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July 18, 2024
PI Global Investments
Precious Metals

For Wheaton CEO, Bitcoin cannot be the ‘new gold’

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Randy Smallwood, chief executive officer of Wheaton Precious Metals and former chair of the World Gold Council, says the council is currently working on a form of digital gold that banks can use among themselves.SUPPLIED

Among the beneficiaries of a rising gold price – which is off to a strong start in 2024, hitting a record high earlier this month – is Wheaton Precious Metals Corp. WPM-T.

The company has a seasoned management team, strong cash flow generation, a healthy balance sheet, predictable costs, a rising dividend and robust growth anticipated. In a news release issued last month, management targets production growth of roughly 40 per cent over the next five years.

The Globe and Mail spoke with Wheaton’s chief executive officer, Randy Smallwood, to gain his insights on the company’s successful business model, his precious metals outlook along with his thoughts on Bitcoin.

Between 2020 and 2023, you were the chairman of the World Gold Council. What are your expectations for the price of gold?

One of the most exciting things that we’re working on at the World Gold Council – I’m still very active there – is the concept of digital gold.

We have record gold prices, and yet gold ETFs are dropping off and the equities aren’t getting very much support. That tells me that the reason we’re seeing record prices in gold is because central banks around the world are buying it at record levels. Central banks don’t buy ETFs. Central banks don’t invest in mining companies.

Even though we’re at record prices, there still hasn’t been a retail pick up in that demand. What I think we have to do and what the World Gold Council is working on is a version of digital gold guaranteed by the World Gold Council and other groups backed by physical gold that’s stored in a vault.

There are already several banks that do this HSBC and UBS both have internal digital gold systems. We’re working with them and other banks, including here in Canada, the National Bank of Canada NA-T, to bring in a system that the banks can use among themselves – not just internally, because we think that if we can get institutions to embrace digital gold, then it’ll spill out into the retail space. We think it’s going to revolutionize the way people would own gold.

What’s the timing on this endeavour?

Our hope is to have something out by the end of this year. We’re making good progress.

Let’s shift to your other major commodity exposure: silver. In 2024, the Silver Institute anticipates global silver demand will increase 1 per cent, while total global silver supply is expected to grow 3 per cent. It seems like a tough environment for silver. What’s your assessment on the price of silver?

I think demand is going to climb higher than 1 per cent. Silver conducts electricity better than any other commodity out there. I think demand for increased mobility, whether it be electric vehicles or electric devices, with just a little bit of silver it makes a big difference in terms of how efficiently energy is moved.

The problem is there are no central banks buying silver. That’s what’s missing in the equation.

I think it does have good longer-term potential. Silver always lags but then outperforms, if you go back and look at the last 50, 60 years of trading history, every time gold has had a surge, silver waits and then shoots and outperforms.

Is 2024 the year for silver then, or is it a few more years away?

I think it’s a few more years away because I think that we’re going to start seeing retail investors coming into the gold space in 2025, as we see challenges in terms of managing other currencies and commodities around the world.

Approximately 60 per cent of your revenue is attributed to gold, roughly 36 per cent to silver. How do you see that revenue mix five years from now?

We’re not seeing a lot of silver opportunities, so I do think that gold is going to continue to dominate the space. I would say that five years from now, we’ll probably be about 65 or 70-per-cent gold. I say that, but we do have some projects in our portfolio that will produce a lot of silver, but they’re optional.

You’re not going to diversify down the road? It will always be precious metals?

We think that’s what we’re providing to our shareholders is a way to invest into precious metals.

Many investors view Bitcoin as the new gold – a storage of value and growth. How do you view Bitcoin?

Bitcoin is a vacuum, there’s nothing real behind it. At least with gold, you’ve got something solid, of substance behind it. You can’t copy gold, and that’s why gold is so attractive. It will withstand time. Bitcoin will be replaced by another cryptocurrency, and that cryptocurrency will be replaced by another cryptocurrency because they’re just manufactured, you can create them.

In 2023, you entered into agreements for eight assets. Do you try to average a certain number a year?

No, but that was the busiest we’ve ever been. We’ve never done that many transactions in one year.

Why do you think there were so many opportunities?

People are realizing that streaming is a very attractive source of capital. Streaming is an investment into an asset based on the value of the contained metal, not on the value of your shares.

If you’re trying to build an asset and you need capital from outside, if you issue shares, you’re dramatically diluting your existing shares. Whereas if you sell off metal, at least you’re getting one times net asset value for that metal. It’s a very attractive source of capital.

Every starving company out there, especially the single asset development companies that don’t have access to internal operating cash flow, they’re all very interested in streaming as a source of capital.

What are your acquisition criteria in terms of size, geography, commodity exposure, multi-asset versus single-asset mine, cost profile. What do you focus on?

It’s the cost profile, it’s the margins of the operator that are important to us – that’s the first test that we have – are you a first quartile or a second quartile asset?

If it’s in the first quartile, we’ll knock down our discount rate, which means we’re willing to pay more. If it’s a second quartile asset, we’re still willing to pay a bit more. If it’s third quartile, then we reduce the amount we’re willing to pay. And if it’s a fourth quartile asset, a lot of times we won’t even bid on the asset itself. So cost profile is one of the most important aspects.

The other thing that’s really important is the community support. Our due diligence teams now consist of a geologist, an engineer, a metallurgist – and a social scientist. That’s new, that’s only in the last four or five years that we’ve actually had a dedicated person that comes along on all due diligence trips to sit with community leaders and representatives.

You have a team of employees including geologists and metallurgists who study the projects and potential acquisition opportunities in order to determine the company’s production profile and the economics of a project. Do you have an AI specialist, or would you have like to add one?

We’re definitely exploring it. I’m sure that it will ultimately help us make better decisions. The risk is having too much faith in it. Uncontrolled AI can be dangerous. The concern with AI is that you’ve got to make sure that you have a temper of control over top of it.

What differentiates you from your streaming peers?

We’re essentially 100-per-cent precious metals. We created the streaming model back in 2004, 20 years ago, we were the first streaming company, prior to that, it was just royalties. Royalties don’t have that same sense of partnership. I was working at Goldcorp at the time. We created Silver Wheaton originally out of Goldcorp, we took our non-core by-product silver production and stuck it into this entity, which then blossomed into a huge success. Ultimately, it delivered $3-billion in value back to Goldcorp.

All of our revenue is streams and streams create better value, it’s based on stronger partnerships. Back in 2013, we started co-funding community initiatives around our mines to help. We co-contribute with our operating partners to help build better programs, health programs, education.

So what differentiates us? We’re much more focused on the partnership. We have this overlying mantra in our company, the stronger our partners are, the stronger we are. We do everything we can to help our partners be strong.

If you look at the eight transactions that we did last year, six of them were with companies that we’ve dealt with in the past. They like working with us. Five of them weren’t competitive, they didn’t even run an auction process. That’s what you want – to deliver an experience where people want to work with you.

What catalysts may lift the share price in 2024?

I think we’ve got a good chance of exceeding our production guidance because if Salobo [project in Brazil] continues to outperform the way it did last year, we should have a nice bump up and we’re starting this huge growth profile. The next five years are going to be incredibly exciting as we take Wheaton to a level that’s never been seen.

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