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

Good morning, ladies and gentlemen, and welcome to Wheaton Precious Metals Operational Update Conference Call. [Operator Instructions] I will now turn the conference over to Emma Murray. Please go ahead.

Thank you, operator. Good morning, ladies and gentlemen, and thank you for participating in today's call. I'm joined today by Randy Smallwood, Wheaton Precious Metals President and Chief Executive Officer; Haytham Hodaly, Senior Vice President Corporate Development; Gary Brown, Senior Vice President and Chief Financial Officer; and Curt Bernardi, Senior Vice President, Legal and Strategic Development. Please note for those not currently on the webcast, a slide presentation accompanying this conference call is available in PDF format on the Presentations page of our website. Some of the commentary in today's call may contain forward-looking statements, and I would direct everyone to review Slide 2 of the presentation, which contains important cautionary notes. It should be noted that all figures referred to on today's call are in U.S. dollars unless otherwise noted. With that, I'd like to turn the call over to Randy Smallwood, our President and Chief Executive Officer.

Thank you, Emma, and good morning, ladies and gentlemen. Thank you, everyone, for dialing in to today's conference call on short notice to discuss our latest acquisition. As announced this morning, we have acquired a new gold stream on Montage Gold's Kone Project located in Cote d'Ivoire for upfront consideration of $625 million. Additionally, we will provide a $75 million secured debt facility to Montage, making this a full financing package. With essential permits in place, coupled with its impressive scale, we believe the Kone Project stands out as one of the premier gold assets in Africa. Supported by strong shareholder backing from the Lundin Group and Zijin Mining, the Kone Project is expected to significantly boost Wheaton's near-term annual gold production and further strengthen our peer-leading growth trajectory. In fact, once fully ramped up, Montage is forecast to become our second largest gold-producing asset for its first 5 years of production and the third largest producing asset overall. A key focus of our due diligence process is on sustainability initiatives, and we observed firsthand Montage's efforts in fostering strong relationships with the communities around the project. In addition to being the largest employer in the area, Montage is committed to community development, including investments into medical facilities, schools and infrastructure to strengthen the local community. So we look forward to collaborating with Montage's outstanding team whose extensive experience in West Africa has driven remarkable progress in derisking this project and advancing it towards construction. In addition to this new gold stream on the Kone Project, we also announced an expanded relationship with Rio2 Limited, whereby Wheaton will provide a full financing package for the construction of the Fenix Gold project over and above our current gold stream, which was announced in 2021. I will now turn the call over to Haytham to discuss the details of our latest acquisitions. Haytham?

