Although Wheaton Precious Metals Corp (NYSE: WPM) earns money from the sale of gold and silver, it isn't a miner -- it's a streaming company. That means you have to look at it a little differently than you would a miner. And there's a lot of apportunities ahead in 2018 to turn into Wheaton's best year yet. But you'll need to watch the optionality in its portfolio.
What is streaming?
Wheaton provides cash upfront to miners for the right to buy silver and gold at reduced prices in the future. This is called streaming. Wheaton never gets its hands dirty running a mine, leaving that task to its mining partners. The recipients of its cash, meanwhile, use the money to reduce debt, build new mines, and expand existing properties. When new assets and expansions are involved, Wheaton often has to wait for the investments to begin producing before it receives any silver or gold.
The big benefit of the streaming model is that it provides Wheaton with wide margins in good years and bad. That's because of the locked-in low prices. Currently the company pays around $4.70 an ounce for silver and $400 an ounce for gold, well below spot prices. Those low costs also provide plenty of leeway for price declines before Wheaton has to worry about its margins dipping into negative territory. Miners, which face hard-to-adjust mining costs, often see EBITDA margins turn negative during commodity downturns.
Most people, rightly, focus a lot of attention on this aspect of the streaming business. But there's more to it than that.
It's probably best to think of Wheaton, and its peers Franco-Nevada (TSX:FNV) and Royal Gold (NASDAQ:RGLD), as specialty finance companies that get paid in gold and silver. What they own is a portfolio of mining investments in varying stages of their life. For example, Franco-Nevada has around 340 investments, with 47 currently producing. Royal Gold's portfolio includes 195 properties, 40 of which are producing. These two streamers have a larger number of small deals than Wheaton. Wheaton's portfolio consists of 28 relatively large investments, with 20 currently producing gold and silver.
There are two ways that Wheaton's production grows from here, the most obvious being when the eight mines not currently up and running start producing silver and gold. The less visible avenue for production growth is when expansion projects get completed. Right now Wheaton estimates that its production could increase by as much as 45% from its existing portfolio of investments alone. It calls this optionality.
It's hard to predict when mining projects will be completed, particularly large ones. For example, Wheaton has a stake in the Pascua Lama project that has been stalled for several years because of environmental concerns. However, it still believes that project will eventually get permitted and built. The opportunities in its portfolio span the gamut, from stalled (Pascua Lama) to those that are showing "significant exploration success" (Keno Hill). Notably, gold is expected to become an increasingly important part of Wheaton's portfolio as new developments come on line.
The ultimate outcome for 2018 will depend largely on how much of that optionality in Wheaton's portfolio turns into actual production. And with so much upside potential, 2018 could be a very good year -- with even better years to follow.
Be careful what you watch
That said, Wheaton's top and bottom lines are heavily influenced by commodity prices. So solid success on the production front could easily be overshadowed by volatile silver and gold prices. But don't let that distract you from the fundamental driver of Wheaton's business: creating a well-diversified and productive portfolio of streaming deals. That's what will really make 2018 a good year or a bad one. At this point, there's a lot of "optionality" for this year to be the best one yet.