Wheaton Precious Metals Corp. (WPM) Earnings Call Transcript & Summary

Good morning, and welcome to the Wheaton Precious Metals Corp. corporate update presentation. [Operator Instructions] I'd now like to hand over to Randy Smallwood, President and Chief Executive Officer of Wheaton Precious Metals. Good morning.

Good morning, and thank you, Paul, for the introduction. And thank you, everyone, for dialing in to listen to our story about Wheaton Precious Metals. My name is Randy Smallwood, as said, President and Chief Executive Officer of the company. I've been with the company since we founded it back in 2004, and I'm really quite pleased with what we've been able to build, but we've still got so much more to do. There will be some forward-looking statements in this presentation. I urge everyone to understand the risks associated with those forward-looking statements. They are detailed -- some of the details are here on the screen, and there's more details available on, of course, our website. So who is Wheaton Precious Metals? When we started this company back in 2004, we came up with a unique business model based on streaming. And we can use that streaming business model to deliver good, strong value to all of our stakeholders and ultimately wind up being the world's best way to invest into precious metals, the premier precious metals investment method. And I mentioned our stakeholders. Our stakeholders, of course, are our shareholders. They are the ones that pay my salary and pay our team's salary in terms of going forward, but they're not the only stakeholders that we work for. We -- in the streaming business, we also work for our partners, the companies that actually operate the mines where we get our metal from. It's also a very, very important stakeholder in our business. And without them, we wouldn't have any success. But the third stakeholder and ever as important as the others is, of course, our neighbors, the communities that we operate in and the ones that give us social license to be successful and our partner social license to be successful. So we are a company that is built around making sure that we deliver success and good sustainable progress to all of our stakeholders. The streaming model is unique. We don't actually operate mines. What we do is supply capital to mining companies. And for that capital -- for a portion of that capital, what we call the upfront payment, we get a portion of the metal that's produced at these mine sites. And when that metal is delivered to us, we make a fixed production payment on a per-ounce basis on a go-forward basis. These agreements are usually life of mine, and they cover all of the exploration and all the expansion potential. So if the mine grows or has exploration success, we still get the benefits of that expansion. And so really, what that comes down to is this what I call the streaming advantages highlighted on this slide here, where -- what we deliver to our shareholders and our stakeholders is high-quality access to high-quality assets. The 85% of our current production comes from assets that are in the bottom half of their respective cost curve. Exploration and expansion upside, as I mentioned, the life of mine and the percentage of production means that we get that expansion potential, we get exploration success wrapped into us. Very predictable costs, and this is one of the huge advantages of a streaming company over a traditional mining company, from an investment perspective is that our capital costs are fixed and defined by the contract. And our operating costs are also fixed and defined by the contract. And so there's no surprises, no cost surprises, a huge difference between us and mining companies. Of course, with that operating cost, that production payment that we make on a per-ounce basis, that does give us some commodity price leverage. And so that's one of the advantages that we supply over top of owning just straight bullion or investing into gold ETFs and such. We do actually supply some leverage and some growth over both of those other options. The company has got an innovative dividend policy, where 30% of our cash is returned to our shareholders. We use that as a base reference through the course of the year. So we won't see any drops with quarterly volatility, and this is something that I see as our projects continue to grow and we continue to grow our company, that 30% will climb. And of course, optionality. We do have a number of assets in our portfolio that are still waiting for permits and still waiting for the go-ahead. And so even over and above our current very impressive production profile, we have a number of assets that provide additional optionality over and above that. So all of these together add into a very sustainable foundation, which is really a focus of what we're building here, good long-term value. We have been busy during the pandemic. As you can see here, this is the list of transactions: 9 streams on 8 different assets; over $1.5 billion committed in deals over the last 1.5 years, a little bit -- maybe a little bit more than 1.5 years now. And you can see that overall, those streams, most of them are development projects, but they will add over 150,000 ounces of gold-equivalent production per year as they all come online over the next 3 to 4 years. So a very nice add-on to our already strong growth profile within the company and it makes us even stronger. We are leaders in the ESG space. This is something that's been a long commitment of our company. It really comes from my