing shareholders. 

Take Vale’s ($VALE) Salobo copper-gold mine in Brazil for example. An estimated 80% of its capex was covered by Wheaton’s upfront payments, which secured streaming for 75% of the gold produced. Because Vale maintains control over copper production and sales, this gold output only accounts for 30% of the mine’s EBITDA.

ABCs of GEOs

Its agreements delivered Wheaton 584,000 gold equivalent ounces (GEOs) in FY23, with production of between 550,000 and 620,000 GEOs slated for FY24. GEOs convert silver, platinum, palladium and cobalt production into gold equivalent ounces. 

A targeted increase to more than 800,000 GEOs by FY28 highlights an advantage over gold-backed ETFs: upside from expanding existing projects, new developments, and exploration that can grow reserves and future production. One streaming deal is linked to Artemis Gold’s Blackwater mine in Canada, which was 87% complete by June 30. The first gold pour is expected in Q4.

And unlike mining companies, Wheaton isn’t exposed to capital cost overruns or operating costs after its upfront payment and a long-term price for its metal has been secured. Its total cash cost was US$455 an ounce in FY23 compared to an average gold price of around US$1,950 across the year.

However, the streaming business is not totally risk-free. There is operational risk. The newest processing plant at Vale’s Salobo mine was suspended for a month after a fire in mid-June. 

AUsome

While silver is trading at close to US$30 an ounce from US$24 at the start of the year, gold’s record-breaking run is what’s really lifting Wheaton shares.

From here, the short-term outlook for gold hinges on the prospect of U.S. rate cuts. Federal Reserve Chair Jerome Powell has left the door open for a rate cut in September. Lower rates make gold more attractive by lowering the opportunity cost of holding the non-dividend paying metal. The likelihood of rate cuts has weakened the U.S. dollar, making gold more attractive to non-USD buyers.

Central bank buying continues to support gold. The World Gold Council said net buying was 483 tonnes in H1, 5% above the previous record of 460 tonnes in H1 2023.

Gold backed

Wheaton Precious Metals has performed strongly against other streaming companies. Up 25% year-to-date, it has delivered a gilt-edged showing against Franco-Nevada ($FNV) (+10%) and Royal Gold ($RGLD) (+15%), which offer precious metals exposures of 78% and 88% of their respective FY23 revenues. 

Wheaton, with its 99% exposure to precious metals, appears well positioned if it continues to grow its gold streams and bullion prices remain robust. It will hope gold enthusiasts keep putting the bull into bullion.