Gold continues to recover in the wake of the Fed interest rate hike, and investors are wondering which stocks are best positioned to benefit from more strength.
Let’s take a look at Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) to see if the streaming company should be in your portfolio.
Gold focus
Despite its name, Silver Wheaton is as much a gold stock as it is a play on silver. In fact, gold revenues matched those of silver in the second half of 2016, and the yellow metal has become such an important part of its streaming mix, the company has applied to change its name to Wheaton Precious Metals.
The company sold a record 28.3 million ounces of silver and 330,000 ounces of gold in 2016, representing increases of 7% and 63%, respectively, over the previous year.
Adjusted net earnings for the year came in at $266 million compared to $210 million in 2015.
Silver Wheaton expects 2017 production to be 28 million ounces of silver and 340,000 ounces of gold.
The streaming model
Silver Wheaton is popular with precious metals investors because it doesn’t actually own mines; the company simply provides mining firms with upfront cash to help them move projects from development to production.
In return, Silver Wheaton receives the right to buy silver or gold produced at the mines at attractive prices.
How attractive?
Silver Wheaton reported average costs in 2016 of US$4.42 per ounce of silver and US$391 per ounce of gold sold. This resulted in cash operating margins of US$12.54 per ounce of silver and US$855 per ounce of gold sold, representing increases of 9% and 13%, respectively, compared to 2015.
Why would mining companies agree to such terms?
Most of the streaming agreements are negotiated on mines set up to produce base metals. The gold and silver that come out are simply by-products.
Dealing with Silver Wheaton provides the mining companies with an important cash source, especially during difficult times. In some cases, going to the debt market might not be possible, and issuing new stock could be too dilutive.
Should you buy Silver Wheaton?
The stock lives and dies by the movements of the precious metals prices, so you have to be a gold and silver bull to own it.
If you fall in that camp, Silver Wheaton is a great way to play both metals without taking on direct risks of owning individual mining companies.
At this point, gold appears to be catching a bit of a tailwind, and there are enough geopolitical and financial risks on the horizon (Brexit, French elections, Italian bank crisis) to provide support, at least in the near term.
Rate hikes in the United States remain the main headwind, and it’s a strong one. As such, I would keep gold positions small just in case the Federal Reserve decides to get more aggressive in the back half of 2017.