own background. I'm a geological engineer that has worked in the mining industry, and I understand -- many, many decades ago I understood how important strong social license is. And so we, as a streaming company, even though we don't operate these mines, we endeavor to work with site management to do our best to strengthen their own capacity to maintain strong social and environmental license with respect to their operations. We do a lot of co-funding programs and additional work. We have this overlying mantra that our partners -- when our partners are strong, so are we. And so all of that has been recognized in terms of the success that we've had in providing that. And we are definitely one of the top citizens. We've been named Top Precious Metals Company by Sustainalytics and top ranked by MSCI and such. And so a good, strong recognition there. Of course, our dividend has been healthy and has seen growth over the last couple of years, last 1.5 years, and so we've got a good, strong dividend growth on that side. And we've had a couple of other sales, where we've sat there and optimized our own portfolio and closed off the Keno Hill stream and the LA AcuStream for very good prices that we will then turn and take and invest into new projects as we continue to grow our company. The portfolio is made up of 21 different operating mines and 13 development projects. As you can see here, there is a very strong Americas focus on the asset mix. This really comes from our roots. We started off being focused only on silver. But back about 10 years ago, we decided to venture into the entire precious metal spectrum, mainly focusing on gold. And we are now generating more revenue from gold than silver and with a little bit of revenue coming from palladium and from platinum -- and from cobalt. You can see political risk is something that's very, very important to us. And if you look at these jurisdictions, it is something that does resonate in terms of how our portfolio is distributed around the world. And you can also see the strength of the streaming model and the fact that our partners, the partner list that we see down the right side of this slide, really highlights the fact that the streaming business model works with the entire mining industry. The senior diversified big companies like Vale and Glencore, the senior gold companies like Newmont and Barrick, all have stepped into streaming as a source of capital. And of course, now we're seeing a lot of smaller companies and single-asset development companies that are joining the parade towards an effective capital to help build mines successfully and minimize the risks to their own shareholders. So a good, strong track record in terms of what we've been able to accomplish. And really, really focused on political risk is one of the attributes that we really put a lot of value in, in terms of our own due diligence process. I think if there's a slide that separates us from our peers, we did create the streaming model back in 2004, but the success that we had very earlier on brought out a lot of, call them, copycats. The traditional royalty companies quickly became streaming companies. And they have now stepped into this space. But we have maintained a very diligent focus on quality. And I think if there's one slide that differentiates us from our peers, from those traditional royalty companies, it is this slide. It's the quality of the assets, and we judge quality by the operating margins of the partner, not so much ourselves. Our margins are defined by the contract. It's the operating margins of our partner. And 85% of our production comes from the bottom half of the respective cost curve. So that's to say that if we're getting gold from a copper mine, that copper mine will be in the bottom half of that respective cost curve, and that's what we focus on. But I think the other attribute that makes our company unique within the space is our reserve and resource base. We have close to 30 years of reserves in front of us, over 10 years of measured and indicated resources, which is a higher-confidence resource, and then another close to 20 years of inferred resources, a little bit lower confidence, but nevertheless, still resources. This is unheard of in the precious metal space. We have high-quality, long-life assets in our portfolio that's really highlighted on this slide. Our production profile, we, unfortunately, did have to go through a reduction in our guidance earlier at the end of our second quarter earlier this year. It is unfortunate. Salobo has had some challenges down in Brazil, but it looks like they have turned the corner. So I do think that it has created an opportunity in terms of investing into our company. Because as Salobo climbs its way back up, we've had a stream at Salobo since 2013, and that asset has outperformed every year until the last 1.5 years, 2 years, and we're confident that Vale will be able to bring it back up to being an outperformer over the next few quarters. And so our current guidance for this year is now centered around 660,000 gold-equivalent ounces between 640,000 and 680,000. So centered at 660,000 gold-equivalent ounces. But we see growth or average over the next 10 years will be 850,000 ounces, which, for that average to work, we will, within 5-year, see production up over 900,000 ounces per year. That's 35% plus of growth organically within our current portfolio, not counting any of the new opportunities that we're seeing. And the pipeline is very strong. We are seeing lots of new opportunities to continue