Wheaton: A Royal Pick in Gold

09/17/2019 5:00 am EST


Michael Cintolo

Vice President of Investments and Chief Analyst, Cabot Heritage Corporation

We’ll have to see if the overall environment changes, but the combination of plunging interest rates, slowing economic growth, tariffs and general uncertainty remains a boon for precious metals, notes Mike Cintolo, editor of Cabot Top Ten Trader.

Wheaton Precious Metals (WPM) is a major player in the streaming sector — whereas a royalty gives a firm a percentage of sales, streaming allows a company to buy output at a set, low price in exchange for pre-funding portions of a mine. (Wheaton’s per-ounce cash costs in Q2 was $420 for gold and $5.14 for silver.)

All told, Wheaton has streaming agreements with 19 mines in operation, as well as another nine in development, and in recent times, business has been mixed—Q2 saw an 11% bump in gold output and a 19% drop in silver output (mostly due to one streaming agreement being terminated), with overall sales and earnings falling sharply (see table).

But investors see the writing on the wall here: Wheaton’s sales prices in Q2 averaged $1,320 for gold (13% below current spot prices) and nearly $15 for silver (18% below), so as those catch-up to reality and output picks up steam (production should increase from 690,000 this year to an average of 750,000 during the next five years), the company’s bottom line should jump.

Even with the hard times, Wheaton cranked out a 23%-plus profit margin in Q2, showing the power of the business model. Analysts see earnings up 10% this year before a 30%-plus gain in 2020, but that could prove conservative if gold and silver remain in bull markets. The company will be hosting an analyst day on September 25.

Like most of its peers, Wheaton Precious Metals changed character in late May, when it began a steep, persistent uptrend. Granted, there have been a couple of pullbacks along the way, but buyers have generally stepped up to the plate near the stock’s 25-day line.

Interestingly, the stock consolidated mostly between $26 and $28 for about four weeks before lifting to $30 toward the end of last month on good volume. Try to get in on dips toward the 25-day line.

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