Thank you, Randy, and good morning, everyone. By now, you've all had a chance to go through the specifics of this transaction. So I'll just point out some of the highlights so we can leave time for questions at the end. As Randy described, we've entered into a new stream relative to the Kone Project for cash consideration of $625 million in addition to a $75 million secured debt facility. The project is situated near existing infrastructure, has year-round road access, and ample water resources. Based on the feasibility study published in 2024, Kone ranks as one of the highest quality gold projects in Africa with a long 16-year mine life, low all-in sustaining costs of under $1,000 an ounce over its life of mine, and sizable total annual production of over 300,000 ounces of gold over the first 8 years. Under the Kone stream agreement, Wheaton will receive 19.5% of the payable gold until a total of 400,000 ounces of gold has been delivered, subject to adjustment if there are delays in deliveries relative to an agreed schedule, at which point, Wheaton will purchase 10.8% of the payable gold until an additional 130,000 ounces of gold have been delivered, at which point Wheaton will then purchase 5.4% of the payable gold for the life of the mine. In return, Wheaton will make ongoing payments for the ounces delivered equal to 20% of the spot gold price. For 5 years after signing, the production payment will be subject to a price adjustment mechanism if gold is less than $2,100 per ounce, or over $2,700 per ounce. For example, if spot gold is $3,200 per ounce, Wheaton's production payment would be $675 per ounce, equating to only 21% of the spot price. The price adjustment mechanism expires on the fifth anniversary of the precious metals purchase agreement signing, after which the production payment will be equal to 20% of the spot price going forward. Attributable gold production is forecast to average over 60,000 ounces of gold per year for the first 5 years of production, over 47,000 ounces of gold per year for the first 10 years of production, and over 34,000 ounces for the life of the mine. And Wheaton anticipates receiving ounces beginning in early 2027. As outlined in the precious metals purchase agreement, Montage will provide Wheaton with corporate guarantees and certain other security over their assets. In addition, Wheaton has obtained a right of first refusal on any future precious metal streams, royalties, prepays, or similar transactions. As stated by Randy, we're very pleased to partner with Montage, who with long-standing relationships in West Africa has done an immense amount of work to derisk the asset and are rapidly advancing the Kone Project towards production. Closing of this acquisition is subject to typical terms and conditions and is anticipated to occur within the fourth quarter of 2024 or early first quarter of 2025. Turning over to Slide 5. Wheaton is focused on high-quality mine projects that can support streaming transactions in the long term, maintain social license by operating in a responsible manner, and support the communities around their operations. During our site visit to Kone, we visited various investment projects in and around the mine site that are providing basic necessities to community members, including potable water through newly constructed water wells. The Kone Project has all essential permits in place, including its environmental permit received in May 2024, followed by its mining permits in July 2024. Under the stream agreement, the Kone Project will implement the 2012 International Finance Corporation's performance standards on environmental and social sustainability and the global industry standard on tailings management. As the largest precious metals streaming agreement announced by a single streamer in nearly a decade, the new Kone stream is expected to contribute meaningfully to Wheaton's portfolio. As Randy stated earlier, by 2028, we expect Kone to become our third largest producing asset, accounting for over 7% of Wheaton's total gold equivalent production. Turning over to Slide 7, the Fenix project. In addition to this new stream on the Kone Project, we've expanded our relationship with Rio2 Limited relative to our existing gold stream on the Fenix project located in Chile. Wheaton will pay Rio2 additional upfront cash consideration of $100 million over and above the remaining $25 million payable under the existing stream with Rio2 in exchange for which we will receive 95,000 ounces of gold from the Fenix project. Once Rio2 delivers an additional 95,000 ounces, the stream will revert to the percentages and thresholds under the original Fenix precious metals purchase agreement. In addition, Wheaton has agreed to adjust the production payment for all gold ounces delivered to 20% of the spot gold price. Wheaton will also provide a $20 million contingent cost overrun facility in the form of a standby loan facility. Lastly, Wheaton has committed to participate in the private placement of Rio2 common shares for CAD 5 million at a price per share equal to and concurrent with a public offering by Rio2. This expanded relationship is a testament to our continued support of Rio2 and its development of one of the largest gold oxide resources in the world. With EIA approval in hand, permitting activities well underway and a full financing package now in place, Rio2 is projecting first gold production will be achieved in the third quarter of 2025. That concludes the project overview, and I will now turn the call over to Gary.

Thanks, Haytham. Of the $625 million total cash consideration relative to the Kone Project, we expect to make our first of 4 equal installments in early 2025 and the remaining balance by the end of 2026, with first production expected in early 2027. The $100 million upfront payment relative to the Fenix stream amendment will be made in 2 equal installments, the first of which is anticipated to be paid in mid-2025 with the remainder expected to be paid in 2026. With these 2 new funding commitments -- when these 2 new funding commitments are added to our existing contractual obligations, we anticipate disbursing an aggregate of approximately $1.9 billion in upfront payments by the end of 2026. With a cash balance as at June 30, 2024, of $540 million, combined with annual operating cash flows that are estimated to average $1.4 billion over the next 5 years, we anticipate funding these commitments without having to rely at all on the fully undrawn $2 billion revolving credit facility. As such, we believe the company is very well-positioned to satisfy its funding commitments while maintaining the financial flexibility to acquire additional accretive mineral stream interests. With that, I will turn the call back over to Randy.

Thank you, Gary. Despite this being the first corporate development announcement that we have made in 2024, it has been an exceptionally busy year with no signs of slowing down. We continue to stay laser-focused on identifying only the highest quality opportunities to strengthen our asset base and elevate our portfolio. And I am proud of the efforts by both the Wheaton and the Montage teams in finding a win-win solution for the development of this asset. We have a very strong growth pipeline, both in our scheduled production and the optionality upside from some very attractive projects that we believe will move forward in the near term, including the acquisition of the diverse high-quality streams described here today. So finally, on Slide 9, I will summarize the key deal attributes before opening the floor to questions. First and foremost, with essential permits in place and its impressive scale, we believe the Kone Project will be one of the premier gold assets in Africa, providing forecasted near-term meaningful production and adding to our already robust growth profile. Secondly, the Kone Project offers Wheaton the opportunity to further diversify our global asset base across geographies and partnerships with our new partners at Montage bringing extensive experience in West Africa. Thirdly, we are able to fund both acquisitions using cash on hand while maintaining the financial flexibility for future accretive growth. And lastly, the concerted efforts and progress made by Montage in working with the community and other stakeholders as they advance the Kone Project towards production. So with that, I would like to open up the call for questions. Operator?

[Operator Instructions] Your first question comes from Josh Wolfson from RBC Capital Markets.

When I look at this deal relative to some of the other transactions the company has done, this looks to be a very high proportion of the total funding required for the build. And then when I look at the production percentage, 19.5% is also fairly high. How should we be thinking about risks and sort of just understanding the goalposts for typical construction challenges or ramp-up challenges and how the company is managing that risk?