growing our company, as streaming becomes an even more competitive source of capital in this current mining environment. As you can see, a real strong focus on gold, and I will say that even the pipeline that we have has even a heavier focus on gold. So I do predict that gold will become even more and more important to our company as we continue to grow. But we do have a little bit of cobalt and a little bit of palladium from Stillwater, and we will be getting a little bit of platinum from the Marathon project once it gets up and running. And so good strong growth, good-quality assets all the way through. And of course, don't forget the optionality on the other side, a number of assets that still earn -- are still waiting for permits to move forward before they start delivering metal to us. If there's a slide that defines the strength of the streaming model, I think -- especially compared to the mining industry, I think this slide probably does the best. Our costs are fixed there, defined by the contracts. There are slight inflation kickers that are actually not even inflation. It's just a fixed kicker of 1% in most of our fixed-price contracts. A lot of our newer contracts now have fixed margins, where we pay between 18% and 22% of the spot price for every ounce that gets delivered to us. And so either way, there's no cost surprises. You know exactly where the price is going to be, which gives us the capacity to make a forecast for the next 5 years. Our gold will cost us around $444 per ounce. Our silver will cost us around $5.25 per ounce. You can see the margins that, that delivers. And that's margins with high confidence to our shareholders. Our balance sheet is strong. We've got a $2 billion revolving credit facility, a revolver that we have used successfully in the past to minimize dilution to our existing shareholders. We were as far drawn as $1.5 billion into that revolver at the peak of our growth cycle. But our cash flows have really ramped up over the last couple of years to the point of where we chewed away that debt. And we've now got, as of the end of second quarter, in excess of $400 million, and you can imagine in excess of $500 million now of cash on hand. So immediate capacity of close to $2.5 billion right now. That doesn't count a $300 million ATM that we have over and above, which we have never exercised a share into and likely won't, mainly because we don't like diluting our existing shareholders. That is who we work for. But all of that adds up to a lot of capacity to continue growing our company on a go-forward basis. And I will tell you that we are extremely busy on that front, probably the highest number of opportunities we've ever seen in terms of reviewing and potentially supporting with capital commitments to help grow our company on a go-forward basis. As you can see, the amount of cash flow that we generate over the next 5 years, our average operating cash flow per year is about $1 billion. And of course, the other highlight, I would say, is that, again, the leverage that we see here, if commodity prices go up 50%, our cash flows go up 65%. Again, that's that even though we have high margins, we still do supply leverage on the commodity price itself. So a good, strong balance sheet. This kind of highlights our company history in terms of how we've grown in terms of production and cash flows on a go-forward basis. And as you can see, the last time there was a bull run in commodity prices, we wound up generating in excess of $2 billion of excess cash flow over and above what we were forecasting from our own internal cash flows. It sure looks like we're shaping up for something very similar and of importance to highlight here is the fact that we are now producing more than twice the metal that we were back in the 2010, 2011 era when we were -- saw the last bump. And so the capacity to deliver excess cash flow over and above whenever we see precious metal prices move, is very strong in our company. Our dividend, as I mentioned earlier on, it is tied to being 30% of our operating cash flows. We originally started the dividend many years ago, close to 10 years ago, we started at 20%. We will gradually move this up over time. It's tough to maintain the same growth profile in this industry as our company gets bigger and bigger. So as our company does grow, more and more of the cash will shift towards paying a stronger and stronger dividend. And that will be driven by increasing the 30% to 40%, 50%, et cetera. So why do partner mining companies want to do streams? In today's environment, why would companies want to sell off a portion of their own production to us to push that forward? Well, the list is long. Streaming is a very, very competitive source of capital. As you can see, it works very well compared to debt, and it works very well compared to equity. There's probably 2 key points that should be strong enough to justify an operating company using a stream to help finance. So that's really the second and third point on this list here, which are really highlighted on this slide right now. The top half of this slide talks about the arbitrage in value. Our business really is focused on trying to acquire noncore byproduct production. I'm not sure if you're aware, but every copper mine in the world produces a little bit of gold. Every lead, zinc mine in the world produces a little bit of silver. Every nickel mine in the world produces a little bit of gold. And so our company is really focused on trying to unlock that noncore byproduct precious metals, that's