Royalty Knockout #11
First of the big boys
Wheaton Precious Metals (WPM)
A market capitalization of $60 billion, trading at 30 times earnings, with little debt. As with the other large royalty firms, there’s visibility in their earnings. No single property substantially moves the needle on their future valuation mainly because the stock is fully valued and their largest properties are already generating the bulk of their earnings.
In WPM’s case, there are a few large pieces. The Salobo gold stream, 50 percent of gold from Brazil’s largest copper mine, is their main earnings drive. Next is the Antamina stream purchased for $4.3 billion, which upped their stream to two-thirds of the mine’s silver output. Peñasquito is the third largest, but declining. By 2030, the current mix of assets should see Salobo and Antamina generating close to half of WPM’s cash flow.
Most of the streaming deals give linear exposure to precious metals prices. That’s not to say optionality didn’t exist before, but it is in hindsight now that WPM sits 13x above where it was a decade earlier.
In terms of gold and silver, a gold-silver ratio of 50 is around the 50/50 point for WPM’s gold and silver mix. Below 50, silver starts driving earnings. Above 50, gold is the driver. The best case for WPM: a falling gold-silver ratio because silver is leading the precious metals bull market.
A new chart view: the 10-year CAGR.
WPM struggled through the long bear market in precious metals. The current 10-year return bests the S&P 500 Index, but this outperformance was generated entirely in the past 18 months and from the favorable comparison periods around the low in 2016.
The entry price is the most important factor in determining the success of an investment that the investor controls. With WPM, buying lows and during long consolidation phases paid off. The current price level is not one of those times.
For this series, $6000 gold and $10 copper were assumptions. With silver now a major component, $150 or a ratio of 40 with gold, the peak of most precious metals bull markets, is optimistic, but fair. At these prices, WPM pencils in at a comfortable double, with a possible stretch triple if it turns into a mania. My sense is prices would have to go beyond those targets for a triple in the stock price.
Knockout vs Ligand Pharmaceuticals (LGND)
Ligand was covered in the first knockout.
Neither is cheap; both trade around 30 times earnings. Leaving aside speculation on the direction of precious metals prices, which we’re assuming will do well for the purposes of comparing stocks in this series, Ligand also has similar upside prospects from its pharma royalty portfolio. Ligand’s portfolio is far more diversified though, whereas Wheaton is tied to metals prices.
This did not factor into deciding the winner, but Ligand would be a much better entry around $220 per share and there’s a clean chart scenario where it tests the base created since 2018. A cup on the base could extend as far as $190 and leave the bullish setup intact. Conversely, there’s no clear stop point for WPM if the bear move resumes, at least not until way down around $50 per share. It would also be a better entry at lower prices, but from here I suspect WPM has more downside if down is the direction.
On the upside, if Ligand isn’t a double-top, then it has a large base. What could drive it to new highs? There’s quite a bit of upside if it broke out however. Whereas Wheaton at new highs would also be bullish with a bull flag completing and a new rally in progress, but without the base right below it.
Ligand wins by degrees here. Neither of these stocks will survive encounters with some of the other stocks in the knockout. Since it’s by degrees, what’s a scenario where WPM wins? Stagflation. Financial assets collapse in value if rates take off, but precious metals would be expected to outrun a rising discount rate.
The assumption here is also holding for years to capture upside. If you force me to make a trade today that will close in days to weeks, I might try a short on Ligand.
WPM sporting a potential bull flag.
Whereas LGND has a bearish looking pattern that will complete below $280 per share.