Josh, I would actually compare it to Salobo. Salobo, we supplied about 80% of the capital in terms of that build to date, a little bit over 80% of the capital. And we're pulling out pretty close to 20% of the revenue from Salobo itself. And so it's not unheard of. The ratios are similar to, obviously, our flagship asset at Salobo. It's done very well for us. This is a high-margin asset. And because it's a full financing package combined with the funding from Zijin, we're very comfortable with taking this 19.5%. It's no different than having -- if you had project debt on it, the bulk of the cash flows at the front end will go to paying off that debt. This is very similar in that sense, but it is a fully financed package. And so we feel we're very comfortable with it. It's a high-margin project. It has a very low cost per ounce. Good, qualified, experienced team that has built in the past in this region, knows West Africa very well. And so we're very comfortable with all those ratios. And we just think that the project itself is one of the most promising projects that we've seen in a long time.

And then just one other question. In terms of the area of interest, just so I can wrap my head around this, is there a way to sort of simplify how we should think about this? The way I sort of read it, if there's a discovery made after whatever it is, maybe year 12 or 14 or so in the mine plan, it wouldn't be captured if the delivery schedule has been sort of achieved. Is that correct?

Yes. I mean it's a challenge because you've got a property package there that does have really good exploration potential, and this is not something that's unusual. We constantly run into this challenge where companies don't want to give up that exploration potential. But it's tough for us to assign a value to it because it's exploration potential, and that's all it is. And so the approach that we took here, I think, is truly a win-win because in the event that they do have -- so just as a refresher, the area of interest is a 500-meter ring around the -- I think it's a $2,500 gold pit, design pit. And so first off, that is a pretty healthy expansion area. So if we do see higher prices, there may be opportunities for those pits to actually go bigger. We're already seeing a gold price higher than $2,500. So that does give us some exploration potential internally. But there is outside potential there that just hasn't been fully tested because Montage is moving forward towards generating cash flow before they start growing it at that. So the way we structured this is that we didn't want to limit their ability to process that. But we do get -- the advantage is if they do have exploration success outside of that 500-meter ring and they process that material, they develop and process that material through the infrastructure that's part of the -- part of what we're funding right now, we get the benefit of moving ounces forward. And so there is a slight benefit to us. We don't actually gain the extra ounces. But we do get our share of ounces from there, and it gets credited against the ultimate drop-down levels. And so at the end of the current stream, we still get the 5-plus percent of whatever comes from that core area of interest for life of mine. And then depending on how they fund their expansions and stuff like that, hopefully, they're making enough money they can fund that internally, but we do have also a ROFR on any potential funding required to fund any other developments on the project itself. And so we're comfortable with that. We think it's a win-win because even with exploration success outside, if it does come into additional production, we would see a bit of a benefit in terms of moving ounces forward in the production profile that comes from that area versus from within our area of interest. And so we think that was an excellent way to sort of balance the risk and opportunity on that side and make it a win-win agreement.

The next question comes from Ralph Profiti from Eight Capital.

Haytham mentioned road and water and sort of the project parameters. Just wondering what the project -- how the project is shaping up for power.

Haytham, I'll let you take that one.

Sure. And from a power perspective, they are going to be connected to the grid. So the power will come from that. There has been some instances of unreliable power in the past, but it seems like they've resolved that and National Grid seems to be operating quite well at this point.

Okay. And then maybe just following up on the last question. I'm wondering about the potential when you think about exploration upside coming in at the front end of the mine plan versus the back end of the mine plan, and outside of exploration, is there a chance for process improvements or even satellite deposits within the core area that could be brought on at the front end and enhance that sort of first 5 years production profile as opposed to exploration?

So maybe I'll just add something -- sorry, Randy, should I take this one?

Yes, go ahead.

So maybe I'll just add something to what Randy said earlier. So what we want is our partner to mine the best economic ore they always have available to them. So whether that comes from outside the area of interest or inside the area of interest, it doesn't matter to us because if they're mining the best economic ore, they're mining the highest grade ore based on our percentage, we're going to get more ounces faster. So that's the first thing to remember. As Randy said earlier, they've built the pit shells at much lower than the current commodity price. I think it was 18 -- sub-$1,800, and we're sitting at $2,700 right now. And we modeled it based on a $2,500 pit shell with a 500-meter area of interest around that. We would expect to see significant exploration upside in and around those existing pits based on higher commodity pricing and bringing some of the lower-grade material that didn't make it into the existing mine plans back into the mine plan. That would probably be the fastest and easiest way for them to put more material through towards the tail end. So as we see that expanded resource, that will also be subject to the stream. Now if they come back and they actually find additional material outside of the area of interest that's higher grade, well, they're going to put that through sooner. If they put it through sooner, those ounces get credited towards the tail end of the stream. So either way, we're actually doing much better because we're receiving better ounces faster if that actually happens.