really being produced at the copper, the lead, zinc and the nickel mines around the world, and unlocking that and bringing that to our shareholders on a go-forward basis. Now precious metal companies and especially precious metal streaming companies trade at much higher valuations than base metal companies. And so there's an arbitrage in how those ounces are valued. They're valued much less than the base metal company than they are in our company. So we basically run a good, strong arbitrage -- we share that arbitrage with the operator, which makes the acquisition of that much more attractive than if they were to issue shares and dilute their existing shareholder base makes it very, very attractive. That arbitrage is probably no stronger now than it's ever been with respect to especially with single-asset junior companies in the mining space. Mining stocks, as we know, haven't been well supported by investors of late. And so those companies are trading at very low P/NAV multiples, price to net asset value multiples. The bottom half of this slide talks about how we can improve the internal rate of return or, in other words, the return on invested capital for a project as a company builds a project. And the example that we use here is from the Salobo mine, our most important asset. It's owned and operated by Vale down in Brazil, one of the world's best copper-gold mines in the world. And altogether, Vale spent close to $4 billion building the first 2 phases of this project. We supplied $3.1 billion out of that $4 billion. So we supplied 78% of the capital to build that, and yet we only took away about 23% of the revenue with our stream. We get 75% of whatever gold is ever going to be produced at this mine on a go-forward basis, incredibly attractive for the Vale shareholders. They put in very, very little capital to build this mine, and yet they get the bulk of the revenue for this mine on a go-forward basis. This is an excellent example of how to dramatically amplify the return on your invested capital or your IRRs on these projects. And so it makes it very, very attractive for companies to use a stream as part of this -- as part of the financing package and building new mines, and it will take a good mine and make it a great mine. The benefits to the community are -- one of our other important stakeholders in the company itself. We -- as I mentioned, sustainability is a real key part of our DNA. It's something that I understand from good business practices in many years in the mining industry and for that matter, common sense really. But at Wheaton, it's really sort of represented in 4 different areas. Of course, the due diligence side, we've got good, strong social scientists that are always looking for and measuring risk in terms of whether we should invest in the projects, but we also monitor our existing projects to see if there's ways we can help them move forward. One of the advantages that Wheaton has is that our technical teams see many, many projects. So we do get a good sense of what best practices are. And we are part of a broader industry, a mining industry. So we do our best to make sure that all of our partners understand what those best practices are and can move forward. So due diligence is important. Community investment programs. We were the first in the streaming and royalty space to actually start investing back into communities around the mine sites where we get our metal from, an incredibly important aspect of long-term business success. And I'm happy to report that the royalty companies, the traditional royalty companies are now following suit and starting to do this because, overall, they'll make the entire industry that much more acceptable by society. Good, strong policies and practices within the company. This is something that is part of our DNA. It's something that we really, really do put a lot of focus on, and of course, good, strong external and voluntary commitments, both on a corporate basis, but also on personal basis. One of the measures that we have is what do our staff, what does our team do on their own personal time with respect to contributing back to the community around them. And so it is something that is, as I said, a strong part of our DNA. On the community investment program, we have really 4 pillars that we focus on: health, education, environment and then, of course, community itself. It's -- we've committed to a minimum of 1.5% of our average income goes back into this, with the bulk of that going towards the communities around the mines where we get our metal from. And we do this by working in partnership with the operators. It doesn't make sense for us to actually run the programs in the area. We're not operating these mines. But what does make sense is that we expand the capacity of the site management to make sure that they deliver good things and sustainable benefits to the communities around those mines. So lots of success on this front. And I think the results speak for themselves. We're a top-rated precious metals company. What I'm particularly proud of is we actually made the list of the Global Top 50 from Sustainalytics, which is a multi-sector list of companies. That doesn't -- that's not just the mining or the resource industry. That includes tourism, includes banking, includes all sorts of services, software technology. We made the Global Top 50, and we're a resource-based company that works in the mining space. This really is sort of the recognition in terms of how we've pushed this forward and made this important. Proud