Wheaton Precious Metals Corp.

Moat: 2.5/5

Understandability: 3/5

Balance Sheet Health: 4/5

Wheaton Precious Metals Corp. is a streaming company that purchases precious metals at a predetermined price, typically a fixed amount, from mining companies as a by-product of their operations, allowing for a very diverse portfolio of mining assets.

Investor Relations Previous Earnings Calls

The moat, understandability, and balance sheet health scores reflect a conservative evaluation to ensure a margin of safety in any assessment.

Business Overview

Wheaton Precious Metals (WPM) operates as a precious metal streaming company rather than a traditional mining company. This means they do not directly engage in mining operations themselves. Instead, WPM provides upfront capital to mining companies in exchange for the right to purchase a portion of the gold, silver, and other precious metals produced at a predetermined price (often below market price). The company receives these metals as a by-product of the mining companies operations and doesn’t bear the risk of exploration, mine development, or operating risk.

  • Revenue Distribution: WPM’s revenue is derived from the sale of precious metals acquired through its streaming agreements. The revenue stream is diversified across multiple assets and commodities (primarily gold and silver), which provides a level of stability. There are some concerns that WPM depends a lot of its revenue on a few assets, specifically Salobo.
  • Gold is the biggest contributor, then silver, and finally some other metals.
  • Industry Trends: The precious metals industry is largely influenced by economic factors, such as inflation, currency fluctuations, and interest rates. While gold and silver are often seen as safe havens during economic uncertainty, they can also be volatile. There is a significant correlation between the market perception and price of gold and risk in the markets. A key challenge in emerging markets for WPM is the local government regulations. This can impact the profitability and stability of their mining partners and thus impacting WPM indirectly. The rise of ESG regulations has pushed companies towards more ethical and responsible practices, and a part of those trends are that customers are being more critical to how their precious metals have been sourced.
  • Margins: WPM’s profit margins can be really high since it purchases the metals for a set low price, which means that once the underlying mine is profitable and continues to operate, WPM enjoys the difference. If we check the last few years of revenues and gross profits, WPM has an incredibly high gross profit ratio, usually over 80%. This is a very attractive aspect of the business model.
  • Competitive Landscape: Unlike mining companies, WPM does not have competition in the production side. However, it competes with other streaming companies for the acquisitions of new mining streams.
  • What Makes the Company Different?: WPM’s business model is characterized by diversification across different metals and assets, along with a focus on downside protection through its streaming contracts (pre-agreed purchase price for the metals). WPM also benefits from a comparatively smaller risk profile than miners because they are not directly involved in the mining process, and all their risks are financial and contractual.
  • Recent Concerns/Controversies/Problems: In the most recent earnings call, analysts pressed the CEO about the Salobo and other assets that have some uncertainty. There is also uncertainty regarding the geopolitical climate and how it may impact WPM and its assets. There have been rumors about new taxes and more regulations from different governments that also makes investors a little more nervous.

Financials

It’s important to understand that the key for WPM is to understand the profitability of the underlying mine. Because its profitability is tightly linked with the mines.

  • Revenue Growth: WPM revenues depend heavily on how much of the resource its partners produce and at what value. As a result of this, WPM revenues may be cyclical and volatile. However, with the increased number of streams, revenue is more stable overall in time.
  • Profitability: WPM displays very high gross profit and operating margins due to its business model. The actual net income may fluctuate more, and there could be significant write-offs due to impairment issues with its assets. While not a direct loss to the company, this could impact the overall picture and make it more difficult for analysts to make predictions.
  • Balance Sheet: WPM balance sheet looks quite stable and healthy, as it operates in a market with tangible assets. WPM does carry debt, but the debt levels are under control, and this means that WPM’s business has little to no risk of going under due to debt obligations.
  • Cash flow: WPM typically has high cash flow which comes from selling its metals at a higher price than bought. With this free cash flow, WPM is able to invest into new mining streams. WPM also maintains a stable dividend, which could be another sign of their stability.

It’s important to note that one of WPM’s greatest strengths and key points in its business is the fact it is not a mine, and thus does not have operating risks. This helps create a predictable and consistent stream of revenues as long as the mines continue operating.

Moat Rating: 2.5 / 5

WPM’s moat is rather narrow due to several factors. They do not have a strong brand, technological edge, or distribution networks that are exclusive to them. What WPM has is a business model that makes the company resilient to operational risks and have great profitability, that can translate into predictable, consistent free cash flows as long as its partners continue to operate successfully.

  1. Switching Costs: There are no switching costs for the partners of WPM. While there is a contract in place, mining companies may switch their streaming partner in the future if it is better for them.
  2. Intangible Assets: There are not significant intangible assets.
  3. Network Effect: There is no network effect for WPM.
  4. Cost Advantages: WPM does not have cost advantages in production since they don’t produce, but what they do have is contracts that allow them to buy at a below market price, which gives them a cost advantage over market price. This provides them an ability to buy these metals at a discount, and they benefit immensely when the prices go up.

Justification: The moat is relatively narrow, but still present. The limited sources of competitive advantages are offset by the fact that the company does have a unique business model that does not require the company to be an expert in mining, while still giving the company an opportunity to profit from it. The contracts that allow them to acquire metals at low prices create an economic benefit in the long run. While the sources of competitive advantage are weak by themselves, all of them combined make the moat somewhat sustainable. Thus the moat is rated at 2.5/5

Risks

There is no guarantee WPM will continue to be successful in buying new streams on favorable terms. Moreover, if prices of gold and silver fall, this will result in lower revenue and profits for WPM, which has happened in the past.

  • Geopolitical Risk: Many of WPM’s partners operate in emerging markets, these have elevated political and economic risks and any changes in regulations, government practices, etc., could impact negatively WPM and its bottom line.
  • Metal Price Volatility: The price of precious metals are subject to volatility, and a major drop in the price will drastically impact the profitability of WPM
  • Operational Risk at Mining Partners: WPM has no control over the operations of the companies from whom they buy streams. Many factors, such as equipment failure, lower grades of ore, or financial issues, could impact the production of metals, negatively impacting WPM revenues. WPM has no control over these risks.
  • Contractual Risk: As WPM’s business model is reliant on contracts, the company faces the risk that these contracts will not be valid, or changed in the future. Changes in jurisdiction and regulations can impact contracts to a great degree.
  • Competitors: Competition from other streaming and royalty companies can result in higher prices paid for future streams and this could mean that future streams may be unprofitable.

Business Resilience: WPM’s resilience comes from its diversified portfolio of streams, and the lack of operating risks. High profit margins also create a buffer that helps the company weather financial storms. However, as WPM has no power over the operations of its partners, there is a chance of major shocks occurring in the form of operational risks for its partners.

Understandability: 3 / 5

WPM’s business model is fairly straightforward and can be summarized as “a company that buys precious metals at low fixed prices and sells at a market price”. However, the company’s valuation is more complicated as many nuances to be considered that make it complicated. The financial statements can appear quite confusing if you don’t understand how the operations function, and which adjustments to make when analyzing it. Thus, the understandability is rated at 3/5.

Balance Sheet Health: 4 / 5

WPM has a relatively strong balance sheet, with a decent amount of cash and moderate level of debt. However, as previously mentioned, its profitability and cash flows may be more volatile due to fluctuations in commodity prices, and if those become erratic, the debt payments may become an issue in the future. WPM also holds a number of non-operating assets that add some complexity, but most assets are very tangible and can be easily valued, this is the reason WPM’s balance sheet is considered to be healthy at a 4/5.