Streaming Company's 'Attractive Valuation' Is Behind Analyst's Outperform Rating

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Published : November 22nd, 2017
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BMO Capital Markets reviewed this company's Q3/17 financial results and an impending deadline pertaining to one of its streams.

A Nov. 9, 2017, research note indicated that Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE) reported "an in line Q3/17 despite lower-than-expected sales," wrote Andrew Kaip, an analyst with BMO Capital Markets.

This company's deliveries of gold and silver "were a beat relative to our expectation," Kaip said. Gold deliveries were 95,900 ounces (95.9 Koz) versus BMO's 92.1 Koz estimate. For silver, they were 7.6 million ounces (7.6 Moz) relative to BMO's 6.9 Moz estimate.

The streaming firm's sales of 82.5 Koz of gold and 5.8 Moz of silver were a miss in Q3/17 due to "concentrate build-up at a number of operations," Kaip explained. This resulted in lower-than-projected operating cash flow. That came in at $129 million ($129M), which compares to BMO's $150M projection.

During Q3/17, the company's Penasquito and Salobo streams outperformed. In contrast, the San Dimas stream underperformed and "is at risk of missing delivery guidance of 4 Moz," the analyst noted. Wheaton, however, reiterated 2017 overall guidance of 28 Moz of gold and 340 Koz of silver.

Adjusted EPS was $0.15, which was as expected "despite the revenue miss on lower sales," reported Kaip. BMO anticipated EPS of $0.14, and consensus estimated $0.15.

On the balance sheet at quarter's end, Wheaton Precious Metals had $70M in cash, $854M in debt and $1.1 billion available under its $2 billion revolving credit facility. On that obligation, the company repaid $99M during Q3/17.

Of near-term significance, on Nov. 23, Wheaton's guarantee on the Primero Mining credit facility will expire. One of two possibilities could occur by that date: a resolution takes place or Wheaton extends the deadline, Kaip suggested. BMO believes the latter is more likely, that Wheaton will "provide additional time for interested parties to assess a number of variables, including potential stream restructuring and associated payment, Mexican tax risk, etc., that will factor into valuation for San Dimas," which Primero operates.

"Clarity on San Dimas" will be positive for Wheaton, Kaip deduced. It should catalyze upward movement of its stock, "given that shares of the company have underperformed peers by 40% since operational issues emerged this time last year."

Wheaton is currently trading at $26.11, which compares to the $28 target price BMO Capital has on it, along with an Outperform rating. "A positive outlook for shares of WPM is predicated on the view that investors are already imputing a CRA discount, and on the company's attractive valuation relative to peers," wrote Kaip.

"As a lower-risk investment opportunity, we expect WPM will become increasingly attractive to generalists re-entering the sector and looking for exposure to precious metals," Kaip stated.

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