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Is Wheaton Precious Metals a Buy?

By Reuben Gregg Brewer - Oct 20, 2017 at 9:16AM

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Wheaton is a unique way to invest in gold and silver, with plenty of opportunity ahead of it.

So far this year Wheaton Precious Metals (NYSE: WPM) shares haven't done much, bouncing along with the price of gold and silver. That showing is no different than that of other precious metals stocks, including Barrick Gold (GOLD 2.09%) and Goldcorp (GG). But Wheaton isn't a miner and that makes a big difference. Here are two reasons why you might want to buy Wheaton Precious Metals today.

loose pile of cash with gold bullion bricks on top

Image source: Getty Images.

1. Streaming the future

One of the most important things to note about Wheaton is that it is a streaming company. That means it provides cash up front to miners in exchange for the right to buy gold and silver at reduced rates in the future. It never gets its hands dirty building or running a mine, which is often what the miners it deals with do with the cash they get.

There's often a delay between Wheaton's investment and when gold and silver start to flow. Building a new mine or expanding an older one can take a lot of time. But the production that will come in the future from its streaming deals has, in most cases, already been bought and paid for.

Wheaton calls this "optionality," which is essentially the potential production growth already built into the investments it has made. And there's a lot of potential in Wheaton's portfolio today. Management expects production to remain roughly flat between 2017 and 2021, which doesn't sound like a very good outcome. But if all of the company's investments work out as hoped, production could rise by 45% or more!    

A bar chart showing that Wheaton could increase production by 45%

Wheaton's production growth projections and "optionality." Image source: Wheaton Precious Metals. 

The truth is that all of that potential probably won't be realized, but some of it likely will. The key takeaway, however, is that Wheaton doesn't have to plow more money into those options to benefit. It has already made these investments and now just has to wait for the gold and silver to start flowing out of the mines, whereas miners attempting to boost production would have to keep spending cash to achieve a similar result.

So if you are looking for a precious metals investment, Wheaton's production outlook is pretty good when you consider how much more it needs to spend to boost production by 45% (zero!).

2. Fat margins

Being a streaming company brings other unique benefits, too. For example, Wheaton's cost to buy silver is roughly $4 an ounce, and around $400 an ounce for gold. These prices are well below what the precious metals go for on the spot market today, and they are contractually locked in.   

This leads to wide EBITDA margins. Wheaton doesn't face any of the costs of running a mine so its margins tend to be higher than miners. Miners aren't so lucky, since they have to deal with the costs, and headaches, of running mines. This isn't a small issue: When gold and silver were caught in the commodity downturn, miners Barrick and Goldcorp saw their EBITDA margins dip deep into the red.

WPM EBITDA Margin (TTM) Chart

WPM EBITDA Margin (TTM) data by YCharts.

Wheaton's EBITDA margin contracted, as would be expected, since gold and silver prices were falling. But the company's margins remained solidly in positive territory. This is a dynamic that should repeat itself in future precious metals downturns. Wheaton's very business model provides a margin of safety to investors. That's a good thing considering that gold and silver prices are prone to volatility.

Notable advantages

If you are looking for some precious metals exposure, Wheaton Precious Metals is a good option today. Its price will move around with the prices of gold and silver, as you'd expect. However, the streaming model has some notable benefits over the model that miners follow. Two traits that tip Wheaton into the buy camp today are the "optionality" built into its portfolio and the wide margins it enjoys in good times and, more important, bad. A deep dive here would be well worth the effort. 

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Stocks Mentioned

Goldcorp Inc. Stock Quote
Goldcorp Inc.
GG
Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
GOLD
$18.06 (2.09%) $0.37

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