of what we've been able to accomplish here. But our journey is not finished. We have just recently committed earlier this year to being net zero by 2050, and that includes the emissions that our partners produce as our -- as a portion of our share of the production from these mine sites. So we've got some challenges, some exciting challenges in front of us in terms of how do we help our partners get closer and closer to net zero so that our share of the emissions from these mine sites will reduce over time. And so this is something that's very, very important to us. And as you can see, I've said it several times, this is a journey that we are on, of constant improvement. I think society as a whole is going down this path, and we're doing our part to make sure that we lead the mining industry or at least the mining streaming industry also down this path. So why invest into Wheaton Precious Metals? I don't know, the list is long. If you're going to invest into precious metals, you really have 3 different options. You can either invest into the mining companies or you can go and buy bullion or the gold ETFs, or you can invest into the streaming space. Now with respect to precious metal miners, of course, the cost risk itself should be enough to scare everyone away from that space. It is a very, very high levered -- costs are higher than where we are. And so that higher leverage, unfortunately, gives you a lot more risk and exposure. If you're right on the call, you might do better on that front, but it is definitely a much riskier environment to invest into. At the other end of the spectrum is bullion and ETFs, where there is no growth and there is no risk. There is no cost risk. But there's also no growth. There's no expansion. There's no exploration success. An ounce stays an ounce all the way through. And in fact, it shrinks when you factor in your service fees for storing that gold or holding that ETF. So in the streaming space, when you sit and look at it, the benefits that we provide, no cost risk, and we still deliver all the growth. The streaming space is the best way to invest in the precious metals. And amongst the streaming companies, Wheaton is by far the purest of the bunch. We have greater than 95% of revenue -- in fact, right now, it's about 98% of our revenue comes from precious metals. We've got a little bit of cobalt coming from the Voisey's Bay mine in Canada, which I will highlight is the cleanest, greenest, most socially responsible, most environmentally sound cobalt produced in the world. But the rest of our revenue does come from precious metals. When you look at the other streamers, especially the senior ones, you can see that a large portion of the revenue actually comes from oil and gas or from iron ore or from copper. We are focused on precious metals, as the name implies. And I would argue that we also have the highest-quality portfolio, with 85% of our production from the bottom half of the respective cost curves, and the longest reserve and resource life, with close to 60 years combined reserves and resources all together. So I really do think that Wheaton stands out on this list. As you can see here, we talked about the split in revenue. As I mentioned, we've only got a small portion of our revenue coming from cobalt. And the way cobalt prices are going, who knows, maybe it will be a precious metal sometime soon. So our track record of what we've accomplished, I'm pleased -- very pleased to announce that earlier this year, we surpassed over $10 billion committed into streams since we created this company in 2004. So a very successful track record in terms of doing that. What I find amazing is that we've invested $10 billion. We've already recovered back about $8.8 billion of cash flow from our mines to date. And when you combine that with the extensive reserves and resources that we have in front of us, it just underscores the strength of our business model. We've already delivered over $1.7 billion back to our shareholders in the form of dividends. And with our strong annual cash flows and growing production profile, we're going to see those dividends climb, especially with current prices, especially when you look at that at current commodity prices, if we see prices continue to strengthen over time here, that's just going to even compound the strength there. So good, strong commitment towards sustainability, helping the entire industry move forward, very, very important to us. All of this has added up to around a 20% average annualized after-tax return from our portfolio. So we have delivered good, strong value to our shareholders. In fact, if you look at our returns compared to other ways of investing into the mining space, you can see that we have delivered consistently. We have outperformed the entire space. Wheaton is the best way to invest into precious metals. So this is my last slide, and then we'll start working our way through some of the questions. I see a few here. If you like precious metals, we do check the boxes; cost predictable; good exploration and expansion potential; a very high-quality asset base; long-life operations; good reserve base; very, very unique standalone within the precious metals space; leverage to increasing precious metal prices; very strong commitment towards sustainability; and of course, a good, strong dividend. All of that adds up to an excellent way to invest into precious metals. So with that, I think we're going to shift to answers and questions. I do have some questions that have come up on the screen.

