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Wheaton revisited"Market
Trends" 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 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. ________________ |
