Wheaton Withdraws '20 Production Guidance on Coronavirus Scare
Wheaton Precious Metals Corp. WPM has withdrawn the production guidance for the current year due to temporary ramp down of operations at some of its partner mines amid coronavirus pandemic.
During the fourth-quarter 2019 earnings conference call, the company projected gold production of 390,000 - 410,000 ounces, silver between 22 million ounces and 23.5 million ounces, and palladium in the band of 23,000-24,500 ounces.
Impact of Sliding Commodity Prices
The outbreak has dealt a severe blow to both commodity and stock markets. Given the current market conditions, commodity-price uncertainty underscores Wheaton’s low-risk, high-margin nature of business. The company’s 88% of production comes from lower cost mines with higher margins, and hence, at the current lower base metal prices, the company’s partner operations are well poised to run with low commodity-price cycles.
However, the company’s revenues are particularly sensitive to changes in the prices of precious metals and cobalt, as it derives all of its revenues from these metals. Thus, decline in commodity prices is likely to erode Wheaton’s revenues.
Silver prices have slid 22% so far this year, primarily due to the coronavirus pandemic, which has disrupted global economic activity, in turn weakening consumption of industrial raw materials. The situation has only been aggravated by the fact that silver is already in oversupply. Palladium prices have also dipped on worries of a further supply shortage in 2020 amid the rapidly-rising demand from automakers.
Strong Liquidity Position a Boon
Wheaton continues to generate strong free cash flow with current debt levels. The company has $104 million cash in hand, with available credit capacity of more than $1.1 billion, under the revolving facility of $2 billion as of Dec 31, 2019. This bodes well for the company to fund outstanding commitments and known contingencies, including dividends, while also providing flexibility to acquire additional accretive precious metal stream interests. For 2020, Wheaton’s board of directors has hiked the quarterly dividend by 11% year over year to 10 cents per share.
Mining Operations on Suspension
Wheaton has precious metal (gold, silver and palladium) purchase agreement with several other mining companies. These companies have halted their mining operations in an attempt to contain spread of the coronavirus outbreak. Metal producers worldwide are temporarily halting their operations and suspending production, as several governments are imposing restrictions to combat the spread of the virus. These companies are also cutting non-essential travel of office employees to protect them. Many countries have imposed travel and border restrictions, and other measures, such as constrained movement and quarantines to limit the spread.
Wheaton's partner operations are currently running with the exception of Voisey's Bay, Constancia, Yauliyacu, and Peñasquito mines. Wheaton has silver purchase agreement with Constancia, Yauliyacu, and Peñasquito mines and cobalt purchase agreement with Voisey's Bay mine.
Vale S.A VALE announced that it is placing its Voisey's Bay mining operation in Canada on care and maintenance for a period of four weeks to ensure safety of its employees and local communities. Wheaton expects to receive cobalt deliveries from Voisey's Bay mine from Jan 1, 2021. Consequently, the company does not expect any material impact on future deliveries from the temporary shutdown.
Hudbay Minerals Inc. HBM also temporarily ramped down its operations at the Constancia mine due to limited availability of certain critical mining supplies as the Peruvian government imposed restrictions on account of the coronavirus outbreak. The Yauliyacu mine has also temporarily halted mining operations due to supply-chain disruptions in Peru.
Apart from this, the Mexican government has instructed all non-essential businesses to temporarily shut down their operations until Apr 30. As a result, Newmont Corporation NEM intends to ramp down operations at the Peñasquito mine. Wheaton has precious metal purchase agreements with other Mexican mining operations, like San Dimas and Los Filos mines.
Measures to Combat the Crisis
Wheaton is focused on health safety of its employees amid the coronavirus crisis. The pandemic has become a major threat to public health claiming thousands of lives. The company is taking precautionary measures and has closed its offices, while successfully transitioning to telecommuting for all of its employees. The company has provided work-from-home facility to its employees, which resulted in a seamless transition and uninterrupted flow of business. Given the rapidly-evolving situation, the company is also closely monitoring its partner operations and providing possible support. In fact, Wheaton is well poised to stand amid current choppy market conditions with strong financial flexibility.
The company carries a Zacks Rank #3 (Hold), at present. The company’s shares have gained 16.8% over the past year, as against the industry’s decline of 31.6%.You can seethe complete list of today’s Zacks #1 Rank stocks here.
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