When I wrote about Wheaton Precious Metals (NYSE: WPM) in February, I strongly believed the stock deserved better treatment and that investors shouldn't overlook the opportunity while Wheaton still traded at a steep discount to peers Royal Gold (NASDAQ:RGLD) and Franco-Nevada Corp. (TSX:FNV). Wheaton shares are up almost 12% since.
I didn't predict Wheaton's stock price or by how much it will rise, as I don't know of a formula yet in the stock market that can predict prices accurately. What I did, though, was examine Wheaton's growth catalysts and extrapolate them into the future to see where the stock could be headed.
With Wheaton back on investors' radar, it's time for an encore, but with a specific time frame in mind. Where will it be in five years? I can think of three major moves that Wheaton will likely make in the next five years that should give you an idea about the stock's future.
1. Acquire new low-cost streams
Precious metal streams are Wheaton's bread and butter. While Wheaton is also a precious metals company like, say, Goldcorp (NYSE:GG), the two don't make money the same way. As a pure miner, Goldcorp owns, develops, and operates mines to extract gold, silver, and other byproducts. Wheaton doesn't do any of it -- it buys metal streams from miners like Goldcorp to resell. In exchange, it finances the miners up front.
For mining companies, such "streaming agreements" as they're called, are a way to access capital, especially when the traditional debt markets dry up. For Wheaton, the agreements secure a source of metals at low prices, usually substantially below spot rates, which translate into strong margins.
Wheaton's business and growth, therefore, depend entirely on the number and kind of streaming and royalty agreements that it has. Over the 14 years of its existence, Wheaton Precious Metals has come to dominate the industry as the world's largest precious metals streaming company.
Wheaton currently has agreements for 20 operating and nine developing mines with some of the largest mining companies, and management is keen to expand its portfolio. As CEO Randy Smallwood elaborated during Wheaton's last earnings call:
There is several high quality accretive opportunities that we are pursuing related to both operating and development assets. And with the strongest free cash flow in the entire streaming space at well over a $100 million per quarter and over $1.3 billion of current capacity, Wheaton still has plenty of firepower for continued investments.
In short, I expect to see several streaming deals coming from Wheaton over the next five years, starting this year. And I wouldn't be surprised if they're tied with some top low-cost assets, preferably in gold.
2. Increase exposure to gold
Wheaton's acquisition history proves the company's preference for low-cost streams, which is why its purchase costs have typically ranged from $4 to $6 per ounce of silver and averaged $400 per ounce of gold. As you may know, spot silver and gold prices are way higher.
Smallwood recently emphasized how the "underlying cost of producing the core product" remains the "most important" acquisition criteria for Wheaton. By core product, it's important to know that the metal streams that Wheaton secures are often byproducts for miners.
Consider Wheaton's agreement with mining giant Vale (NYSE:VALE) to buy 75% of the gold produced from Vale's Salobo mine for life. Now Salobo is a copper mine, precisely an iron-oxide copper-gold deposit. So while Salobo's primary product is copper, Wheaton is invested in its by-product, gold. Vale is among the top low-cost copper producers in the world, which explains Wheaton's interest in the mine.
I gave Vale's example to highlight another crucial point: Wheaton's increasing exposure to gold. Wheaton projects gold to make up 45% of its average production between 2017 and 2021, which is also why the company changed its name from the erstwhile Silver Wheaton Corp. last year.
Wheaton's latest agreement with First Majestic Silver, which replaced its earlier agreement on Primero Mining's San Dimas mine, which was recently acquired by First Majestic, also evidences the streamer's increasing preference for gold.
If the strong operational performances of gold-focused rivals, Royal Gold and Franco-Nevada, are anything to go by, a higher leverage to the yellow metal should boost Wheaton's revenue and cash flows, which should mean stronger shareholder returns.
3. Pay higher dividends
Wheaton Precious Metals has been popular among income investors in silver as it pays a pre-decided percentage of its cash flow in dividends, making a dividend cut less likely.
Wheaton sprung a surprise for shareholders in 2017 when it updated its dividend policy to a quarterly dividend equal to 30% of its average cash from operations for the trailing four quarters from the earlier 20%. The move was backed by strong cash flows that Wheaton generated last year -- a trend that'll continue, thanks to the optionality that several of the company's agreements have to offer, as my colleague Matthew DiLallo explains here.
At 1.7%, Wheaton is already offering a higher yield than Royal Gold and Franco-Nevada, and I see strong chances of its dividends rising further in the coming years.
While gold prices have been volatile but northward in the past year or so, industry experts foresee strong chances of silver prices making a move now. As one of the most balanced gold-and-silver companies, Wheaton Precious Metals could be a major beneficiary.
Even otherwise, I see strong potential in Wheaton to strengthen its financials and boost cash flows into the future for the reasons explained above. Wheaton's free cash flows in 2017 were, in fact, the highest in several years, which tells me the stock could be a winner five years down the line.