GMS: Risk-averse Wheaton eyes Australia as China buoys gold price

Resurgent Chinese demand can overcome a potential recession while the gold price remains strong and Wheaton Precious Metals (TSX: WPM; NYSE: WPM) expands its production by 40% over four years, according to company head Randy Smallwood.  

The streaming company remains focused on long-life mines with gold and silver byproducts in stable jurisdictions and may step outside its Americas focus to enter Australia, CEO Smallwood told The Northern Miner’s first Global Mining Symposium of 2023 on Wednesday.  

“The world is within our full reach, within our full spectrum, but we are very, very sensitive to political risks,” Smallwood said by video from Vancouver where Wheaton is based. “Australia is a unique one, we spent a lot of time looking down there and I’m confident that we will eventually latch onto something, but it’s a pretty competitive space.” 

Wheaton, which helped develop the streaming model over the past two decades among rivals such as Franco-Nevada (TSX: FNV; NYSE: FNV), Royal Gold (NASDAQ: RGLD) and Osisko Gold Royalties (TSX: OR; NYSE: OR), is targeting average annual gold-equivalent output of 810,000 oz. over the next five years as it earns from 21 streams and more than a dozen projects.  

Smallwood welcomes the entry of more private equity into the industry to help fund projects when sole-asset listed companies are trading at discounts to their net asset values and want to avoid diluting their stock by issuing more shares to raise money. Streaming can’t fill the entire gap, he said.  

“We have seen a lot of that private equity also step into the streaming space and create some competitors,” he said. “And there’s no doubt we’ve got a pretty good business model as long as we’re smart in terms of which assets we invest into, and that is one of the key aspects of being successful in this business.”   

Output rebound 

Wheaton this week reported gold production of 638,000 oz. last year that fell short of the 640,000-680,000 oz. estimated in August because of challenges at Vale’s (NYSE: VALE) Salobo copper mine in Brazil and Sibanye-Stillwater’s (NYSE: SBSW; JSE: SSW) Stillwater platinum mine in Montana. But Smallwood foresees a rebound this year.  

“We do expect not only an improvement from the preventative maintenance side to start getting Salobo back up to where it was, but we’re also looking forward to them ramping up Salobo Three, which is a 50% increase in throughput capacity through the course of this year.”  

The stream from Hudbay Minerals’ (TSX, NYSE: HBM) Constancia copper mine in Peru was affected by a fuel shortage in December amid anti-government protests that spread to some mining areas while Glencore’s (LSE: GLEN) Antamina copper mine also suffered weaker-than-expected output. The unrest, prompted by the ouster of former president Pedro Castillo, will subside after an election that’s been promised for next year, the CEO said.  

“We’ll see some stability after that,” Smallwood said. “We’ve been fortunate with the assets that we’ve got down there, Antamina and Constancia, both very, very good assets run very well and to be honest, have avoided all the challenges that we’ve seen in so many other assets in Peru and so kudos to our partners.” 

The wider geopolitical scene, with the stalemated Russia-Ukraine war and U.S.-China tensions over Taiwan, saw increases in central bank purchases of gold last year tracked by the World Gold Council, a marketing body representing 32 companies accounting for 60% of global output. Smallwood is council chairman.  

Dollar weaponization

“The one thing that came out of that, that really should be recognized by the mining industry and by the gold industry specifically, was the weaponization of the U.S. dollar when we saw the SWIFT system get handicapped and the U.S. dollars in Russia’s central bank reserves being limited,” he said. “That woke up a lot of other central banks around the world.”  

The council, which has introduced blockchain tracing to verify gold bars’ integrity, is working on a plan to trade physical gold digitally, perhaps by year’s end, Smallwood said.  

Continuing on the geopolitical front, he said the industry and others will have to pay attention to commodity needs from the other large autocratic regime, in Beijing, as it opens up this year following pandemic restrictions while the green energy transition gathers pace. 

“You can’t ignore China, the amount of demand that comes out of China, you know, it just has such an impact,” Smallwood said. “The other driving force, of course, is that they continue to push towards electrification and that is going to have a big impact in the mining space.” 

The strongest U.S. dollar in nearly two months due to a persistently hawkish Federal Reserve stance on strong inflation and jobless numbers after declines in the greenback last year shows some headwinds for the gold price. Yet, rising debt levels and interest rates bode well for the yellow metal’s performance, Smallwood said.  

“Gold has stood up very well in the face of that very strong U.S. dollar,” he said. “The level of debt that we see around the world, rising interest rates just makes that more and more expensive, makes it more and more challenging for governments to actually get on top of some sort of stable balance sheet or fiscal environment, and so longer term, it looks more promising than ever for gold.”