In case you haven’t realized it yet, gold and silver prices recently dipped below the floor that was set with the recovery rally following the multi-year drop in 2011. After rising rapidly to a near US$1,900 per ounce in 2011, gold prices dropped over the course of several years to sub-US$1,100 levels before mounting a recovery in 2016.
At the time of writing, an ounce of gold is now under US$1,200, and an ounce of silver has fallen below US$15. Prior to the dip below US$1,200 this month, the last time that gold prices dropped below that level was in January of 2017. While this price drop may be good for gold bugs buying up precious metals as a hedge against a potential market correction or fallout from the turmoil in Turkey, what does this drop really mean for investors of precious metals stocks?
Wheaton is not a traditional miner. It is what’s known as a precious metals streamer. In short, streamers provide upfront financing for traditional miners to use for the setup of the requisite infrastructure and to begin mining operations. In exchange for that upfront capital, the streamer is allocated a certain amount of the metal produced for an insanely discounted rate that can be as low as US$400 per ounce for gold and US$4.50 per ounce for silver.
The streamer can then sell the precious metals at the market rate and reap the reward.
On the surface, the streaming model seems like a win-win for precious metals investors. There is far less risk than a traditional miner has, and the arms-length type of arrangement with the day-to-day operation of the mine permits the streamer to diversify to other mines and mining companies with ease. In the case of Wheaton, the company has over a dozen streaming agreements in place around the world and signed two new agreements within the past three-month period.
Three Additional reasons you may want to consider Wheaton
Besides the overall market sentiment, falling precious metal prices, the relatively lower risk and more diversified portfolio that a streamer can offer, there are a few more reasons worth noting.
First, Wheaton is expanding to stream additional metals. Rewind a few years, and Wheaton was primarily a streamer of silver. The opportunity to stream gold and other metals ultimately pushed the company to proceed with other types of streaming opportunities. Once such opportunity is Wheaton’s agreement to stream cobalt from a mine in Newfoundland & Labrador. Cobalt is unique because most of the world’s supply is in the Democratic Republic of Congo, where concerns with maintaining profitable operations and a sustainable supply are an issue.
Wheaton expanded further recently to include palladium streaming to its portfolio, and the company’s US$500 million investment in a U.S.-based mine will see Wheaton gain both gold and palladium.
A second reason to consider Wheaton is the company’s dividend. The 1.97% may not sound as appealing as some of the better-paying income investments on the market, but it far exceeds any of its peers and is based on 30% of the average cash of operations from the previous four quarters.
Finally, there’s Wheaton’s stock price. Year to date, the stock has fallen nearly 15%, with much of that drop coinciding with the dip of gold below US$1,200 per ounce, which was felt across the board by most miners. The point here is, this is an opportunity to buy a great investment at a discounted price.
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.
Fool contributor Demetris Afxentiou has no position in any stocks mentioned.