8 Reasons Wheaton Precious Metals Could Be the World's Most Perfect Stock
Investors have north of 5,000 publicly traded stocks on reputable U.S. exchanges to choose from. Unfortunately, finding the proverbial needle in the haystack can be quite difficult.
But if you're looking for the world's most perfect stock, your search might end with royalty among the precious-metal mining stocks, in the form ofWheaton Precious Metals (NYSE: SLW), which was until this past couple of days known as Silver Wheaton. Since July 2005, shares have risen by more than 500%. Best of all, they may not be anywhere near finished.
Here are eight reasons Wheaton Precious Metals might just be the world's most perfect stock.
Image source: Getty Images.
1. Exceptionally high precious-metal margins
Without question, the biggest draw of for Wheaton Precious Metals is its business structure. Instead of going the route of being a traditional mining company, it chose a path that leads to some of the highest margins in the entire industry. Here's how it works.
Wheaton Precious Metals works out a deal with another mining company that's looking to expand an existing mine of develop a new mine, but which doesn't have the upfront capital to make it happen. Wheaton provides this capital in exchange for a percentage of the production at a price well below the market rate. Its contracts tend to run for many, many years, or perhaps even the life of the mine in question.
The result? According to the company's first-quarter earnings report, released just a few days ago, it reported average cash costs of $4.54 per silver ounce and $391 per gold ounce. This led, based on the average realized selling price for both precious metals, to a cash operating margin of $12.91 per silver ounce and $817 per gold ounce in Q1 2017. Good luck finding better margins than that among mining stocks.
2. No direct day-to-day mining costs
Building on the first point, Wheaton Precious Metals solely deals with orchestrating and executing these royalty and streaming deals, not with the day-to-day operations of its partnered mines. This means that with the exception of raising the capital needed to fund its deals, the company has pretty minimal overhead costs.
The company listed just $7.9 million in general and administrative expenses in Q1, along with $6.4 million in interest expenses. Essentially $14 million is general corporate expensing, compared with $198 million in reportable precious-metal sales, which is an exceptionally low ratio relative to traditional mining companies. This is another reason it has one of the top margin rates in the industry.
Image source: Getty Images.
3. Multiple royalty and streaming deals
Building the foundation a bit further, Wheaton Precious Metals has multiple streaming and royalty partners, which means that production woes at a single mine won't cripple its top or bottom line when all is said and done. Plus, having multiple deals in place means they end in staggered fashion, as opposed to all at the same time.
For example, between mid-February and mid-April, Primero Mining'sSan Dimas mine was at a standstill because of a strike. San Dimas is one of a number of silver-producing mines that Wheaton Precious Metals counts on. Though the strike lasted only two months, it did weigh on Wheaton's Q1 silver production. However, Vale's (NYSE: VALE) Sudbury mine delivered a 91% increase in gold production, and its Salobo mine saw gold production improve by 38%. Along with higher realized prices, having multiple deals in place allows Wheaton Precious Metals not to be sacked by poor production at any single mine.
4. Improved production diversity
Another factor investors are bound to like is that Wheaton Precious Metals has better diversified its production in recent years. This year, the company is set to generate just a little more than half of its revenue from the sale of silver. In years past, this figure would have been significantly higher. Instead, the company has filled the gap with gold production over the past couple of years.
For instance, Wheaton Precious Metals wound up paying Vale $1.9 billion in cash, plus 10 million warrants for Wheaton's common stock with a strike price of $65 over the next 10 years, for a 25% gold stream at Salobo in Brazil, and a 70% stream for Sudbury's gold in Canada. Having a more balanced production portfolio should lead to less volatile results and steadier growth over the long run.
Image source: Getty Images.
5. Positive long-term outlook for gold and silver
A positive long-term outlook for precious metals is another reason Wheaton shareholders should be pretty excited. Even though interest rates are rising, which has a tendency to increase interest-bearing asset yields and makes gold and silver less attractive to investors, there are plenty of reasons gold and silver can still head higher.
In no particular order:
- Rising interest rates act as a hedge against rising interest rates that tend to help out gold.
- Uncertainty tied to Donald Trump's presidency and the inability of Congress to pass legislation could have investors flocking to precious metals as a safe-haven investment.
- Supply has generally been constrained for years, while demand for gold and silver keeps modestly growing, which is usually a recipe for higher prices.
6. A tenured management team
Great companies can essentially run themselves, at least according to investing great Warren Buffett. But I'm of the opinion that it's a feather in the cap for shareholders when a company they own also has a cohesive management team. With Wheaton Precious Metals, you're getting a management team that's not only seasoned but has also stuck with the company for an extended period of time.
As a quick rundown:
- CEO Randy Smallwood was involved with founding the company, and he's been on the executive board since 2007. He became CEO more than six years ago.
- Curt Bernardi, the company's senior vice president, joined the company back in 2008.
- Gary Brown, the CFO and senior vice president, also joined the company in 2008.
Long story short, a consistent management team means a company that doesn't stray off the tracks.
Image source: Getty Images.
7. Shareholder yield
While owning physical metals might seem appealing at times, neither gold nor silver offers a dividend. That's not necessarily the case with precious-metal mining stocks. With miners you can pore over more fundamental data, take advantage of management's maneuvering, and even be privy to share buybacks and/or a dividend payment. With Wheaton Precious Metals, you get both buybacks and a dividend.
In 2015, the company announced its intention to rebuy 20.2 million shares of its common stock, or at the time what represented about 5% of its outstanding shares. This was the company's first-ever share-repurchase program. Rebuying stock reduces the number of shares outstanding, which can help boost underlying earnings per share and make a company look more attractive from a valuation perspective.
The company is also paying a $0.07-per-share quarterly dividend that's more or less tied to the price of silver. That works out to a current annual yield of 1.4%.
Last, but not least, Wheaton Precious Metals is a lot more attractive from a valuation perspective than most investors may realize.
For example, over the past five years, its average price-to-cash flow (P/CF) has averaged a bit over 16. The industry average tends to be between 11 and 12, but Wheaton's considerably higher margins afford it a premium valuation in this respect. However, looking at Wall Street's cash-flow estimate in the years that lie ahead for Wheaton, its P/CF is valued closer to 13 or 14, signaling a possible undervaluation at current levels.
Plus, if spot gold and silver do indeed head higher over the long run, no company is going to feel a more immediate and positive margin impact than Wheaton. It's quite possible that Wheaton Precious Metals may be the world's most perfect stock.
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Sean Williams owns shares of Primero Mining and Wheaton Precious Metals. The Motley Fool owns shares of Wheaton Precious Metals and Vale S.A. The Motley Fool has a disclosure policy.