Avoid the Risk of a Disaster with these 2 Investments

Pulling natural resources out of the ground is an important, but risky business. BP's (NYSE: BP  ) Deepwater Horizon oil spill is a good example of those risks. That's why companies like Natural Resource Partners (NYSE: NRP  ) and Silver Wheaton (NYSE: SLW  ) avoid getting dirty.

The trouble with the drill bit
Modern life wouldn't be possible without iron ore (steel), copper, coal, potash (a fertilizer), oil, natural gas, silver, gold... etc. But pulling these natural resources out of the ground is becoming increasingly difficult.

BP is a prime example. It pushed the envelope in its efforts to find new sources of oil and wound up with an oil spill of record proportions in the deep and dangerous waters of the Gulf of Mexico. That single event has cost the company $25 billion to date in damages and clean-up costs, forced it to sell assets, and has left BP with a legal nightmare that still isn't over.

BP Chart

BP data by YCharts

BP is a different company today than it was before the Deepwater Horizon. Those who owned it throughout the Horizon mess are still hurting. And despite the stock's relatively high yield of nearly 5%, risk averse investors should stay away. Lucky for you, however, there's a way to invest in key natural resources without taking on the risks of drilling and mining.

Coal and gas
Natural Resource Partners makes its money from coal and, increasingly, from oil and gas. Only it doesn't actually mine for coal or drill for oil and gas—it lets other people do the hard work. For example, it owns coal mines, but leases them out to miners. In return, it collects royalty payments based on the amount of coal that is sold from the mines.

More recently, Natural Resource Partners is making a strategic shift toward oil and gas. Here it buys non-operating interests in wells and land. In return for cash, which is often used to subsidize drilling activities, it gets a cut of the money earned from oil and gas sales. So far this year, the company has completed or agreed to two deals in the Bakken region.

Although coal makes up a disproportionate share of Natural Resource Partners' top and bottom lines, this limited partnership is a high-yield way to play both a coal turnaround and the future growth of domestic oil and gas.

Shimmering streams of silver and gold
If you are more interested in shiny metals, Silver Wheaton may be a better option. Its revenues are split about 80/20 between silver and gold. Like Natural Resource Partners, it doesn't actually do any mining. Instead, it makes an upfront payment to miners to secure the rights to purchase future silver production at predetermined prices.

The real genius of Silver Wheaton, however, is that silver is often a byproduct of other mining efforts. A gold miner, for example, might also find silver but isn't as concerned about the metal since it's focus is gold. That lets Silver Wheaton step in at advantaged prices while providing the miner with cash it can use to fund its mining efforts.

Silver Wheaton, meanwhile, has ensured itself a future production stream of silver without any need for future investments in mining. While it still has to pay for the silver it buys (recently around $4 an ounce), it knows its costs ahead of time and they won't change. And the company is big, with investments in 24 mines.

A way around the shovel
If you like to keep risks to a minimum, then owning companies like Natural Resource Partners or Silver Wheaton are a great way to avoid the inherent business risks of mining and drilling. Both are still subject to commodity prices, but you'll avoid a BP-like surprise while benefiting from the world's growing demand for coal, oil, gas, silver, and gold.

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  • Report this Comment On November 27, 2013, at 11:45 AM, WACowboy wrote:

    OK. NRP is paying out over 11% and has gone up 10.95% so far this year.

    Why would I want to compare that with 1.7% and a drop of 55% in value.

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