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Wheaton Precious Metals
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== Exceptional business plan == WPM acquires the right to purchase streams of precious metals from producing or near-producing mines in return for a combination of a fixed upfront payment (in US dollars, typically in either cash or WPM shares) and an agreed upon ongoing payment (in US$/oz). Typically, it focuses on by-product precious metals streams as this offers the greatest arbitrage opportunity between the perceived value of the stream to the producer in the equity market and the perceived value of the stream to WPM. Specifically, however, it seeks to build long-term value by entering streaming agreements with large, relatively financially stable counterparties operating premium, high-margin projects in the lowest quartile (and certainly the lowest half) of the cost curve. As well as providing comfort regarding the sustainability of the underlying operation, this strategy also helps to mitigate geopolitical and operating risks. In addition, it provides a degree of flexibility if projects are not developed according to plan (eg as evidenced by WPM’s ability to successfully renegotiate a series of amendments with Barrick regarding the latter’s Pascua-Lama project). Unlike a number of its peers, WPM has restricted itself almost exclusively to precious metals streaming agreements and does not participate in the base metal (with the single exception of one cobalt stream) or oil & gas markets. This strategy has the effect, among others, of exposing WPM to the traditional premium multiples afforded to precious metal companies compared to base metal ones. Latterly, WPM has engaged in a number of ‘early deposit’ contracts whereby it has contracted to buy gold and silver streams from the Cotabambas and Toroparu mines in South America and the Kutcho mine in British Columbia, thereby effectively becoming a relatively low-cost financing component of these projects. In Q122, WPM’s revenue, by metal, was as shown below: '''Exhibit 7: Q122 revenue, by metal (%)<ref>Source: Edison Investment Research (underlying data: Wheaton Precious Metals).</ref>''' [[File:Image6-7d463c19cc382d30d66aee327ac8823e.png|600x600px]] === Streaming agreement characteristics === While royalty companies compete with WPM to some extent in the provision of capital to the mining industry, there are notable differences between the two business plans. Royalties are typically linked to tenement areas, for example, and also typically relate to a mine’s primary output, whereas streaming arrangements are governed by a commercial agreement between two companies (albeit often relating to a single mine) and typically relate to a mine’s secondary, or by-product, output. A summary of the unique features of WPM’s streaming business plan and how it is distinguished from other investment opportunities in the precious metal, precious metal mining and mining finance industries is as follows: Compared to exchange traded funds (ETFs), WPM: * has exposure to exploration success in the form of extended mine lives; * has exposure to levels of production; * is operationally geared to changes in metals prices; * balances costs and revenues, such that inventory held is minimal at the WPM level; and * pays a dividend. Compared to precious metal mining companies, WPM: * has no exposure to capital cost overruns; * has no exposure to operating cost overruns; * is only exposed to grade fluctuations inasmuch as they affect production levels rather than margins; * has a predetermined level of inflation (typically 1%) applied to its own unit cash costs; and * is unaffected by changes in a host country’s mining tax and regulatory regimes. Compared to royalty companies, WPM: * has geared exposure to metals prices; and * typically negotiates and exploits the value differential around a secondary, or by-product, metal, rather than applying the stream to all metals including the primary one. A key advantage for WPM compared to potential competitors is its size, scale and valuation, which allows it to raise equity on a non-dilutive basis to fund new streams, or even to issue counterparties with equity in consideration of new streams. === Cornerstone assets === WPM has five cornerstone assets (Salobo, Penasquito, Antamina, Constancia and San Dimas). The following is an analysis of the financial returns generated as a result of the application of WPM’s investment criteria to one of its cornerstone assets – Penasquito. ==== Penasquito ==== Penasquito is a gold-silver-lead-zinc mine, operated by Newmont in Mexico, and has consistently been regarded as one of WPM’s cornerstone assets. The stream relating to this asset was acquired late in 2007 for US$485m plus US$3.56m in costs and US$15.761m in capitalised interest. The first silver-bearing lead and zinc concentrate was delivered from the mine in 2009 after production at its first 50,000tpd sulphide process line was ramped up on schedule and on budget. During the ramp-up period, metal recoveries, concentrate grades and concentrate quality were within expected ranges. By this time, construction of a second 50,000tpd sulphide process line was also progressing towards planned completion in Q310. After exceeding ramp-up expectations, Penasquito became WPM’s second largest contributor of silver production in 2010 and, after further expansions, its largest in 2012 (by which time it held the title of Mexico’s largest precious metals mine, one of the world’s largest and lowest-cost gold-silver mines and one of Newmont’s most significant cash flow generators). Output of silver rose to c 7Moz pq after the mine’s production schedule was adjusted to reflect a targeted mill throughput rate of 110,000tpd, rising to in excess of 115,000tpd beyond 2015, after which Penasquito embarked on the Pyrite Leach Project to produce an additional 4–6Moz pa (of which 25% was attributable to WPM) by recovering 48% of the silver that previously reported to tailings. Compared to an initial investment of US$504.3m, Edison Investment Research estimates that Penasquito has yielded – and will yield – the following historical and forecast cash flows to WPM: {| class="wikitable" |+Exhibit 8: Penasquito cash flows to WPM, 2008–26e (US$m)<ref>Source: Edison Investment Research, Wheaton Precious Metals. Note: Mine life forecast to extend until 2031 (not shown here).</ref> ! ! colspan="15" |Historical ! colspan="5" |Forecast |- |Year |2008 |2009 |2010 |2011 |2012 |2013 |2014 |2015 |2016 |2017 |2018 |2019 |2020 |2021 | colspan="2" |2022 |2023 |2024 |2025 |2026 |- |Cash flow |2.3 |6.9 |52.2 |126.8 |162.2 |105.2 |106.0 |85.1 |54.1 |67.0 |57.2 |55.3 |119.0 |167.2 | colspan="2" |152.8 |165.9 |168.3 |174.2 |179.5 |} On an undiscounted basis, therefore, Penasquito paid back WPM’s initial investment midway through 2014, while, on a discounted basis (at a 10% discount rate), it paid it back late in 2020 and still has a residual value of US$1.9bn (as at 1 January 2022) to the end of 2031 (the end of the mine’s life, based on current reserves). By contrast, applying a 10% discount/hurdle rate over the life of the stream of income to end-FY31 yields a value to WPM at the start of the period of its investment of US$845.5m in 2007 money terms, which is directly comparable to the stream’s acquisition cost of US$504.3m. Stated alternatively, Edison Investment Research estimates that the stream will provide WPM with an internal rate of return of 15.7% from the point of acquisition in 2007 until 2031. In addition, there is substantial underground potential beneath the current open pits, providing excellent opportunities for further exploration growth and expanded and/or extended silver production.
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