A Great Model, But You’re Paying For It

Don’t forget about valuation when considering this group of mining financiers.

| More on:

Silver Wheaton (TSX:SLW,NYSE:SLW) released quarterly and 2012 year-end earnings last week and the numbers appear solid.  Compared to 2011, several indicators demonstrated nice growth including production, earnings, and operating cash flow.  In addition, recently announced streaming agreements with Hudbay Minerals and Vale help to ensure a bright future for the company, barring a crash in commodity prices.

Great company, bad stock?

Silver Wheaton is part of a collection of companies with business models oriented to providing an alternative source of financing to the mining industry.  Though not all of these companies follow the same “streaming” model that SLW uses, the entire group is well positioned to benefit from the current drought in traditional debt and equity issuance facing the industry.  The problem is, investors have to pay up if they want to invest in the haves vs. the have-nots of the mining world.

The table below indicates that this collection of financiers are rather expensive relative to the rest of S&P/TSX Metals and Mining Index.





Earnings Yield

Silver Wheaton   (TSX:SLW,NYSE:SLW)















Franco Nevada   (TSX:FNV,NYSE:FNV)










TSX Metals + Mining Index





Source:  Capital IQ

Given the rather paltry ROE and earnings yield provided by this high-priced group, you’re really not getting much for what you pay for.  Silver Wheaton and its ROE of 20% and EY of 5.6% is the only one that comes close to deserving its current multiples relative to the rest of the industry.

The Foolish Bottom Line

On average, these four financiers have doubled in value over the past 3 years while the rest of the Canadian mining space has declined by 17%.  If, someday, the sun once again shines on the Materials sector, given the valuation gap that exists between the financiers and the mining companies, this performance could very well invert over the next three years.  Not that the financiers will decline in value in a more bullish environment for mining, but there is a lot more torque built into the producer’s stocks given the rough patch they have endured.  In my opinion, if you’re bullish, the miners are the place to be.

There is one natural resource in particular that you should be especially bullish about.  We have prepared a special free report that outlines the supply/demand dynamics that support the long-term case for this material and specify two ways that you can jump on for the ride.  Simply click here to receive this report, absolutely free!

Follow us on Twitter and Facebook for the latest in Foolish investing.

Fool contributor Iain Butler does not own shares in any of the companies mentioned in this report at this time.  The Motley Fool has no positions in the stocks mentioned above.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

More on Investing

growing plant shoots on stacked coins
Dividend Stocks

Here Are My Top 5 Dividend Aristocrats to Buy Right Now

Now is the time to buy these top five dividend aristocrats at their two-year low before they recover to 2021…

Read more »

Target. Stand out from the crowd
Stocks for Beginners

5 Stocks You Can Confidently Invest $500 in Right Now

Whether it's stocks making a comeback or proven investments over decades, these five belong in your portfolio.

Read more »

edit Businessman using calculator next to laptop

Unearthing Incredible Value: 2 Dirt-Cheap Commodity Stocks That Demand Attention Today

Barrick Gold (TSX:ABX) and another great mining stock look like huge value plays right here.

Read more »

A woman shops in a grocery store while pushing a stroller with a child

New Rules for Grocers: 1 Canadian Grocery Stock That Could Soar

Metro (TSX:MRU) stock looks poised to win as it signs onto the new grocery code of conduct.

Read more »

edit Real Estate Investment Trust REIT on double exsposure business background.
Dividend Stocks

Is NorthWest REIT Stock the Best High-Yield Dividend for You?

NorthWest REIT (TSX:NWH.UN) offers a substantial dividend, but exercise caution with this riskier stock.

Read more »

oil and gas pipeline
Energy Stocks

TC Energy Stock Is Starting to Get Ridiculously Oversold

TC Energy (TSX:TRP) stock is one of those deep-value dividend plays for the next decade and beyond.

Read more »

An analyst uses a computer and dashboard for data business analysis and Data Management System with KPI and metrics connected to the database for technology finance, operations, sales, marketing, and artificial intelligence.

Want to Get Richer? Here Are the 3 Best Stocks to Buy Now and Hold Forever

These three stocks all have fantastic operations and years of growth potential, making them three of the best to buy…

Read more »

Dividend Stocks

Income Stocks: A Once-in-a-Decade Chance to Get Rich

These two income stocks are among the best on the TSX for those seeking consistent total returns over a long-term…

Read more »