Wheaton Precious Metals (WPM) currently has a market cap of around $21 billion. By market cap, it is the second-largest publicly traded royalty streaming company behind Franco-Nevada (FNV) which currently has about a $28 billion market cap.

In 2019, Wheaton had $861 million in revenue, while Franco-Nevada had $844 million. Both companies generate very similar revenues, while Franco-Nevada is much more richly valued. This must mean that Franco-Nevada is potentially growing faster.

I recently projected Franco-Nevada’s 2020 revenue using its 2020 guidance, and I’m going to do a similar exercise here with Wheaton to determine if Franco-Nevada’s growth warrants the sizable valuation difference between the two companies.

In the process, I will also gain a higher-level perspective on Wheaton, which I will also present.

Historical Performance

For reference, Wheaton Precious Metals has had some excellent performance over multiple time frames. It has perhaps lagged over the 10-year time frame relative to its peers but has done very well comparatively in the 1 to 5-year time frames.

Source: Large-Cap Royalty Streaming Companies’ Historical Returns 2020

Breakdown Of Streaming Revenue Source

Source: Wheaton Precious Metals FY2019 Financial Statements

Jurisdictions By % Revenue

Wheaton Precious Metals received the majority of its revenues from Brazil in 2019.

Source: Wheaton Precious Metals FY2019 Financial Statements

Leadership

Wheaton Precious Metals is led by its CEO Randy Smallwood. Mr. Smallwood has been leading the company as CEO since April 2011 and has been with the company since 2001 when he started as an exploration geologist.

Mr. Smallwood was hired very near the peak of the gold price in 2011. Thus, ever since being hired, he has faced a decreasing gold price environment. It is difficult to judge his performance thus far based on that.

That said, today’s Wheaton share price is not much higher than it was in 2011, with gold prices approaching all-time highs. This might say that not much value has been added since Mr. Smallwood was hired. I think the next few years will be very informative.

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2020 Projected Revenue

Wheaton, like other companies, withdrew its 2020 production guidance as of its Q1 report. Therefore, I’m going to rely on the lower end of the range of its 2020 guidance at year-end to project revenues.

Q1 Results

Through Q1, they generated revenue of $254.8 million at an average gold price of $1,589/ounce. They sold 100,000 ounces of gold, nearly 5 million ounces of silver, and almost 5,000 ounces of palladium. Wheaton’s gold equivalent ounces of production were 182,240 ounces. That means the average price for a gold equivalent ounce sold was ~$1,398/ounce.

Q2 Through Q4 Projections

Their full-year 2020 guidance at the end of 2019 was 685,000 to 725,000 gold equivalent ounces. Since COVID-19 has undoubtedly been a factor, I’m going to estimate that they come close to the lower end of their range by producing 165,000 GEOs each quarter for the remainder of the year, which totals 495,000 ounces. This adds up to a total of 677,240 gold equivalent ounces.

Source: Created by the author using estimates and FY2019 and Q1 WPM financials

Combined Q1 Actuals Plus Q2 Through Q4 Estimated Revenue

For the chart below, I used an estimated GEO price per ounce of about $1,500 based on what I believe Q2 will be. If gold prices rise, then this will be too conservative for a full year number and vice versa.

Source: Created by the author using estimates and FY2019 and Q1 WPM financials

Purpose Of This Exercise

There’s a lot of time left in the year, and there’s still a lot could go wrong related to COVID-19 that could cause these estimates to be wildly wrong. However, the purpose of this exercise isn’t to try to predict the future perfectly. The purpose, from my perspective, is to understand why there’s such a significant difference in valuation between Wheaton and Franco-Nevada given revenue is nearly the same. As long as my projections between the two are somewhat consistent, I hope to be able to tell if future (2020) revenue is a factor.

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Compared To Franco-Nevada

When I compare to Franco-Nevada’s estimates that I created based on their 2020 guidance, it seems that Franco-Nevada’s estimates are very similar and likely even a bit lower. However, I didn’t factor in FNV’s energy revenues (estimated to be around $100 million in 2020) into the below chart, which would bring it closer to Wheaton’s revenue projections.

So the question remains why Franco-Nevada is valued as richly as it is.

Source: Created by the author in the last Franco-Nevada article using assumptions and Franco-Nevada financials.

Other Possible Explanations

Balance Sheet – The two companies have very similar balance sheets,

Cash Flow Statement – The two companies generate very similar cash flows from operations and are both reinvesting cash flow into capital investments for the future.

Income Statement – As we’ve already talked about, revenue was very similar and projected to continue to be so in 2020. Wheaton Precious Metals did, however, take a sizeable impairment in 2019 on one of its royalty streams. It wasn’t near large enough to justify a $7 billion valuation difference, in my opinion.

Conclusion

Wheaton Precious Metals has performed well in the past. It has had stronger performance relative to its peers over the shorter time frames.

Because I recently wrote an article about Franco-Nevada, and the companies are at very similar sizes when comparing their financial statements, I thought it would be interesting to compare the two companies. What I found was that there was very little, if anything, that justifies that Franco-Nevada is valued $7 billion higher in market cap.

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The only thing I can think of is that Wheaton has 42% of its revenue coming from Brazil. In contrast, Franco-Nevada’s revenues are more evenly spread around with a more significant percentage coming from the United States and Canada.

That said, Wheaton doesn’t have any oil and gas assets and is purely focused on gold and silver, which at this moment, should be an advantage to Wheaton.

To conclude, I think Wheaton is undervalued relative to Franco-Nevada. I like both of them, but if you had to pick one, at this moment, I would favor Wheaton Precious Metals. If I’m wrong, then I would expect Franco-Nevada to outpace Wheaton Precious Metals in the coming years in terms of its financial results.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: The author of this article is not a Registered Investment Advisor or Financial Planner. This writing is for informational purposes only. It does not constitute an offer to sell, a solicitation to buy, or a recommendation regarding any securities transaction. The information contained in this writing should not be construed as financial or investment advice on any subject matter. The author of this article expressly disclaims all liability in respect to actions taken based on any or all of the information on this writing.



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