Is This the Best Contrarian Strategy for Precious Metals Investors?

Thinking about a contrarian play in the precious metals space? Consider this one.

Apr 22, 2014 at 3:28PM

Often, the word "contrarian" equates to investors attempting to catch a falling knife. You don't need to look like a used butcher's block for contrarian strategies to pay off in the long run, however. 

Recently, the precious metals markets have been consolidating following a severe decline from all-time highs. If you believe that they will someday regain popularity following another economic decline, political debacle, above average inflation, or other crisis, however, then join the club.

Numerous catalysts for a spike in precious metals exist, and Silver Wheaton (NYSE:SLW) looks well positioned to capitalize in both the gold and silver markets. Its business model provides for known costs with limited downside while allowing for upside potential based on precious metal prices increases.

This is done by upfront payments to mine operators, guaranteeing Silver Wheaton a percentage of mine output to be purchased at a predesignated price (typically around $4/oz for silver and $400/oz for gold). About 25% of the company's revenue comes from gold and 75% comes from silver.

Known costs with leveraged upside based on silver and gold price increases makes this a top contrarian selection in this sector. The business model insulates it from the operational cost troubles that have plagued miners such as IAMGOLD (NYSE:IAG), where harder rock and decreasing yields have taken their toll on profit margins.

While other producers such as Barrick Gold (NYSE:ABX) have been able to keep costs under control, it has often been at the expense of foregoing expansions and liquidating interests in less productive yet often profitable mines. That strategy has a limited life span.

The biggest disadvantage that producers like IAMGOLD and Barrick Gold face, compared to SIlver Wheaton's business model, is having to comply with constantly changing regulations on a global scale. These range from labor disputes, environmental compliance issues, health and safety regulations, taxation, permits and licensing, and civil/political disturbances. That's just the tip of the iceberg when it comes to the challenges of operating a large-scale mine that needs access to power, water, and infrastructure as well.

The beauty of Silver Wheaton is letting the producers figure out these issues. When complications arise, as they did recently when Barrick decided to temporarily suspend construction activities at its Pascua-Lama project following a challenge from a group of local farmers and indigenous communities, there is often a fallback plan. In this case, the amended plan entitles Silver Wheaton to 100% of the silver production from Barrick's Lagunas Norte, Pierina, and Veladero mines until the end of 2016 – an extension of one year. This is projected to make up the difference in the meantime, unfortunately at Barrick's expense.

If Silver Wheaton's own projections come to fruition, the next four years could see some solid growth. The company generates its revenue from the sales volume of silver and gold, and this revenue is projected to increase as more projects come online. According to the company's 2013 report, its current agreements forecast 2014 production of 36 million silver equivalent ounces, including 155,000 ounces of gold. By 2018, production is anticipated to increase significantly to approximately 48 million silver equivalent ounces, including 250,000 ounces of gold. That's a 33% increase in silver and 61% in gold.

Final thoughts
When an industry is already facing challenging times, it is best to lessen the unknown. While no contrarian play is without risk, Silver Wheaton helps to curtail that risk though its business model. Its fixed cost structure minimizes potential downside while still allowing investors to participate in leveraged upside based on precious metal price increases. This structure makes Silver Wheaton a superior contrarian play in the gold and silver sector.

Boost your 2014 returns with The Motley Fool's top stock
There’s a huge difference between a good stock and a stock that can make you rich. The Motley Fool's chief investment officer has selected his No. 1 stock for 2014, and it’s one of those stocks that could make you rich. You can find out which stock it is in the special free report "The Motley Fool's Top Stock for 2014." Just click here to access the report and find out the name of this under-the-radar company.

James Catlin has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

Don't be one of them.

Jun 12, 2015 at 5:01PM

Admitting fear is difficult.

So you can imagine how shocked I was to find out Warren Buffett recently told a select number of investors about the cutting-edge technology that's keeping him awake at night.

This past May, The Motley Fool sent 8 of its best stock analysts to Omaha, Nebraska to attend the Berkshire Hathaway annual shareholder meeting. CEO Warren Buffett and Vice Chairman Charlie Munger fielded questions for nearly 6 hours.
The catch was: Attendees weren't allowed to record any of it. No audio. No video. 

Our team of analysts wrote down every single word Buffett and Munger uttered. Over 16,000 words. But only two words stood out to me as I read the detailed transcript of the event: "Real threat."

That's how Buffett responded when asked about this emerging market that is already expected to be worth more than $2 trillion in the U.S. alone. Google has already put some of its best engineers behind the technology powering this trend. 

The amazing thing is, while Buffett may be nervous, the rest of us can invest in this new industry BEFORE the old money realizes what hit them.

KPMG advises we're "on the cusp of revolutionary change" coming much "sooner than you think."

Even one legendary MIT professor had to recant his position that the technology was "beyond the capability of computer science." (He recently confessed to The Wall Street Journal that he's now a believer and amazed "how quickly this technology caught on.")

Yet according to one J.D. Power and Associates survey, only 1 in 5 Americans are even interested in this technology, much less ready to invest in it. Needless to say, you haven't missed your window of opportunity. 

Think about how many amazing technologies you've watched soar to new heights while you kick yourself thinking, "I knew about that technology before everyone was talking about it, but I just sat on my hands." 

Don't let that happen again. This time, it should be your family telling you, "I can't believe you knew about and invested in that technology so early on."

That's why I hope you take just a few minutes to access the exclusive research our team of analysts has put together on this industry and the one stock positioned to capitalize on this major shift.

Click here to learn about this incredible technology before Buffett stops being scared and starts buying!

David Hanson owns shares of Berkshire Hathaway and American Express. The Motley Fool recommends and owns shares of Berkshire Hathaway, Google, and Coca-Cola.We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

©1995-2014 The Motley Fool. All rights reserved. | Privacy/Legal Information