Wheaton Precious Metals Corp. (NYSE:WPM) has a unique business model, providing investors exposure to silver and gold without the need to own a miner. You need to make sure you understand the implications of how Wheaton runs its precious-metals streaming business before you sell the stock for any one of these three terrible reasons.

What is streaming?

First things first, streaming companies like Wheaton, and competitors Royal Gold (NASDAQ:RGLD) and Franco-Nevada (NYSE:FNV), give cash up front to miners in exchange for the right to buy silver and gold in the future at reduced rates. These deals provide miners an alternate source of capital when other options, like banks and capital markets, are undesirable.

A miner holding a gold nugget

Image source: Getty Images.

Wheaton, meanwhile, benefits from buying silver and gold at low rates. The company's average silver cost is around $4 an ounce. For gold, the average is around $400 an ounce. Those are low relative to current prices and provide Wheaton with huge margins. With that as a backdrop, let's talk about some reasons why you wouldn't want to sell Wheaton.    

1. Volatile precious metals

The price of gold and silver go up and down in often swift and volatile swings. That will clearly have an impact on Wheaton's top and bottom lines. Just like it would at any company that makes money selling precious metals. But step back for a moment and think about the streaming model.

When times are flush, Wheaton will benefit from wide margins because its costs are so low. In other words, it can do quite well in the good times. When gold and silver prices fall, those wide margins also provide downside protection. It can generally handle downturns better than miners.

A visual representation of the streaming business model

Image source: Wheaton Precious Metals Corp. 

But there's one more thing. When precious-metals prices are low, miners are likely to find capital hard to come by. So commodity downturns are great times for Wheaton to make new streaming deals. For example, in 2015, roughly the nadir of the recent commodity downturn, it inked two deals worth $1.8 billion. Not surprisingly, Wheaton achieved record sales volumes in 2016. Volatile silver and gold prices aren't a reason to sell Wheaton, but they might be a reason to buy it.    

2. No big deals

That said, Wheaton still needs to keep a close eye on production. That's because mines only hold just so much gold and silver and, over time, they run out. So Wheaton needs to replace deals backed by mines where production is falling due to age (or other factors), and it needs to add deals that offer new production beyond its replacement needs in order to grow.

Sometimes, however, it's hard to find large streaming deals. For example, the company hasn't made any notable deals so far in 2017. But streaming deals aren't always about current production. Other times, Wheaton inks agreements where the cash is being used to build a new mine or expand production at an existing asset.  

For example, the relatively tiny $140 million deal with Panoro Minerals Ltd. signed in 2016 is a mine that's only in the development stage. If it lives up to expectations, the mine Wheaton is backing will have a 19-year lifespan and contain at least 860,000 ounces gold and 10.3 million ounces silver. So product for from this mine is zero today, but for a very small investment, it could add to Wheaton's production for years into the future.    

A bar graph showing that optionality could add 45% to Wheaton Precious Metals' production

Wheaton has upside production potential. Image source: Wheaton Precious Metals. 

In other words, don't equate Wheaton's prospects with the number or size of the deals that it's completing. Some of its streaming agreements are meant to pay off in the future. That's what Wheaton calls optionality, and if you look at the far right of the bar graph above, you'll see that even without big deals Wheaton has a lot of opportunity to increase production already built into its portfolio.

3. Dividends

The last terrible reason to sell Wheaton has nothing to do with the streaming model and everything to do with Wheaton's stated dividend policy. Streaming peer Royal Gold has increased its dividend every year for 16 consecutive years. Franco-Nevada has hiked its dividend annually for 10 years running (if you include 2017). Wheaton's dividend has gone up for three consecutive years but was cut six times after peaking in early 2013, which sounds awful by comparison.    

WPM Dividend Per Share (Quarterly) Chart

WPM Dividend Per Share (Quarterly) data by YCharts.

That's because Royal Gold and Franco-Nevada have a goal of steadily increasing dividends. Wheaton specifically pays out "20% of the average cash generated by operating activities in the previous four quarters divided by the Company's outstanding common shares at the time the dividend is approved." In other words, the dividend is meant to go up when precious-metals prices are high and fall when silver and gold are in the doldrums. Make sure you understand that difference before you even think about selling Wheaton because of its dividend history.    

The way it's run

When you look at Wheaton Precious Metals, it's important to understand the business model. That includes the specifics of the streaming business, which can benefit from low precious-metals prices and includes deals where production isn't expected for years into the future. Also, you should examine simply how Wheaton chooses to run its business, which is where the variable dividend policy comes into play. If you don't take the time to think about these things you might sell the stock for a terrible reason.

Reuben Gregg Brewer has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.