Wheaton Precious Metals Corp. (NYSE:WPM) BofA Securities Global Metals, Mining & Steel Conference May 17, 2023 4:05 AM ET
Company Participants
Randy Smallwood – President and Chief Executive Officer
Conference Call Participants
Lawson Winder – Bank of America
Lawson Winder
Next we’ll feature Wheaton Precious Metals, another huge player in the sector, that is, in this case, entirely focused on the streaming as opposed to the royalty side of the business. And that is responsible for actually creating the royalty business ready. You’re involved in that. Sorry, in the streaming business. You’re involved in creating the streaming business, which has now become sort of the linchpin of the industry and where all the big transactions are done. So I’m pleased to have with me here today, Randy Smallwood, who is President and CEO of Wheaton Precious Metals. Randy, welcome to Barcelona.
Randy Smallwood
Thank you so much, Lawson. Really enjoy being back here.
Lawson Winder
Fantastic. I wanted to start off with this same question I started off with Paul, which is the gold price. It’s had a fantastic start to the year. One of the best starts in the last decade. I think investors are getting bullish. It seems that the mood among corporates are quite bullish. What’s your view from here? What do you see as the drivers?
Randy Smallwood
Well, it’s hard not to be optimistic, if you look at the fundamentals out there, from the perspective of gold versus other currencies, versus fiat currencies in today’s world. I think a lot of the events that we’ve seen over the last couple of years have just really pushed us towards society having even more of a need in terms of investing into the gold space. I chair the World Gold Council. And, of course, the efforts that we’ve put into in terms of educating central banks on building up their own reserves are really starting to bear fruit. And we’ve seen record purchases from central banks as they’re shifting out their US dollars that they have in [Technical Difficulty] out for gold and starting to build up. And so, we’re seeing that consistently around the world, number of different locations.
All it takes us to have a look at the fundamentals again in the US – and it’s not just the US, around the world – to not be very optimistic. And so, we’re still out there looking for new opportunities to grow because we think gold has got another leg up coming over the next few years.
Along with gold – and I always chuckle at this because I am chairing the World Gold Council, but I really like silver. I think silver actually has even better fundamentals behind it. And of course, silver’s a large portion of our own production. About 40% of our revenue comes from silver right now. And when you sit and think about greening the world and critical minerals in terms of what’s required to lessen our footprint and increase efficiencies and less waste, silver plays a role. And we’re seeing increasing demand on that side. So, as strong as the fundamentals are for gold, I actually like silver even better, and I think in Wheaton, you get good exposure to both.
Lawson Winder
My next question was going to be about the deal pipeline, and you prematurely answered it for me by investing $300 million into Lumina Gold this morning.
Randy Smallwood
That’s right.
Lawson Winder
Could you maybe talk about that transaction? Some of the details of it? But also, talk about whether or not that’s representative of what you’re seeing in the deal pipeline?
Randy Smallwood
Yeah, I think that’s exactly the type of transaction that probably 90% or 80% of what we’re looking at fits into. For those that didn’t see it, we announced this morning, a transaction with Lumina Gold on their Cangrejos project in southwestern Ecuador. It’s a $300 million stream, of which $48 million will be fed in early deposit. $37 million of that is actually to fund their ongoing progress towards the feasibility and the permitting. And another $11 million of that $48 million is focused on acquiring surface rights and helping funds surface rights. And then the rest, the remaining $252 million will go towards the construction as they work the way forward. They’re hopeful in terms of having a permit by 2025 and loosely penciling having production by 2028 or 2029. It’s a meaty transaction for us because it would add close to 25,000 ounces of gold to our production profile per year once it’s up and running.
It’s an asset that that – it’s relatively low impact, dry stack tails. It’s in an area of Ecuador that has good strong community support. We spent time down on the site and met with community leaders. It’s close to tidewater, it’s low elevation, it’s just got a lot of positives to it, the Lumina team has done a great job advancing this project going forward. And it’s really kind of representative of what we’re seeing out there.
