Precious metals are subject to often volatile price swings. When the price of metals like gold and silver run up, miners have no problem making money and funding growth. However, when prices are weak, expansion costs can be hard to fund. That's when miners turn to companies like Silver Wheaton (NYSE: SLW ) , Royal Gold (NASDAQ: RGLD ) , and Franco-Nevada (NYSE: FNV ) .
Definitely NOT miners
It's important to make a distinction between a Silver Wheaton and, say, Barrick Gold (NYSE: ABX ) . While Barrick Gold builds and runs mines, Silver Wheaton doesn't. It gives miners like Barrick cash upfront to help them build mines in exchange for a portion of what comes out of those mines. That funding can take different forms, but the key distinction is really that Barrick owns and runs the mine while Silver Wheaton and Royal Gold provide money for a cut of the action.
This distinction comes into stark relief with Barrick's troubled Pascua-Lama mine. The company has had a devil of a time trying to get it built. Right now construction is on hold until the miner can work through environmental issues. However, both Silver Wheaton and Royal Gold have a stake in the outcome because they have put money into the mine, too.
Silver Wheaton, for example, "...dropped about $2 per share immediately following [the suspension of construction].... We lost roughly $700 million worth of value..." And there's little Silver Wheaton or Royal Gold can do to get the mine up and running because it's Barrick's mine. That's the downside of this arrangement.
Still, Silver Wheaton and Royal Gold continue to like the prospects of Barrick's Pascua-Lama mine and expect it to be completed, just later than originally planned. And, according to Silver Wheaton, investors are "valuing the Pascua asset on a worst case scenario" basis. Royal Gold roughly agrees with that assessment. If they are, in fact, gifted soothsayers, then there's plenty of upside.
That was then, this is now...
Funding for Barrick's Pascua-Lama mine took place years ago. Today, Royal Gold notes very low equity issuance in 2012 and 2013. And while debt is cheap, equity is a key component in financing a mine project. That plays right into the company's strengths because it can "provide that pseudo-equity component with royalty or stream financing on [a] project."
That's why this trio is seeing "a lot more business and deal flow." This is important because Royal Gold thinks the current market is very similar to the one in 2010, "a point in time where we saw a lot of growth in our company." In fact, "...about 60% of our revenue really was derived from that pipeline."
Not just gold mines
And it isn't just gold and silver mines. These metals are often a byproduct of other projects, like a copper mine. Almost half of Royal Gold's business is from mines that aren't focused on precious metals. Because precious metals aren't the primary focus of such mines, selling off the rights to gold and silver is often a way to fund mine expansion.
So not only can Royal Gold do deals with precious metals miners like Barrick, but it can partner with miners like Teck Resources (NYSE: TCK ) , too. And the broader natural resource market is weak, so Franco-Nevada, Royal Gold, and Silver Wheaton may have an opportunity to build their businesses like it's 2010 all over again.
Gold and silver without the mining risk
Franco-Nevada, Silver Wheaton, and Royal Gold provide investors a contrarian way to play a weak precious metals market because it's at such moments that they have the best prospects for building their businesses. Royal Gold and Silver Wheaton have both been hampered by exposure to Barrick's Pascua-Lama, which could turn out to be a great asset and a real growth driver for both over the long term. Franco-Nevada doesn't have any exposure there, but is still benefiting from a market in which this trio can plant the seeds for longer term growth.
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