Before interviewing a resource-company CEO, I enjoy inviting members of Motley Fool CAPS to propose their own questions. The poignant insights that commonly stem from reader-submitted questions offer a prime example of how powerful a force it can be to pool our ideas as investors and approach the discipline as a community the way we do here at The Motley Fool.
Before my recent conversation with Silver Wheaton (WPM 0.15%) CEO Randy Smallwood, I asked community members to submit their own questions, and the following exchange stems directly from two questions posed by CAPS member skypilot2005.
Christopher Barker: I had let my readers know that I would be speaking with you and invited them to propose any questions they might wish to ask. One Motley Fool CAPS blogger asked the following two-part question: What's the single greatest threat to the precious-metals streaming industry, and what is the biggest opportunity?
Randy Smallwood: The biggest threat, I would say, is that some of these smaller companies are chipping away at the model and giving up price participation features in the process. For me, one of the highlights of the model -- and something we've always maintained a big focus on -- is that there will never be a cost surprise in our company. It's the one risk that we take out of the equation, which the normal resource investor has to face. The capital cost estimates and operating cost estimates are all very, very fluid, and what we've seen lately is that there are some really poor track records in terms of delivering those. So I want cost-confidence. I want to be able to tell my shareholders that "guess what, you know that my cost per ounce will be 'X' in 2015, and that my cost per ounce will be 'Y' in 2020." And that will stay.
A lot of other companies have taken to giving out price sharing or adjustments based on performance, and to me that opens up a variable on the cost side that is one of the main attractions of the streaming side ... is that we've taken out that cost risk. And so that I think is something that's weakening the model from that perspective. And they've had to do it to remain competitive; it's a competitive space. We've obviously had great success in growing our company, and a lot of people see that success and want to get their foot in the door.
The greatest opportunity in the industry is the continued recognition that selling off a non-core asset to fund your core franchise is viable. What people have a hard time with on the streaming side is that instead of dividing an asset along property boundaries, we're dividing it among metal boundaries within the property. That's really what a stream agreement is. And as that gets more accepted among companies the size and scale of Vale (VALE 1.31%) -- and you know we've got partnerships with Barrick Gold (GOLD -1.02%) and Goldcorp (GG) -- the more acceptable streaming becomes as a means of financing. And we're seeing that more and more. Over the last six months, a lot of the big companies out there -- the big multinational, multicommodity companies -- they are all of a sudden opening the door when we knock on it, whereas in the past it had often been a tough sell.
Barker: The same reader asks: "Is the market accurately pricing your stock at the moment?"
Smallwood: We think we're undervalued. We think that our business model is one that is still not well understood. We're still helping people to fully grasp how much risk is taken out of the equation by investing in Silver Wheaton. The only real risk you have in our investment is, of course, commodity price risk, which you have everywhere you invest in the resource sector, and on production -- and actually achieving production -- because the costs are fixed. I just don't think that's fully understood.
I would say that's a broader thing across the royalties and streaming industry, is that although we are getting a premium over mining companies, I think that premium is worth even more. And there is no doubt that our stock trades at a bit of a discount to the other gold streaming companies [author's note: principally Royal Gold (RGLD 0.43%) and Franco Nevada], but I think we're making some of that up over time. So yes, I do think we're a little light in terms of where our share price is versus where it deserves to be ... especially when you consider our growth over the next three to four years. Climbing up over 50 million ounces per year from the current level of just over 30 million ounces -- and all for exactly $480 million with no surprises on the capex -- as people understand that more, I think they'll understand the value there.
