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Better Buy: Wheaton Precious Metals vs. Pan American Silver

By Neha Chamaria - Updated Sep 11, 2018 at 9:04AM

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With both silver stocks tumbling double digits in recent months, one looks really compelling right now.

Silver prices hit lows not seen since 2016 last week. Silver stocks, unsurprisingly, are getting beaten up, too. Shares of Pan American Silver (PAAS -3.26%), for instance, have dropped 16% in the past three months. Wheaton Precious Metals (NYSE: WPM) has fared even worse, losing a quarter of its value during that period.

For contrarian investors, it's an opportunity, as both companies look well positioned for growth given their recent operational numbers and future plans. But if you choose one stock to buy today between Pan American Silver and Wheaton Precious Metals, my vote goes to the former. Here's why. 

Wheaton Precious Metals has a better business model, but...

Both Pan American Silver and Wheaton Precious Metals are primarily silver plays, but the ways they secure the metal are entirely different. Pan American, like a traditional mining company, explores and develops mines to extract metals. The company currently owns and operates six mines in Mexico, Argentina, Peru, and Bolivia.

A dice saying buy beside a stack of gold coins.

Image source: Getty Images.

Wheaton Precious Metals, on the other hand, doesn't dig up mines but buys silver and other metals from mining companies under "streaming" and royalty agreements at predetermined amounts and prices, which are considerably lower than spot prices. In return, Wheaton pays the miners upfront. So with every agreement, Wheaton adds a revenue stream to its portfolio while the mining company gets access to quick funds.

So while both companies make money selling metals like silver, Pan American's business is laborious, costly, and risky, as any mining business would be. Wheaton doesn't have to worry about mining-related costs and risks, which is a huge competitive advantage to have, one that reflects in its margins.

PAAS Operating Margin (TTM) Chart

PAAS Operating Margin (TTM) data by YCharts.

That's not to say Wheaton is risk-free. No business is, for that matter. Wheaton's biggest risk is its dependency on third-party miners. As the company has no control over production, any slowdown of operations at a mine it has an agreement with hits Wheaton directly. For example, Wheaton's production (or simply, the metal deliveries it receives from miners) from Glencore's Antamina mine declined nearly 23% year over year in the second quarter due to mine sequencing. That's not really bad, as grades from Antamina are expected to improve in coming years, but Wheaton suffers when disruptions or legal hurdles hit mining activity.

...Pan American beats Wheaton on this crucial metric

Wheaton is projecting its silver production to be only 22.5 million ounces, or almost 21% lower, this fiscal year. In contrast, Pan American's silver production is headed higher, with the next couple of years expected to be particularly strong.

A chart showing Pan American Silver's silver psoruction from 1995 to 2020 projected.

Image source: Pan American Silver.

To be fair, the reason behind Wheaton's decelerating production isn't what you probably think. Wheaton had an agreement with Primero Mining on its San Dimas mine. After Primero was recently bought out by First Majestic Silver (AG -4.76%), the deal ceased to exist. Because San Dimas was an important mine, Wheaton will lose almost 10% production as a result.

Wheaton, however, made a smart move. It has structured a fresh deal with First Majestic, entitling it to 25% of gold and gold equivalent to 25% of silver produced from San Dimas. In other words, Wheaton has replaced a silver revenue stream with gold as part of its strategy to expand its gold portfolio. Wheaton expects gold to average 49%, and silver 46%, of its production through 2022.

Pie charts showing Wheaton Precious Metals' revenue exposure by metal and geography.

Image source: Wheaton Precious Metals.

So what does that imply? Wheaton's production numbers will eventually improve, but not before next fiscal year. So I don't expect the stock to pick up the slack in near months, especially in a weak price environment.

Looking further, Wheaton's production estimates for 2019 and beyond are nowhere as encouraging as Pan American's. To put that in numbers, Pan American expects to produce 25 million to 26.5 million ounces of silver in fiscal 2018 and 30.5 million to 33 million ounces by 2020. That's a solid double-digit growth. Wheaton, comparatively, forecasts its silver production to average 25 million ounces annually through 2022. Pan American, therefore, offers better visibility into top-line growth.

Another key point is that Pan American recently lowered its full-year all-in sustaining costs (AISC) outlook to $8.50 to $10 from $9.30 to $10.80 per silver ounce. Its cost projections do not disappoint, either: The miner foresees its 2020 AISC to range between $8.50 and $11 per silver ounce sold despite the big production jump. High production and low costs should bring in good results as and when silver prices firm up.

Finally, there's an incredible chart I'd want you to see before you decide which stock belongs in your portfolio today.

WPM Total Long Term Debt (Quarterly) Chart

WPM Total Long Term Debt (Quarterly) data by YCharts.

Pan American has a rock-solid balance for a mining company. It barely has any debt on its books, is growing its operating cash flows at a steady clip, and is generating stronger returns on assets than Wheaton Precious Metals. Earlier this year, Pan American also increased its dividend by a whopping 40%!

Interestingly enough, at less than 10 times, Pan American Silver is still trading cheaper than Wheaton on a price-to-cash flow basis. I'd consider the silver mining stock a solid bargain at current price.

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Stocks Mentioned

Pan American Silver Corp. Stock Quote
Pan American Silver Corp.
$21.39 (-3.26%) $0.72
First Majestic Silver Stock Quote
First Majestic Silver
$7.89 (-4.76%) $0.40

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