Wheaton Precious Metals (WPM) is on track to meet or exceed its guidance both for this year and for the next five years, asserts Adrian Day, resource sector expert and editor of Global Analyst.

Silver production was a little light, commodity prices were down, and costs increased (due mainly to the termination of an old stream); this quarter saw the first platinum revenue from its new Stillwater stream.

Recent acquisitions by Wheaton have been long-maturity assets with low returns over any reasonable time frame. This is one reason the stock is meaningfully undervalued relative to the two larger royalty/streaming companies, Franco Nevada (FNV) and Royal Gold (RGLD).

It also has a weaker balance sheet, with net debt of around $1.3 billion; the debt is up after the company drew on its credit line to fund the Stillwater stream.

And of course, Wheaton is engaged in a battle with the Canadian tax authorities over the structuring of its offshore streams. The case goes to court in September next year.

Each of these negatives has some potential for mitigation. Wheaton has strong leverage to higher metals prices. It also has project optionality at Penasquito and Salobo, where an expansion has been given the go-ahead.

Wheaton has to pay 50% of the expansion capex, though this is not expected to be due until 2023 (after the completion test). Notwithstanding the debt, Wheaton has $119 million cash, up 25% in the last quarter, and availability on its line.

It is looking at streams smaller than recent acquisitions and these could be easily handled with the credit facility and potentially would have higher short-term returns.

Given the projected cash flow, Wheaton could fully repay its debt by the end of 2022 (that is, before the new debt for the Salobo expansion). So, given the strong cash flow, the balance sheet is not particularly stretched.

With regard to the tax issue, there is some encouragement after Cameco won a not-totally dissimilar case in court, though the government has appealed the decision.

A positive decision for Wheaton would also likely be appealed, but it would boost the stock. Wheaton’s discount is significant: it trades at 27 times earnings, half the figure for Franco and just over half for Royal. The dividend at 2.3% is higher, and on other metrics it also trades at a discount.

A tax court win or higher metals prices would boost the stock price meaningfully. It traded over $20 for most of the year-and-a-half prior to August, and could rally quickly back to that level at least. Wheaton under $16 is a good buy.

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