Silver and gold streaming company Silver Wheaton Corp (SLW +2.94%) is playing out a game plan that has a history of success behind it, while aluminum giant Alcoa Corp (AA +0.00%) is really something of a new company despite the well-known name brand. If you are comparing these two metals and mining companies, you should stick with Silver Wheaton.
Let's take a closer look at why Silver Wheaton is the better buy -- at least right now.
The new (old) kid on the block
You've probably heard the name Alcoa before; it's an iconic company with a history that dates back to the late 1800s. But don't get too caught up in the past -- the Alcoa we know today is something of a baby with a history that dates back to the fourth quarter of 2016. That's when Alcoa and specialty parts maker Arconic split in two.
Image source: Alcoa Corp.
The lead-up to the separation of these two entities included a painful downturn in the commodity industry. During that period, Alcoa started to invest heavily in its parts business while focusing on trimming costs and closing operations in the metals business. In November of 2016, the CEO who orchestrated that business plan left to head up Arconic. And now Alcoa has to fly on its own.
The problem is that Alcoa is still working itself into fighting shape in an industry that's only just starting to get back on its feet. For example, in the fourth quarter -- its first as a stand-alone company -- Alcoa lost $0.68 a share because of one-time items. Notably, that included the closure of another plant and the write-off of natural gas assets in Australia. Although these were important decisions that further the company's efforts to right-size itself for today's aluminum market, the moves cost roughly $151 million.
The bigger takeaway, though, is that the company isn't done transforming itself just yet. That introduces a level of execution risk that you may not be willing to take on.
The same old game
Silver Wheaton, on the other hand, is just doing what it has always done. It doesn't have a history that dates back over 100 years, but at this point, it's hard to suggest that today's Alcoa does either. And Silver Wheaton's story is really quite unique in the metals and mining industry.
Silver Wheaton is what's known as a streaming company. That means it gives miners upfront cash payments for the right to buy silver and gold at reduced prices in the future. It pays roughly $4 an ounce for silver and $400 an ounce for gold -- well below what those metals fetch on the spot market today.
Silver Wheaton's unique business model in two pictures. Image source: Silver Wheaton Corp.
What's even more interesting, the commodity downturn that hit Alcoa so hard was actually a great opportunity for Silver Wheaton, because miners were reeling and desperate for cash, which Silver Wheaton was happy to provide. For example, it provided financially strapped mining giants Vale SA and Glencore with a combined $1.8 billion in 2015.
Not surprisingly, the company's silver production increased 33% year over year in the third quarter of 2016, and gold production increased 48% to hit a new company record. These impressive results, coupled with a recovering precious metals market, led to a 62% increase in operating cash flow and a 20% dividend hike. All good news.
However, Silver Wheaton isn't a risk-free investment. And right now, the biggest risk is that Canada says the company is calculating its taxes incorrectly. That could result in a big one-time tax bill and an ongoing reduction in the company's profitability due to higher taxes. But it doesn't change Silver Wheaton's basic business model, just the costs associated with its streaming business. And then only if Silver Wheaton loses, which it doesn't think will happen.
The proven model makes Silver Wheaton the better buy
Alcoa is an iconic name in the aluminum industry with more than 100 years of history behind it. However, because of the late-2016 breakup of the company, it's kind of starting fresh. There's a huge amount of opportunity, but also a huge amount of uncertainty as to what the outlook is from here.
Silver Wheaton, meanwhile, continues to execute the same business plan it always has. And while it has risks of its own to deal with -- most notably the tax row with Canada -- the forecast here is far more clear. Right now, investors looking for a toehold in the metals and mining industry should put Silver Wheaton ahead of Alcoa on their buy lists.
