Despite a second quarter in which ounces produced but not yet delivered to Wheaton Precious Metals Corp (NYSE:WPM) increased, earnings from operations were just US$2.8m (or 3.2%) below our earlier published estimate of US$85.7m. In addition, management formally changed its dividend policy, from 20% of average cash generated by operating activities to 30%, which thus allowed it to declare a relatively generous third quarter dividend of 10c/share compared with our prior expectation of 6c.
Silver sales exceeded gold sales for the first time since Q316 (in the ratio 54:46). Finally, WPM also announced that it had entered into an “early deposit” agreement whereby it will advance US$65m to Desert Star in return for the right to purchase 100% of the silver and gold production from Kutcho in British Columbia at 20% of the spot price of the metals over the life of the mine.
San Dimas reaction excessive
Notwithstanding solid quarterly results, WPM’s shares fell C$2.11 in the three trading days following the announcement of its results, which we attribute to the tribulations of Primero, which operates the San Dimas project and over which WPM has a streaming agreement. San Dimas will account for c 8.5% of WPM’s silver equivalent production in FY17 and approximately 17.5% of EPS.
We value WPM’s San Dimas stream at US$959.9m, or US$2.17 per WPM share, on the basis of its long-term precious metals price assumptions or US$684.2m, or US$1.55/share, on the basis of the current spot price of silver. Including the share price declines after WPM’s Q316 results in November, the stock market thus appears to be discounting the loss of substantially all the San Dimas stream to WPM despite the latter having security over the asset, which seems excessive.
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