It’s a single asset development company, not being very well valued in the marketplace right now. And so, issuing equity for them is very expensive, especially compared to doing a stream. And if we’re willing to take some of the project risk and put it in really deposit, that, of course, helps them advance going forward without being extremely dilutive to their shareholders. And so, it’s a win-win deal on all sides. I’m pretty excited about being able to get this one done.
Lawson Winder
So just keeping on that theme of deal pipeline, this this type of transaction, which is like a greenfield project, you said it is quite representative. So would that suggest that you’re not seeing transactions that are like brownfield expansions or M&A or potentially balance sheet repair?
Randy Smallwood
I would say that, with commodity prices where they are, pretty well across the board, we’ve seen copper pull back a little bit, but with commodity prices where they are, if you’ve got operations, you’ve got some pretty good operating cash flow.
And so, the bulk of what we’re looking at is single asset development companies, companies that don’t have access to operating cash flow. And so, when it comes to funding their growth on a go forward basis, of course, for a good, well designed project in a responsible – there’s always going to be some form of debt available, but debt is never the entire solution in terms of the capital funding. There’s always going to need to be a bit of an equity contribution, and that’s where streaming competes so well compared to actually issuing shares, is the equity side of the equity side of those type of opportunities. Streaming qualifies for that. It’s also another check of quality in terms of the asset itself.
Cangrejos, we had a good team down on site for an extended period of time going through everything from meeting with community leaders, assessing the risk, trying to measure all the way across the front, but also diving down to first principles in terms of due diligence. And so, I do think that it definitely does help in terms of providing confidence on these projects on a go forward basis. And I would say Cangrejos now has the Wheaton stamp of approval.
Lawson Winder
So in the past too, when you’ve spoken about focus metals, obviously, you’ve spoken about gold and silver, but you now have platinum and palladium. And you mentioned that platinum and palladium are focus metals for Wheaton Precious. Do you see much potential deal flow in PGMs?
Randy Smallwood
Not a lie. Unfortunately, most PGMs come from riskier locations around the planet. And so, there’s only a few opportunities that we see in good strong, stable political jurisdictions. And so, that really limits our ability to go into that. Obviously, we’ve got some palladium coming from the Stillwater mine in Montana with Sibanye-Stillwater. And then, we signed the deal now with Generation Mining on the Marathon project in Ontario in terms of moving that project forward. And so, we’ll see some platinum/palladium out of – that’ll be some of the first platinum into our portfolio.
We are very, very sensitive to political risk. And if you look at our asset distribution, it is in very stable jurisdictions on a relative basis. And it’s something that we – we’re long term investors. When we find the assets that we like, we’re there for the long term. And that means we need to be in politically stable jurisdictions. And so, unfortunately, there’s just not a lot of platinum and palladium that comes from politically stable jurisdictions. So it does limit our opportunity set.
Lawson Winder
It’s interesting, too, because platinum and palladium are driven by very different factors than gold and even silver to a large extent. Platinum, largely driven by diesel demand, there isn’t a jewelry component. And palladium almost entirely driven by gas. Conceptually, does that limit the exposure that you want to have for PGMs? Or does that even factor in?
Randy Smallwood
Yeah. Obviously, the conversion to electric, which will happen, it’s well on its way, I converted many years ago and I’m strong believer in ultimately going to electric mobility, that’s going to have an impact in terms of catalyst demand for internal combustion engines. However, increasing environmental standards and then the propensity for hybrid technology and stop/start engines also increase the demand on a per unit basis for platinum and palladium, and so act as catalysts.
So, the combination of those factors, we still see good strong demand for 10 to 20 years, I would say, in the platinum and palladium space. And there’s a lot of other aspects that both of those metals play into in terms of improving environmental performance on a number of different fronts. If people move down the hydrogen side, there’s going to be a demand there and so on.
And the other side of it, I would say, there’s not a lot of those deposits out there. And so, the ongoing, what I call, geological inflation, which is it’s tougher and tougher to find those deposits, that will also provide some support for braising.
