Investors often turn to safer investments, like precious metals, when market volatility hits. But rather than investing in gold miners, investors should consider another option that is full of opportunity.
That option is Wheaton Precious Metals (TSX: WPM), and here’s why this isn’t just another one of the traditional gold miners.
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Meet Wheaton
The first thing that prospective investors should note is that Wheaton isn’t like other gold miners. In fact, it isn’t a miner. Instead, Wheaton is known as a streamer. It’s a subtle difference but one that carries a huge impact.
Streamers don’t actually own the mines producing precious metals like traditional gold miners do. Instead, streamers provide upfront capital to the traditional miners, who then set up operations and begin mining.
In exchange for that initial injection of capital, streamers negotiate a certain amount of the precious metals produced by the mine at a heavily discounted rate. To put that discount into context, let’s look at the current price of precious metals on the market.
As of the time of writing, the price of an ounce of gold and silver is just over US$3,300 and US$33, respectively. The discounted rate that Wheaton sets is typically in the range of US$450-500 per ounce of gold. For silver, the rate is approximately US$5-6 per ounce.
Wheaton has key advantages over traditional miners
Once Wheaton acquires those metals from the mine, it can then opt to sell them at the current market rate or choose to hold them. Either way, that price lets Wheaton maintain high margins and recoup its initial investment.
The traditional miner also benefits from the arrangement. Mines produce a variety of metals beyond gold. That includes copper and silver, which aren’t always the focus of gold miners. A streaming arrangement allows for those other metals to be routed to the streamer.
Further to that, the overall risk involved in the streaming model should be mentioned. As a streamer, there is considerably lower risk when compared with traditional gold miners, and that lower risk also extends to the day-to-day operation of the mine.
Specifically, because the traditional miner assumes operational control of the mine, Wheaton can simply move on to its next venture, leaving the risk with the traditional miner. Wheaton is also not tied to an individual miner or a single type of precious metal. Instead, Wheaton has agreements covering different metals with different miners.
That’s a key reason why Wheaton currently boasts active streams in over a dozen countries on several continents.
It’s worth noting that Wheaton also has an active development queue for additional mines that are not yet operational. That growth isn’t anything to dismiss; the company is actively targeting hefty production increases over the next five years from those development projects.
That fact alone puts Wheaton in an advantageous position over traditional gold miners.
Here’s why Wheaton makes sense for your portfolio
Apart from the key advantages over traditional gold miners noted above, Wheaton also boasts strong financials that lead to stable cash flow, significant growth potential, and a well-covered dividend.
In the most recent quarterly update, Wheaton reported a record US$381 million in revenue. The company also reported operating cash flow of US$319 million, which was also a record. Overall, the company reported net adjusted earnings of US$199 million for the quarter.
The company also announced production of 187,500 ounces in attributable gold equivalent production (GEOs). For the full fiscal year, Wheaton’s production number was 635,000 GEOs, which exceeded the upper guidance previously noted by the company.
Also worth noting is that Wheaton finished the quarter with a cash balance of US$818 million and no debt. The company also maintains an undrawn US$2 billion revolving credit.
Wheaton also pays out a dividend that is based on the average operating cash flow of the preceding four quarters. This results in a well-covered dividend that currently yields 0.91%.
Wheaton vs Gold miners: Your choice?
Wheaton provides many advantages to prospective investors who are contemplating a precious metals investment. Apart from the defensive appeal, Wheaton’s strong balance sheet, well-covered dividend and growth potential make it an ideal holding.
In my opinion, a small position in Wheaton is warranted as part of a larger, well-diversified portfolio.
