It’s my favourite way to invest in precious metals, and apparently George Soros agrees with me.
The stock is Silver Wheaton Corp. (TSX: SLW)(NYSE: SLW). Originally, the company was a small division of mining giant Goldcorp Inc., until it was spun off in 2004. But over the next 10 years, Silver Wheaton has grown into one of the largest players in the mining sector.
It’s an odd bet. Silver Wheaton doesn’t actually own any mines at all. Instead, it buys what’s called in the resource business as a “streaming metal deal”.
It works like this: Silver Wheaton fronts mining companies with the cash they need to fund new projects. Once completed, Silver Wheaton is allowed to buy a percentage of a mine’s production at a fixed price. This allows it to lock in a source of silver that it can often buy at a steep discount to spot rates.
This is a highly profitable business. In the case of Silver Wheaton, it pays an average of US$4.15 per ounce. It can then turn around and sell this metal for US$17 per ounce at today’s prices.
That’s a heck of a lot better than the margins you’ll see in a plain old mining stock. Finding, building, and operating a mine is tough. Your returns can disappear if a producer runs into a labour strike or expensive cost overruns.
In contrast, Silver Wheaton can avoid this risk. Its costs are fixed and doesn’t even have any ongoing capital expenses.
This model has created a huge amount of value for investors. In 2004, one Silver Wheaton share represented 1.5 ounces in silver reserves. Today, that same share is now backed up by 6.5 ounces. That’s why the stock has handily beaten its mining peers over the past decade.
Source: Yahoo! Finance.
Those returns will likely continue. In 2013, the company’s producing streams generated 36 million silver equivalent ounces. By 2018, management projects that figure will nearly double. At those rates, Silver Wheaton will be gushing cash flow.
Apparently, George Soros also likes this name. In a recent SEC filing, the stock shark disclosed that he owned 400,000 Silver Wheaton shares. As of June, his stake was valued at US$10.5 million.
What’s interesting is that Soros has paid between $24 and $29 per share for his recent purchases. That’s up to 34% above the stock’s closing price on Thursday. If Soros is buying at even higher prices, then Silver Wheaton has a lot of upside from here.