Lawson Winder
With that theme of battery metals, you have some cobalt in your portfolio, there also aren’t a lot of cobalt deposits out there, either. Lithium deposits, however, there are quite a few. And we’ve seen the lithium price collapse recently. And perhaps that market becomes more rational and perhaps there is a need for stream financing at some point, maybe not today, but is lithium something that’s appealing to you?
Randy Smallwood
Lithium is actually one of the most common minerals on the planet. And I’ve felt that anything on the lithium side right now is really an infrastructure issue as opposed to a supply/demand issue. And so, I will say that we’ve had spent just about zero time considering lithium outside of looking at the fundamentals of the market for lithium and saying, I don’t know if that works.
Cobalt, on the other hand, generally produces a byproduct and a lot of it comes again from very challenging jurisdictions, very challenging locations. Now, we’re not out hunting cobalt, but when Vale comes knocking on our door and asks if we’re willing to help them up in Voisey’s Bay with a little bit of cobalt, as we looked at it, we realized that it’s a unique opportunity that we felt worked well. When I look at Voisey’s Bay and the track record of production there, relatively new operation, relatively recently permitted, good strong community support, I would call it the cleanest, greenest cobalt being produced on this planet right now. And provenance is an issue. And it’s going to become more and more of an issue as society has higher and higher expectations about knowing the impacts of the products that they’re consuming. And Voisey’s Bay will always compare very, very well to the rest of the cobalt industry.
And so, it was an asset that we invested into with an existing partner with Vale. We’re not looking for cobalt opportunities. But if we have situations like that, we would definitely consider it.
Lithium, we just didn’t see it as being – to us, putting a stream on that, we just – it’s a bulk material. It’s going to eventually – just like iron ore in terms of moving that forward. We’re just not interested in bulk materials.
Lawson Winder
Fantastic perspective. I wanted to ask you one more thing about deal – this is more about deal structure. So, historically, when you and Wheaton created the streaming concept, it was a fixed base escalated ongoing payment.
Randy Smallwood
Right.
Lawson Winder
That’s now evolved to – it seems like a preference for a percent of the payable metal. What are you seeing the demand from your operator partners. They want a percent of payable metal or they want the base escalated, that certainty in terms of what they’re receiving?
Randy Smallwood
It’s a fixed price versus the fixed margin, is really the two options there. And just about all of our recent streams have been based on a fixed margin, which means we get somewhere around 80% operating margins on this metal as it’s being delivered to us. The advantage to this is that, then we saw this back in 2011/2012 is that, streaming is set up so that we have a production payment that helps offset the cost of actually producing that metal as it’s delivered to us. And those costs, those operating costs include the taxation burden that exists in the countries where the metal is being mined, as it should be. That’s where the tax should be paid on these metals.
And the advantage of the fixed margin, what we saw in 2011, 2012, 2013 when we saw gold prices first pop up to $2,000 an ounce and silver prices pop up to $48, we were more of a silver company back then, but popped up to $48 an ounce was the tax burden for our partners dramatically climbed. And it was actually starting to have an impact on some of our partners in terms of economics. And because we had that fixed payment, we didn’t see that offset.
And so, the big advantage of the fixed margin is that as commodity prices climb, the production payment will also climb with it, albeit at a much slower rate. But it will climb to provide that extra support during periods of high commodity prices. It’ll provide that extra support.
Again, it helps our partners be stronger. Our overlying mantra within Wheaton is that the stronger our partners are, the stronger we are. So we’re always looking for ways to ensure that our partners have access to that strength and keeps them sort of fiscally healthy. So it’s something that’s very important for us. It’s something that we support, and just about every transaction we’ve done in the last while has been fixed margin.
That being said, probably about 70% to 80% of our current production still has that fixed production payment on a per ounce basis with typically just a 1% accelerator per year that will push that forward. So, it still dominates our portfolio, but any of the new streams we’re doing are based on fixed margins.
Lawson Winder
I’d like to canvass the audience. If there are any questions. I see one here in the front row. So we’ll get you a microphone right away.
