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7 Reasons Investors Should Be Excited About Wheaton Precious Metals' Business Model

Motley Fool - Fri Sep 8, 2023

Gold and silver are volatile commodities, but some investors like to have a little exposure to them for diversification purposes. You can buy bullion directly or get indirect exposure via the purchase of a precious metals miner. But there's one more option, and that's buying a streaming/royalty company like Wheaton Precious Metals(NYSE: WPM). Here are some of the key reasons why you might want to buy a stock like Wheaton.

Wheaton's customers get big benefits

No company can succeed for very long if its customers don't benefit from the products being offered. In Wheaton's case, it is offering money and its customers are miners. To simplify things a great deal, Wheaton gives miners cash up front for the right to buy gold and silver at reduced rates in the future. Wheaton's profit comes from selling the low-cost precious metals it acquires at whatever the current market rate is at the time. The question is: Why would a miner want to work with Wheaton? Here are three reasons.

A person in protective gear standing by a giant truck in a mine site.

Image source: Getty Images.

1. Avoiding the need to tap the capital markets

The most prominent benefit for miners from working with Wheaton, or peers like Royal Gold(NASDAQ: RGLD) and Franco-Nevada(NYSE: FNV), is that they don't have to sell stock or issue debt. Selling stock dilutes shareholders and can lead to stock price weakness. Selling debt increases leverage, adds to operating expenses (specifically interest expense), and can lead to credit downgrades. Basically the only string attached to the money from Wheaton is the need to sell gold and silver at reduced rates after the mine or redevelopment is complete. Often precious metals are a byproduct of producing other metals, too, so they aren't the main goal of the investment anyway.

2. Improved project returns

The byproduct nature of gold and silver, which often get produced along with metals like copper, is important in its own right. These metals, when the mine is complete, will only make up a small portion of production. But when Wheaton provides upfront cash, the check can represent a fairly large percentage of the capital investment.

Wheaton provided a concrete example based on a deal it inked with Vale(NYSE: VALE). The payment it made covered around 78% of the capital investment Vale was making in the Salobo mine. But the stream only ate up 23% of the earnings before interest, taxes, depreciation, and amortization (EBITDA) of the mine. Basically, working with Wheaton improved the mine economics because the cost was so small relative to the size of the investment made.

3. No ongoing costs

Another key benefit is that the cash doesn't end up leading to interest costs or other expenses while the investment is being made. Eventually, Vale will have to live up to its obligation and sell Wheaton precious metals at what will be advantageous prices. But those prices are still bringing in revenue, just less revenue than would be achieved if the precious metals were sold at spot prices. So there's really no direct cost to the cash Wheaton provides.

Wheaton shareholders also get big benefits

So Wheaton offers a product that its customers value. That's good news, but what's in it for investors looking to add some precious metals exposure to their otherwise diversified portfolios? Here are four more positives to consider, to bring the total number of reasons to like Wheaton up to seven.

4. Direct exposure to gold and silver

Wheaton generates around 95% of its revenues from precious metals. Royal Gold and Franco-Nevada have lower percentages. But whatever the actual percentage, that revenue is directly tied to gold and silver prices. Wheaton's financial performance will rise and fall along with the revenues it generates from selling precious metals. (The company's dividend is tied to its performance, so the income you generate from the stock will also tend to go up and down with precious metals prices.)

5. Minimal operating costs

Miners run mines, which is time-consuming and expensive. Wheaton provides capital to miners, which isn't nearly as time-intensive. Thus, it has a fairly modest employee base, and other than an office and travel expenses (to check out mine investments), its costs are pretty minimal. The big benefit, however, shows up when a mine runs into problems, such as a strike or mine collapse. Those are issues for the miner to handle. Wheaton already put in as much capital as it intended to.

6. A portfolio approach

If you buy a miner to get exposure to precious metals, you will likely find it has just a handful of operating assets. Because it is making financial investments in mines, Wheaton has a portfolio of mines to which it has some exposure. For example, right now it has interests in 19 operating mines and 13 that are in development. Royal Gold and Franco-Nevada have even more diversified portfolios. So, by going with a streaming/royalty company like Wheaton, you get built-in diversification.

7. There's potential upside

While each streaming/royalty deal is different, they are often tied to a specific asset. Mines are depleting over time, so there's a finite amount of gold or silver to back the transaction. But sometimes mine lives can be extended and, thus, there's actually more upside for Wheaton than it thought when it made the initial investment. It is in the best interests of miners to keep a mine producing for as long as possible, as long as the mine can remain profitable. While this is a benefit that's hard to quantify, it is still one that can have material value over time as miners invest to expand existing assets.

A simple way to get precious metals into your portfolio

No investment is perfect, so don't go in thinking that Wheaton is all upside and no downside. For example, when gold and silver prices decline, so will the stock. And if there's a problem with a mine in the portfolio (like a work stoppage), it will affect Wheaton's financial results, since the flow of gold and silver will slow or even stop.

But if you like to keep things as simple as you can when you invest, owning a streaming/royalty company like Wheaton is a good way to outsource the hard work of managing a precious metal mining portfolio while still reaping the benefits of owning gold and silver.

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Reuben Gregg Brewer has positions in Franco-Nevada. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.

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