Randy, perhaps if we could, we did have some pre-submitted questions, which we can just take before we move on to those that we've got through today's meeting. If I may, I'll just read out the first one. Of course, ladies and gentlemen, do please continue to submit your questions just using that Q&A tab on the top right-hand corner of your screen. But the first one, if I may, Randy, reads as follows, when is your next quarterly dividend?

Quarterly dividend will be announced at the end of our quarterly results, which is Q3, November 3, early November. So the dividend will be paid shortly after that. And so it will be sometime in November.

That's fantastic. Next question we've got here is, what is the environment like for M&A? And what kind of companies are you looking for streaming deals at present?

It's a unique opportunity set right now, [ One ] is busy as we've ever seen it. I did mention that earlier on in the presentation. The -- what's unique about the space right now is that commodity prices in general are actually relatively good. The industry is generating decent internal cash flows if they have operations. And so just about our entire opportunity set right now is made up of single-asset development companies. These are companies that don't have access to operating cash flow, but they want to build mines. And so I can tell you we just went through the 2 big conferences in the gold space, the Denver Gold Show and the Beaver Creek Precious Metals Summit. We had over 60 meetings with companies that are looking for capital to help build their mines on a go-forward basis. Now a lot of those assets weren't assets that we're going to be all that interested in. The quality just isn't there. But I can tell you that we currently have over 20 assets that we're looking at, at various stages of data review, and confident that we'll be able to convert some of those into additional streams and continue growing. I mean it's my personal objective to get our company up over 1 million gold-equivalent ounces a year of production, and we're not far off of that right now, but we do fully expect to be able to add a bit more. It is a very right market from that perspective. Those single-asset development companies, most of them are trading at pretty significant discounts to their net asset value, sometimes in [Audio Gap] the area points. When I sit and think about what is -- sorry, I'm getting red squares flashing up here. When I sit and think about -- yes, okay. When I sit and think about what's actually the path forward, it's going to be selecting our way through these projects and helping these companies, when it comes to selling off a noncore portion of their project on a go-forward basis at a value that's closer to the net asset value of that asset. Then it makes imminent sense for these companies to use a stream as part of that financing package. And I think CFOs from around the world are definitely seeing that opportunity set. So very busy on that front.

That's fantastic. Next question we've got here. Again, on the similar theme, what sort of deal capacity do you have in terms of dollars to invest now or in a short space of time?

Well, as I mentioned, we've got a $2 billion revolver that we've used very successfully to really minimize the dilution. I think if we'd have taken the same approach that our peers did, we would have had somewhere around 15% to 20% more shares issued in outstanding than we currently do right now. So that revolver has been very useful. And at its peak, we were probably down around about a 1.3%, 1.4% interest rate, which made it very, very cheap capital for us. However, right now, we're generating such strong cash flows. I'm not sure when we'll get down into that revolver. We've got at the end of the second quarter -- so you can imagine, at the end of the second quarter, we're well over $400 million cash on hand and generating close to $1 billion in free cash flow per year. And that's only going to grow with 35% growth profile over the next 4 to 5 years. That cash flow is just going to continue to grow. So if -- and people often ask what I -- what do I lay sleep at night -- or lay awake at night thinking about while I'm trying to sleep in terms of what problems to solve, it's how to effectively put this cash to work. And if I can't put it in the ground, ultimately, it will be returned to shareholders. But we do have a lot of capacity. I do see the dividend itself ultimately climbing because I just don't think we're going to be able to invest this capital as fast as it's coming in.