The Motley Fool

How to Collect Thousands in Silver Royalties… From Gold Miners

Mining firms like Goldcorp Inc (TSX: G)(NYSE: GG), Barrick Gold Corp (TSX: ABX)(NYSE: ABX), and Vale SA (ADR) make a huge amount of money, and you have the chance to earn a royalty cheque on every ounce of metal they haul out of the ground.

On March 31, 2011, the first “silver royalties” were paid out to the public. Ever since, investors have collected payments totaling $5,000, $10,000, even $25,000. Some ordinary investors have collected cheques adding up to $50,000.

You don’t have to own shares in any of these stocks, either. It’s a simple process, and you can start collecting your first royalty payments almost immediately. Let me explain.

How to make Goldcorp pay YOU on every ounce of silver it mines

As regular Motley Fool Canada readers know, Silver Wheaton Corp (TSX: SLW)(NYSE: SLW) is one of the hottest stocks in the mining sector.

The secret to this company’s success is simple: It’s a silver miner that doesn’t mine silver. In fact, the company doesn’t actually operate any mines at all. Instead, Silver Wheaton fronts resource firms with the cash they need for new mining projects, then collects royalties on future production.

This transaction is called a streaming contract, and they’re fairly easy to wrap your head around. For example, Silver Wheaton paid Goldcorp an upfront cash payment of US$485 million in 2007. In exchange, Goldcorp agreed to sell Silver Wheaton 25% of all silver produced from its Peñasquito mine for US$3.90 per ounce.

In essence, Silver Wheaton operates a kind of tollbooth outside of the property. Every time a truck passes through, Goldcorp must pay a toll: For each 1,000 ounces of silver carried, 250 of these must be paid to the tollbooth. That’s over $3,000 on every single load.

Needless to say, this is an enormously profitable business. Because Silver Wheaton’s cost of revenue is almost zero, it generates giant profit margins between 80% and 90%. That’s a heck of a lot better than your regular old mining stock.

And as you can see in the table below, Silver Wheaton has soared over the past decade, even while other big metal producers have struggled.

Company 10-Year Return
Silver Wheaton Corp 375%
Goldcorp Inc 41%
Barrick Gold Corp (47%)
Newmont Mining Corp (61%)

Source: Google Finance

Silver Wheaton passes on most of this income to investors in the form of consistent, oversized royalty cheques. The company’s policy is to pay out 20% of operating cash flow. Last quarter, it paid a dividend of $0.067 per share, which comes out to an annualized yield of 1.2%.

However, Silver Wheaton’s payout could grow substantially in the years ahead. Last year, the firm’s 19 tollbooths collected 36 million silver equivalent ounces. By 2018, that figure is projected to almost double. At those rates, the company will be absolutely gushing dividends.

Collect your first royalty cheque by December 11

Best of all, Silver Wheaton’s costs are almost entirely fixed, so its payouts closely track precious metal prices. The next round of distributions are scheduled to be mailed out in a few weeks. If you become a partner by November 27, you’ll be eligible to collect your first royalty cheque on December 11.

Just Released! 5 Stocks Under $49 (FREE REPORT)

Motley Fool Canada's market-beating team has just released a brand-new FREE report revealing 5 "dirt cheap" stocks that you can buy today for under $49 a share.
Our team thinks these 5 stocks are critically undervalued, but more importantly, could potentially make Canadian investors who act quickly a fortune.
Don't miss out! Simply click the link below to grab your free copy and discover all 5 of these stocks now.

Claim your FREE 5-stock report now!

Fool contributor Robert Baillieul has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Silver Wheaton. Silver Wheaton is a recommendation of Stock Advisor Canada.

Two New Stock Picks Every Month!

Not to alarm you, but you’re about to miss an important event.

Iain Butler and the Stock Advisor Canada team only publish their new “buy alerts” twice a month, and only to an exclusively small group.

This is your chance to get in early on what could prove to be very special investment advice.

Enter your email address below to get started now, and join the other thousands of Canadians who have already signed up for their chance to get the market-beating advice from Stock Advisor Canada.

I consent to receiving information from The Motley Fool via email, direct mail, and occasional special offer phone calls. I understand I can unsubscribe from these updates at any time. Please read the Privacy Statement and Terms of Service for more information.