Wheaton Precious Metals(NYSE: WPM) is a gold and silver stock, but it isn't a miner. This is an important fact, even though its revenue and profits are driven by the sale of these precious metals. So, "production" levels are important to monitor, but you have to look at the company in a slightly unique way.
Here's why the magic number for Wheaton is looking like it could be 1 million ounces.
Wheaton is not a miner
Wheaton is a streaming and royalty company. That means that it provides miners with cash up front for the right to buy gold, silver, and other metals at reduced rates in the future. The cash that miners receive is usually put toward capital investment projects, like the construction of new mines or the upgrading of existing ones. The benefit of working with a company like Wheaton is that the miner gets access to cash without having to take on debt, which protects its balance sheet, or sell stock, which limits shareholder dilution. Often, the gold and silver that Wheaton buys are just byproducts of other metal mining activities, like mining for copper.
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This is a clear win for the miner, but it is also a win for Wheaton. The price that Wheaton pays for gold and silver is usually set as a percentage of the current market price when it is bought. That, effectively, locks in a profit for Wheaton, as the company simply turns around and sells the gold and silver it buys at market rates to generate revenue. Thus, the streaming and royalty agreements it inks basically afford it strong profit margins in both good commodity markets and bad ones.
With that quick overview, it is probably more appropriate to view Wheaton as a company with a portfolio of mine investments. Those investments span across regions, miners, and, more to the point here, mine development stages. So there's a mix of assets that are producing and getting ready to start producing (new mines) or on the verge of producing more (mine upgrades). Given the expected production profiles of all of the assets in the mix, Wheaton has provided guidance on the gold and silver it will "produce" from its activities.
The whisper number is 1 million
As it stands today, Wheaton produced roughly 617,000 gold equivalent ounces in 2022. Gold equivalent ounces simply lump gold and silver together into one number, which makes production easier to track. In 2023, the company expects to produce between 600,000 and 660,000 gold equivalent ounces. Mine production can vary based on a lot of factors, so this is a reasonable range.
However, the company is currently expecting the investments in its portfolio to lead to gold production of roughly 900,000 ounces by 2027. So in just a few years, the company's production will increase by as much as 50%! That's a step change that investors shouldn't ignore. Only, during the company's third-quarter conference call, management was a bit more optimistic than even that figure. Although no commitment was made to the number, the company hinted that it could eventually update the 900,000 target to 1 million.
This matters for a number of reasons. First, the growth potential here may be bigger than it seems today. Second, Wheaton has a variable dividend policy that ties the dividend to its financial performance. More gold to sell will leverage the company's financial results to gold prices, meaning that, as the expected production comes online, higher gold prices will likely be highly supportive of higher dividend payments.
Who should buy Wheaton?
With a variable dividend policy, income investors looking to create a consistent income stream will probably be better served elsewhere. Falling gold prices will, as you would expect, lead to lower dividends. However, if you see precious metals as a diversification tool, then Wheaton allows you to get exposure to gold and silver without having to invest in a miner or hold bullion. And the growth potential in its production will leverage your return, at least partly via the dividend, to precious metals prices. That's not a bad choice, particularly when you consider that management's whisper number on production suggests that the outlook could be better than its official targets currently suggest.
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Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.
