After a tumultuous two-week period, markets shot back to life yesterday, erasing some but not all of the losses recently sustained. Despite that positive move, market volatility remains high, and most investors are likely pondering the same questions: What will happen next, and how can I protect my hard-earned portfolio?
While defensive investments remain the go-to answer to many of those uncertainty woes, there is another type of investment that sees growth during times of uncertainty: precious metals. Gold, in particular, has been used as a safe store of wealth for millennia, and despite what the cryptocurrency crowd may claim, that trend isn’t changing anytime soon. By way of example, at the time of writing, an ounce of gold is trading at US$1,600 per ounce, which is a price not seen since 2013 (when prices were moving down as part of a multi-year slump that started in 2011).
So, how would an investor diversify into precious metals? Let’s answer that by talking a but about Wheaton Precious Metals (TSX:WPM)(NYSE:WPM).
Wheaton is not your typical precious metals miner
The first thing that prospective investors should take note of is that Wheaton is not a miner in the traditional sense. Instead, Wheaton is a streamer, which adheres to a slightly different business model. In short, a precious metal streamer provides an upfront injection of capital to the traditional miner, who will then use that capital to set up a mine and begin operations. In exchange for that initial investment, a streamer is provided with a certain allotment of the metals extracted from the mine, which can be purchased at a heavily discounted rate. The streamer can then choose to sell those metals on the open market realizing further gains.
That heavily discounted rate that I mentioned can be as low as US$400 per ounce for gold and US$4.50 per ounce for silver. As lucrative as that may sound, there are other advantages to the streaming model. Apart from being less risky than the business of a traditional miner, streamers also benefit from being highly diverse. Unlike the traditional miner that has to manage the day-to-day operations of a mine, a streamer can move on to other mines, wherever they may be, quickly amassing a large portfolio of different precious metal streams.
In the case of Wheaton, this translates into an impressive portfolio of 20 active mines on three continents, and a further nine mines currently in development, which include gold, silver, palladium, and cobalt streams.
It pays you to invest in Wheaton — literally
As intriguing as it may sound to consider investing in Wheaton, the company offers one final advantage: an attractive dividend. To be fair, that attractive dividend is based on the mining segment itself, which has lower yields than other, more lucrative segments of the market.
In the case of Wheaton, that quarterly dividend currently amounts to a yield of 1.26% and is based on 30% of the average cash generated by operations in the trailing four quarters divided by the number of outstanding shares. In other words, as the price of precious metals increase, so too will Wheaton’s cash generation, which in turn will provide a boost to that dividend.
In terms of results, we’re still a little over a week out from Wheaton providing an update on the fourth quarter of fiscal 2019, but we can take a look back at the third quarter for some key takeaways.
In that third quarter, Wheaton generated $142 million in operating cash, which ultimately led to a net debt reduction of $146 million. The company also produced 104,175 ounces of gold, 6,095 ounces of silver, and 5,471 ounces of palladium in the quarter, with growth across the gold and palladium streams offsetting a slight decline in silver production.
Overall, Wheaton reported adjusted net earnings of $75.96 million, or $0.17 per share, beating the $34.02 million, or $0.08 per share, reported in the same period last year.
Final thoughts
Every well-diversified portfolio should have some exposure to the precious metals segment, and, in my opinion, Wheaton represents an excellent way to diversify into that segment without the risk of traditional miners.
