Wheaton Precious Metals Stock Faces a Big Red Flag

Wheaton Precious Metals (WPM.TO) has made an impressive comeback in the past month with the stock rising more than 10%. The stock’s turnaround has been triggered by Wheaton’s impressive first-quarter results that were released at the beginning of May.

The company had managed to beat Wall Street’s top and bottom line estimates quite comfortably, and there’s a good chance that it can sustain its momentum in the coming months. Let’s take a closer look at what’s working for Wheaton Precious Metals.

Wheaton is now back on track

Wheaton Precious Metals had closed 2018 on the back foot as its revenue and earnings had dropped substantially on account of lower production and sales of precious metals such as gold and silver. That’s why the company’s first-quarter 2018 results will seem like a whiff of fresh air.

Wheaton’s gold production increased impressively during the quarter. It delivered 93,585 ounces of gold during the quarter, an increase of 22% over the prior-year period. This was enough to offset the 1.7% drop in the company’s average sales price per ounce of gold during the quarter.

Thanks to the higher gold production, Wheaton’s gold ounces sold shot up 64% year over year to 115,020 ounces. This was enough to offset the company’s weak silver production and sales profile.

Wheaton’s silver production fell 24% year over year on account of the termination of the San Dimas silver streaming agreement that came into effect on May 2018. The increase in gold production was a result of the commencement of the San Dimas gold streaming agreement that began in May last year.

So, Wheaton’s impressive management of its streaming agreements allowed it to deliver a nice increase in its gold production and sales. In fact, the increase in gold sales was strong enough to boost Wheaton’s revenue by 13% during the quarter as compared to the prior-year period.

Costs are ballooning

The increase in Wheaton’s gold sales was accompanied by an increase in costs. The company’s average cash cost in the first quarter of 2019 came in at $417 per ounce of gold sold, up from $399 in the year-ago period. The average cash cost of silver increased to $4.64 per ounce from $4.49 per ounce in the prior-year period.

Due to the increased costs, Wheaton’s cash operating margin shrunk during the quarter. More specifically, the cash operating margin of gold fell 4% and that of silver was down 10% year over year. The lower margins also led to a reduction in the company’s bottom line.

Wheaton delivered adjusted net earnings of $57 million during the quarter, down 19% from the prior-year period’s figure of $70 million. Also, the company’s cash flow from operations shrunk 6% year over year to $118 million.

So, despite an increase in its top line, Wheaton’s weak cost profile turned out to be a sore point for the company during the quarter. This is something that investors need to keep in mind, otherwise Wheaton’s bottom line will remain under pressure in the coming months and derail the company’s stock price momentum.

The opinions provided in this article are those of the author and do not constitute investment advice. Readers should assume that the author and/or employees of Capital 10X hold positions in the company or companies mentioned in the article. For more information, please see our Content Disclaimer.

Harsh Singh Chauhan
Harsh Singh Chauhan has a wealth of experience evaluating publicly-traded companies across several verticals, including technology, oil and gas, retail, and consumer goods. His financial writing has been published across platforms such as The Motley Fool, TheStreet, and Seeking Alpha. Harsh's philosophy is to find great businesses for the long run based on company fundamentals and industry prospects.

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