Wheaton Precious Metals Corp. (NYSE:WPM) recently reported what initially seemed like strong production results, but the spotlight quickly shifted to its updated five-year production guidance, stirring mixed reactions among investors. That’s why the stock shed 10% of its value on Wednesday.
Despite an impressive projection that expects the company’s Gold Equivalent Ounce (“GEO”) production to exceed 800,000 ounces by 2028, and an annual average of over 850,000 GEOs from 2029 to 2033-up from 620,000 GEOs in 2023-the details reveal some concerns.
So, what’s the problem?
One issue is a shortfall in the company’s 2023 production, which did not meet the anticipated range of 600,000-660,000 GEOs. This decline is attributed to several setbacks, including a labor dispute that temporarily suspended the Peñasquito mine, and operational halts at the Minto and Aljustrel mines. These disruptions have slightly tarnished Wheaton’s otherwise stellar performance in 2023.
More importantly, the adjustment in the company’s five-year outlook from a previous average annual production guidance of 810,000 ounces to a “2028 target production guidance” of just over 800,000 ounces, with the promise of reaching 850,000+ ounces annually delayed until 2029, suggests a recalibration of investor’s expectations.
Finally, the company anticipates no growth in GEO production for 2024, aiming to maintain the levels achieved in 2023.
Examining Wheaton’s Growth Potential
Despite these challenges, Wheaton’s long-term growth prospects remain robust, representing a substantial 40% increase from the 2023 production levels in just 5 years.
Achieving such growth is particularly commendable for a company of Wheaton’s size within the precious metals industry.
This level of growth is imposing when compared to smaller entities in the sector, like Sandstorm Gold Ltd. (SAND), which, producing under 100,000 GEOs annually, represents a fraction of Wheaton’s output.
Additionally, Wheaton says that there’s the potential for 200,000 GEOs from other assets it owns. It has not included these ounces in its guidance as they are earlier-stage assets, and have a bit more risk and uncertainty than the near-term growth drivers.
Concerns With its Growth Profile
While Wheaton Precious Metals outlines a robust growth trajectory, investors should approach with caution due to the inherent risks associated with this expansion.
Notably, a portion of Wheaton’s projected growth stems from mines in geopolitically risky regions. I believe that the company’s recent acquisitions, including a significant stream in a South African mine, introduce a layer of complexity and potential risk.
The anticipated production from the South African Platreef mine-projecting over 13,000 ounces of gold and 8,500 ounces of both palladium and platinum annually for the first decade shows that Wheaton is focused on growing aggressively.
But, as I highlighted in my prior analysis, there is the jurisdiction risk to consider. (I won’t get into the details here, since it was covered extensively in that prior coverage).
This expansion has contributed to a cautious outlook on the stock, previously adjusted to a ‘HOLD’ status amidst concerns over valuation and geopolitical exposure.
Lower Production May Be a Blessing
There is a silver lining to the lower production expected by gold miners, including those of which Wheaton owns a royalty or stream.
The industry is bracing for subdued production growth in the coming decade, a trend that might paradoxically bode well for the sector through lower supply.
The anticipation of stagnant or declining production across major mining companies – such as Newmont Corporation (NEM), which expects flat or negative growth ahead – highlights a broader industry challenge: the scarcity of new, economically viable gold mines, coupled with a persistent decline in ore grades, which generally make mining less profitable.
Also, I think it’s possible that gold mining supply shortages could be further exacerbated by geopolitical tensions and technical setbacks (including the ever-rising all-in sustaining cost figure), potentially precipitating an even sharper decline in global gold production.
First Quantum Minerals Ltd. (OTCPK:FQVLF), for example, has seen its Cobre Panama mine closed, taking 100,000oz annual gold production off the market. SSR Mining Inc.’s (SSRM) Çöpler Mine, producing over 200,000oz of gold per year, has seen its operations suspended as a result of a large slip on the heap leach pad.
The concern over depleting gold reserves is also now gaining scientific attention. New projections suggest the rare metal could become exceedingly scarce within the next few decades. One paper pinpoints the year 2050 as when the Earth will be depleted of gold ore.
So, What Do We Do With Wheaton Now?
Wheaton deserved a sell-off in its shares following the new 5-year guidance, but the sell-off is looking pretty overdone, shedding billions from its market cap. Additionally, Wheaton stock is now down 16% from my prior downgrade.
Currently, Wheaton shares carry a forward P/E of 30 and an EV/EBITDA of 26. This may seem overpriced when compared to mining companies, but streamers like Wheaton carry a much higher trading multiple since they are NOT operators and have very high margins. Wheaton’s valuation is in line with its biggest rival, Franco-Nevada Corporation (FNV), and slightly higher than its smaller peer, Royal Gold, Inc. (RGLD).
I still believe the stock is a HOLD here, but I’m definitely getting closer to upgrading shares to a BUY based on its valuation and growth. I believe a share price under $40 presents a more compelling entry point or buying opportunity for investors, especially for those bullish on precious metals in the long term as the company has enormous leverage to the metals.
Editor’s Note: This article discusses one or more securities that do not trade on a major U.S. exchange. Please be aware of the risks associated with these stocks.