Question-and-Answer Session
Q – Unidentified Participant
It’s related about the projects that you have on the table. And I have two, if I may. The first one is how those project has changed in the last 10 years in terms of great risks and so on. And the second question is related, if you have seen an increase in the number of projects due to the reduction in the funding, the capital risk companies, venture capital and so on.
Randy Smallwood
Well, there’s no doubt. We created the streaming model back in 2004. So, next year is going to be our 20th year. We really spent probably the first 8 or 10 years trying to convince people that streaming was an effective source of capital. And so, I would say that what we’re seeing now is a broad acceptance in terms of streaming as a very competitive source of capital. If you’re a single asset – in today’s market, if you look at today’s environment, right now, the mining industry, the single asset development companies are typically trading at substantive discounts to their net asset value, 0.2, 0. .3 times net asset value. You see it across the board. And there’s no doubt that that’s a higher risk aspect of the of resource investing is in that space. And we just haven’t seen those risk investors come back into the space. We need some good success stories to deliver on that and they will come. We’ve seen some great stories out of this. But, currently, with those kinds of discounts, equity financing, issuing shares is incredibly expensive to the existing owners.
As I like to highlight streamers, we are the new long term investors, right? In today’s marketplace right now, you’re you hear a lot of the operators complain about the fact that you just don’t see that long term investment that people are in and out and they’re flipping and following and there’s index investors that are chasing yields.
The streamers, we are long term investors. We invest into these assets. And our funding is not based on the value of the equity. It’s based on the value of the metal. And so, it’s incredibly attractive for a company that has a substantive gold and copper resource, like Lumina, for us to purchase our interest in there based on the value of the contained metal. And we’re paying net asset value for that, close to net asset value for that because we’re willing to take the upside of commodity price and exploration success and be there as a long term partner all the way forward. And so, you compare that to issuing more equity out at such a substantive discount.
So, streaming has really become – pardon the pun, it’s way overused, but it’s mainstream. There’s not a single CFO in today’s world that doesn’t consider streaming at that stage. Now, ideally, you don’t have to issue equity capital. If you’ve got enough operating cash flow internally to fund that growth and access to some reasonably priced debt, then you typically don’t go down the equity side in terms of issuing a portion of your projects’ value your company’s value to try and raise that capital. So that’s why in today’s world, most of what we’re looking at is these development stage projects with single asset companies and making sure that we come up with structures that sort of support them in their efforts to deliver value to their shareholders. So I hope that answers the question.
Lawson Winder
Thanks for the question. That was awesome answer. Thanks, Randy. We don’t have a lot of time. I wanted to touch on growth because you guys stand out in the sector for your growth, particularly for your size. So you’re planning to grow your top line GEO production 40% over the next five years. Maybe just speak to some of the upside and downside risks around that.
Randy Smallwood
This year, we should be doing somewhere around 630,000 gold equivalent ounces, which is a slight increase over last year. But I can tell you, the next five years are incredibly exciting. Our company has never been stronger than it is right now. We’ve got an incredibly strong balance sheet with close to $1 billion cash on hand, access to a $2 billion revolver that we can use whatever we need to, we could easily access over $3 billion in equity if we needed it right now – or sorry, in cash right now if we needed it. Our growth at 630,000 ounces by 2027 will be very close to a million gold equivalent ounces per year production. And two thirds of that growth is actually coming from assets that are already operating right now – Salobo, Antamina, Peñasquito, Stillwater, Voisey’s Bay, they’ve all got substantive growth over the next four or five years in terms of their overall production. And so, it actually works out to about 50% increase in production. And adding on assets like we just did with Lumina with Cangrejos and Lumina, we’ll just keep that that profile going on a go forward basis. And so, very exciting times. As I said at the first quarter, this is the first quarter of many quarters where every quarter is going to be better than the last one. And there’s bound to be a bit of volatility in there. But it’s just consistent across our portfolio. The next four or five years is going to be incredibly exciting for Wheaton.
Lawson Winder
With that, thank you, Randy. I think we’ll conclude it. Thank you everybody for your attention and time today. And thank you for joining me.
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