Picking mining stocks can be dangerous because if the underlying commodity that it deals in drops, profits are bound to drop for the miner as well. And dropping prices don’t change the unfortunate reality that the miner still needs to run its machinery to find new commodity. That’s why I like Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW); it generates its returns on commodities using a different method.
Silver Wheaton is a streaming company, which means it finances other mines in exchange for the gold and silver found. According to Silver Wheaton’s website, “it is estimated that silver production comes as a by-product from base metal and gold mines.”
Why would mining companies sell to Silver Wheaton at a discount? Silver Wheaton provides the upfront financing for the mine to launch in exchange for cheap silver. This is a much lower risk way because Silver Wheaton doesn’t have the same risk that miners do.
Last year was an amazing year for the company.
Silver Wheaton had record gold production of 353,00 ounces and silver production of over 30 million ounces. Gold production in 2016 was up 46% compared to 2015, while silver production was only down by 1%. This massive jump in gold is important for Silver Wheaton because it provides an element of diversification for the company. Because of this, Silver Wheaton is actually changing its name to Wheaton Precious Metals.
If we look at profits, the company is firing on all cylinders. Its average cost for silver in 2016 was $4.42 — up only 6% versus the previous year. However, it sold the silver for $16.96 an ounce, which is up 8% from 2015. On the gold side, Silver Wheaton sold an ounce of gold for $1,246, which is up 8% from 2015, while the cost was actually $391 — virtually unchanged from the previous year. That’s a big contributing factor to the company’s increased profitability.
For investors, this is a good sign because Silver Wheaton pays its dividend based entirely on operating cash flow. Essentially, whatever the average of the operating cash flow of the previous four quarters is, Silver Wheaton pays 20%. Therefore, the dividend was increased to $0.07 per share from $0.01. Further, the company has implemented a dividend-reinvestment plan, allowing investors to get shares 3% cheaper than the average market price.
So, should you buy Silver Wheaton (or, should I say, Wheaton Precious Metals)?
That depends entirely on your outlook of silver and gold. While silver has quite a few industrial use cases, including electrical and solar panels, gold is more of a fear-based asset. Therefore, if you believe market conditions point to increased economic uncertainty, then Silver Wheaton is a great buy. If, however, you’re not bullish on precious metals, perhaps now is not the best time to buy. Personally, I would pick up some shares as a hedge against the uncertainty surrounding Brexit and European countries.
