Wheaton revisited
"Market
Trends"
Larry MacDonald
February
16, 2004
Last week's
column on Wheaton River Minerals Ltd. deserves a follow-up given
the unusual number of responses from readers and the disagreement
many voiced with an "overly negative portrayal" of
the company. In the interests of presenting both sides of the
story, a summary of the main points follows below.
Fundamentals
Wheaton's fundamentals
are among the strongest within the group of mid-tier gold miners.
While many of its peers reported losses in the third quarter,
the company was one of the few that was profitable. And it is
on target to report a profitable fourth quarter.
Earnings growth
is outpacing issuance of equity. Earnings per share has gone
from a loss of $0.45 (CAD) in 2001 to a profit of $0.04 (U.S.)
in 2002 to a projected profit of $0.12 (U.S.) in 2003 (results
to be released Apr. 7, 2004).
Wheaton's cash
cost per ounce of gold is under $100 (U.S.), after allowing for
copper and silver production. Reserve growth has been among the
highest in the industry, and an 80% increase in production is
scheduled over the next two years. Earnings from copper (40%)
and silver (10%) production provide diversification.
Valuation
Wheaton's forward
price-to-earnings ratio, based on projected earnings per share
of $0.16 to $0.22 for 2004, is in the 12 to 17 range. By comparison,
the forward price-to-earnings ratio for the sector is greater
than 40. The company's forward price-to-cash-flow ratio, based
on cash flow per share of $0.32 to $0.36 projected for 2004,
is in the 7 to 8 range " compared to the sector average
over 25.
Institutional
ownership
Fidelity Investments
owns 72 million shares across several mutual funds, over 10%
of the amount outstanding. Wheaton is the second biggest holding
in U.S. Global Investors Gold Shares. Three other U.S. gold funds
have the company in their top five holdings.
Short selling
A rise in short
selling is not unusual given the increase in the number of shares
from 190 million to 566 million within the past year or so. Furthermore,
it is "highly possible, if not probable" (as one reader
wrote) that some institutions were locking in profits on their
warrant holdings by shorting the shares.
Published TSX
short-selling data aren't disaggregated enough to confirm this
possibility, but one reader indicated that the surge in short
selling near the end of 2003 signaled as much. Such trading activity
was consistent with institutions boosting their year-end cash
position (for window-dressing purposes) while simultaneously
deferring taxes for a year.
Even if the
short position mostly reflected naked short selling, said others,
it would be a positive sign as it represents "pent-up demand."
The shares shorted have to be bought back at some point, and
given Wheaton's revenues and earnings growth, the naked shorts
would likely get squeezed into a short-covering rally.
Insider
selling
Salaries paid
to executives of junior companies are not high and insider sales
are a way to supplement income. Moreover, the recent insider
selling in the case of Wheaton was due to the cashing in of options
that were scheduled to expire. One insider did make a major disposition,
but he was an executive who was terminated.
Accounting
Even if one-time
factors such as currency fluctuations are stripped out, Wheaton's
earnings far surpass those of its peer group. Moreover, there
were deferred earnings of $5.6 million reported in the last set
of financial statements, which would have raised reported net
earnings.
Management
Ian Telfer,
Wheaton's chairman and CEO, has many fans among Wheaton shareholders.
The general sentiment is that his performance has been stellar.
Said one: the transformation of Wheaton River has been "absolutely
stunning," considering the company's losses and tapped-out
reserves when he took over in 2001.
Gold fundamentals
The price of
gold (and copper and silver) is likely to remain strong. Among
other factors, supply/demand imbalances are supportive.
Wrap-up
As best as
I could determine, those were the main points received from readers
who took issue with the depiction of the company. I wish to thank
all who took the time to write in. Feedback " good, bad,
and ugly " is always a chance to learn and get better.
Was the article
overly negative? It was in that not all the aspects of the case
were covered (e.g., insider selling reflecting the cashing in
of options near expiration). The lesson for me, which I will
be practicing henceforward, is to make more certain that all
the angles are dealt with.
Is Wheaton
a good investment? As suggested in the original article, I think
it depends on one's risk tolerance. Personally, I get uneasy
when a company is built up quickly through acquisitions and joint
ventures. I believe the potential for unforeseen events, such
as production delays, is higher.
I may end up
watching a shooting star from the sidelines. But the greater
satisfaction for me will be in adhering to a disciplined investment
approach, one that calls for staying within self-prescribed risk
thresholds.
By the way,
I am not a short seller of Wheaton shares (or in cahoots with
the short sellers). Nor would I recommend short selling to the
average investor " it is hard to do and comes with the potential
for greater losses.
Larry MacDonald
Feb. 16, 2004
Larry MacDonald
is editor of Investment Ideas newsletter and author of Nortel
Networks: How Innovation and Vision Created a Network Giant and
The Bombardier Story: Planes, Trains and Snowmobiles. He can
be reached at mccolumn@yahoo.com.
________________
321gold Inc Miami USA
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