Up 23% This Year, Will Wheaton Precious Metals Stock Continue To See Gains?

Wheaton Precious Metals stock has fared reasonably well this year, rising by about 23% year-to-date, slightly ahead of the S&P 500. There have been a couple of factors helping Wheaton. Firstly, prices for gold and silver have been rising this year, driven by easing inflation, dovish remarks by the Fed, and geopolitical concerns given the ongoing wars between Russia – Ukraine and Israel-Hamas. Moreover, Wheaton has also moved to add new streams and royalties in a move that could bolster production and revenues in the coming years. The recently added assets include platinum-group metals mine in South Africa, a polymetallic project in Canada, and a gold project in Ireland, which are together expected to add 30,000 gold equivalent ounces of production per annum over the next decade.

Wheaton’s Q3 results were also reasonably strong. Adjusted earnings stood at $0.27 per share, coming in slightly ahead of estimates, while revenue grew by about 2% year-over-year to $223 million. The company was impacted by weaker sales from its Penasquito silver stream (volumes down 70% versus last year) amid a strike that began in June (and has now been settled), although this was offset by slightly higher price realizations versus last year and stronger performance of the gold stream at Salobo and gold and silver streams at Constancia. Overall average realized gold price for the quarter came in at $1,944 per ounce, up 12.5% versus last year, while its average realized silver price came in at $23.73, up 13% versus last year.

Now looking at a slightly longer period, WPM stock has shown strong gains of 25% from levels of $40 in early January 2021 to around $50 now, vs. an increase of about 20% for the S&P 500 over this roughly 3-year period. However, the increase in WPM stock has been far from consistent. Returns for the stock were 3% in 2021, -9% in 2022, and 23% in 2023. In comparison, returns for the S&P 500 have been 27% in 2021, -19% in 2022, and 19% in 2023 – indicating that WPM underperformed the S&P in 2021. In fact, consistently beating the S&P 500 – in good times and bad – has been difficult over recent years for individual stocks; for heavyweights in the Materials sector including LIN, RIO, and SHW, and even for the megacap stars GOOG, TSLA, and MSFT.

In contrast, the Trefis High Quality Portfolio, with a collection of 30 stocks, has outperformed the S&P 500 each year over the same period. Why is that? As a group, HQ Portfolio stocks provided better returns with less risk versus the benchmark index; less of a roller-coaster ride as evident in HQ Portfolio performance metrics. Given the current uncertain macroeconomic environment with high oil prices and elevated interest rates, could WPM face a similar situation as it did in 2021 and underperform the S&P over the next 12 months – or will it see a strong jump?

Despite recent production issues, Wheaton’s overall production volumes are also set to pick up in the long run, with the company guiding average production of all metals (gold, silver, palladium, and cobalt) could stand at over 900,000 GEOs by 2028. This is likely to be driven by anticipated production growth from Salobo, Stillwater, and other mines as well as the addition of new streams. This compares to just 638,113 gold-equivalent ounces of total production in 2022. Price realizations for precious metals could also move higher, as easing inflation is making investors speculate on a potential cut in interest rates going forward, given a mixed economy. This could make non-yielding assets such as precious metals a bit more appealing. That being said, we think that WPM’s valuation is a bit rich, trading at over 38x projected 2024 earnings. We estimate Wheaton Precious Metals valuation at $44 per share, slightly below the current market price.