Stores of wealth like gold and silver tend to do well when the broader markets are falling and investors are fearful of the future. That's the basis of the diversification benefit provided by precious metals. But how you gain exposure to gold and silver isn't a simple choice: You can buy bullion, acquire an exchange-traded fund (ETF), invest in a miner, or own a streaming company like Wheaton Precious Metals Corp (NYSE: WPM). Here's why owning Wheaton stock is the best option.
What is streaming?
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The first thing you need to understand is that Wheaton is a streaming company. That means that it provides cash up front to miners for the right to buy silver and gold in the future at reduced rates. Miners like these deals because they provide an additional source of funding that can be particularly beneficial when capital markets and banks have a dour view of the mining industry.
The cash usually gets used to build new mines or solidify balance sheets. Wheaton, meanwhile, likes these deals because they help the company lock in low prices. As a result of these deals, Wheaton's average costs for gold and silver are around $400 an ounce and $4.50 an ounce, respectively. That's well below current spot prices and provides for wide margins in good years and bad for precious metals.
For example, over the past decade precious metals mining giant Barrick Gold has twice seen its EBITDA margin dip into negative territory while Wheaton's trailing EBITDA margin remained solidly above 50% for most of the period, dipping below that impressive level only twice and never falling into negative territory. This is one of the key reasons why Wheaton is better a option than a miner.
More reasons to like Wheaton
Another key difference between Wheaton and miners is diversification. Wheaton's portfolio includes 20 operating mines and nine development projects. Most miners only have a handful of mines and projects working at any time. In fact, it's probably best to think of Wheaton as a specialty finance company with a portfolio of assets. Which highlights another benefit: It's far easier for Wheaton to adjust to changing market conditions by buying and selling streaming rights than it is for a miner to deal with a mine, an expensive and illiquid physical asset.
But buying a miner isn't the only way to gain exposure to precious metals like gold and silver. You could also buy bullion or an ETF. Bullion suffers from high transaction costs, usually built into the price of the coins or bars, and the need to find and often pay for storage. ETFs avoid those issues for the most part. However, both miss out on the potential upside provided by the exploration and construction of new mines.
If you own bullion, your return is limited to the price changes in gold and silver. If you own Wheaton, your investment will mostly track precious metals prices, but you get the potential benefit of increasing production. For example, Wheaton's production from existing assets is expected to be relatively flat through 2021. But it could increase by as much as 45% if all of its investments pan out as hoped.
Another benefit of Wheaton is its dividend. The dividend is set at 30% of the company's previous four quarters' operating cash flows, so it tends to go up when gold and silver are pricey and down when precious metals are falling. But it provides a real return that ETFs and bullion don't. That can make a big difference when commodity prices are weak, allowing you to focus on the benefit of the dividend and maintain the position through the cycle to gain the full diversification effect that gold and silver offer.
A better way to own precious metals
When you examine the differences between streaming, miners, bullion, and precious metals ETFs, streaming comes out on top. Wheaton's production, meanwhile, is split roughly evenly between silver and gold, giving decent exposure to each metal. If you are looking to add gold and silver to your portfolio as a way to protect against market downdrafts, Wheaton Precious Metals should be on your short list. And the best part is that Wheaton's price to tangible book value is currently lower than its own five- and 10-year medians and below that of its largest competitors -- so now could be a good time to jump in.
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