The next question comes from Cosmos Chiu from CIBC.

You kind of touched on it, but maybe can we confirm some of the timing in terms of timing of the start of construction and timing of first production and first contribution to Wheaton Precious Metals. And on that front, you kind of mentioned this, too. It's going to be 4 installments for the total payment. But what's that based on in terms of milestones? Is that based on CapEx spend? And how should we model that payment in '25, I believe, '26 and '27?

Haytham, I'll let you go over the construction timing, and then Gary can talk about the timing of payments.

Sure. Thank you for the question, Cosmos. From a construction timing perspective, they already have all their permits in place. They've already started their clearing of land, earthworks, et cetera. We would expect that they would begin full construction in the first quarter of next year, at which point in time they will ask for the first drawdown. From a drawdown perspective, the way we do is we usually put in 25% of the upfront capital, and I'll have either Gary or Curt if they would like to chime in as well. 25% of the upfront capital. At the end of every 25%, there's an analysis to ensure that the CapEx has not increased over and above what the original number is. If it is, we're not required to actually submit unless they have that increased capital amount available to them. So there's a check every 25% to make sure that they're still on track. As we're actually funding the majority of the overall capital cost and they actually have another stream as well that they can draw upon and they have a cost overrun facility, we don't expect that to be a problem, Cosmos.

Great. And maybe as we look at this, this is your first large foray into Cote d'Ivoire. Cote d'Ivoire has had positive momentum in the past 10 years in terms of stability. But overall, are you -- this is a big investment, as you mentioned, Randy and Haytham and Gary, should we view any kind of risk coming out of Cote d'Ivoire? Or during your due diligence, what kind of risk have you considered? And then on top of that, as you mentioned, during your due diligence process, beyond the country risk, were there any other key risks that you identify in terms of Kone, in terms of technical risk, in terms of operational risk, anything that you can share with us?

So I'll start off just by some comments on Cote d'Ivoire. So first off, the country as a whole has had a long history of stability. In fact, I would say it's comparable to Ghana in terms of operating success. And there's never been any type of nationalization issues, never any serious problems with respect to government there. And we don't see any reason that, that's going to change over the next while. There is elections coming up next year, but it looks like the ruling party does have strong support still. So we'll see, obviously, how that goes, but I don't see any serious issues there. West Africa as a whole has jurisdictions that are -- that have shown longer-term stability in other challenged areas. We don't see any reason that Cote d'Ivoire is going to change from being a good long-term stable jurisdiction. This isn't the first time that we've looked in West Africa. We have been active there in the past. We always -- whenever we do any type of project evaluation, political risk always is factored into how we -- what kind of expected return that we get. And it's not always easy to get that accurate. But I would say that to date, we've had a pretty good track record in terms of staying in relatively good stable jurisdictions and sort of identifying and capturing those risks. And so we're pretty comfortable. I think the other comment that I'd make, Cosmos, is that we're now -- in today's world, it's not so much about country. It's also about the local communities and the local regions. And that's the one thing that -- and maybe Haytham can add some strength to this because he actually was on the site visit there. But the communities around the site itself, strong support and a very stable region. And so again, I think that on multiple factors, it just stands out as being a good, strong place to invest. And the other I think -- probably the third factor that I think comes into play is looking at the management team and their own experiences in terms of working in regions like this. And there's no doubt that the group behind Montage with their past experiences in that area, that also provides us comfort. The shareholder base that we're working with, too, with the Lundin, they've got a long track record of working in countries like Cote d'Ivoire and other countries that are -- that people would argue are pretty similar in terms of potential risk and opportunity. And then having Zijin in there is also a shareholder and a co-stream owner and supplying some project debt. I think all the way across the board, it all lines up to being a very good, strong package in a jurisdiction that's got a lot of stability. And so I don't know, Haytham, you've got anything you want to add to that?

Yes, absolutely. Just from an operating risk perspective, we've done a pretty deep dive on the actual assets and made minor adjustments. The company has actually done a very, very good job from an overall perspective. We stress-tested their costs and the commodity price based all the way down to $1,400, $1,500, and they were still quite robust. So there wasn't really an issue there. From a country risk perspective, we typically have -- we have our own internal analyst that does our country risk analysis for us. But we also, in this situation, went out and actually hired an external consultant to do their analysis for us. And what we found that despite the fact that over the last 3 decades, sometimes you have some political uncertainty, changing in parties, changing in presidents, there has never been an instance where the mining industry has actually been disrupted. So throughout all that, it actually -- everything has operated quite well, which gives us a lot of confidence moving forward.