Wheaton Precious Metals (NYSE: WPM) has seen its stock advance more than 30% so far in 2020, exceeding the performance of its closest gold and silver streaming peers. However, that's not enough for the company, which believes investors don't see the full value of what it has to offer. Here's why Wheaton thinks it should be afforded a higher price, why it may not deserve it, and why you might still want to buy it anyway.
A powerful model
Wheaton is a streaming company, which means it provides miners an up-front payment in exchange for the right to buy gold, silver, and other metals at reduced rates in the future. Miners like these deals because they mean they don't have to sell bonds or issue stock, helping them to pay for projects in a cost-effective manner while maintaining their balance sheet strength. Wheaton likes these arrangements because it gets to lock in low prices for gold and silver. That, in turn, means high margins that tend to remain strong even when precious metals prices are low.
To put some numbers on Wheaton's low costs, the streamer's cash cost for gold in 2019 was roughly $420 an ounce. For silver it paid around $5 an ounce. Gold is trading hands today in the $1,700-an-ounce range, and silver is fetching around $15 per ounce. Even if the prices of these precious metals were to decline materially, Wheaton's costs would still be incredibly low and its margins wide. Put simply, the streaming model has material advantages over physical mining, where operating costs are far more variable.
Wheaton, however, isn't the only streaming company. Its biggest competitors are Royal Gold (NASDAQ:RGLD) and Franco-Nevada (NYSE:FNV). All three do roughly the same thing, though they each have slightly different portfolios. And while Wheaton's stock is up more than those of these peers so far this year, its gain is only slightly ahead of Franco-Nevada's advance. The company still believes it is trading at an undeserved discount.
Relatively cheap or about right?
In late March, Wheaton actually attached some numbers to its discount valuation. Using March 24 prices, it pegged its price to net asset value at 1.8 times, compared to 1.9 times for Royal Gold and 2.7 times for Franco-Nevada. Using those numbers, Wheaton believed that it was trading at a roughly 7% discount to Royal Gold and a massive 50% discount compared to Franco-Nevada. That suggests that Wall Street isn't giving Wheaton enough credit.
However, there's another side to this argument. When you step back and look at Wheaton compared to these peers, there are notable differences. For example, although management will tell you that precious metals make up 100% of its revenue, silver accounts for around a third of that figure. Silver is an odd mix of industrial metal and precious metal, and it hasn't been performing quite as well as gold lately. Silver only accounts for around 10% of the top line at Royal Gold and Franco-Nevada. Thus, at least some discount appears reasonable based on this metric alone.
Meanwhile, Royal Gold and Franco-Nevada have long focused on diversification. For example, Royal Gold's portfolio includes 187 properties, 43 of which are producing with the rest in earlier stages of development and exploration. Franco-Nevada's portfolio is even more diversified, with 296 mines, 56 of which are producing. Franco-Nevada, meanwhile, takes diversification one step further. Royal Gold and Franco-Nevada both have small copper streams, but Franco-Nevada also has investments in 56 producing energy assets (with another 23 in development). Diversification has material benefits, since it spreads risk around. Wheaton, by comparison, tends to make fewer and more concentrated bets -- its portfolio is made up of just 20 operating mines and nine development projects. If something goes wrong in Wheaton's portfolio, there's a good chance it will be a bigger issue. That's probably weighing on its valuation, too.
So while Wheaton may trade at a discount to its peers, there are some very good reasons for the discrepancy right now. That doesn't mean that the gap won't close -- the relationship between silver and gold shifts over time, and if silver were to increase in value relative to gold, Wheaton's stock would likely outperform its peers and close the valuation gap, or perhaps even trade at a premium. On the diversification front, meanwhile, Wheaton has been working to expand into new areas, recently adding cobalt- and platinum-group metals to the mix. So this, too, could become less of an issue over time. Still, a discount doesn't seem unreasonable given the company's current portfolio makeup.
Still not a bad option
All of that said, investors with more of a value bent might still find Wheaton attractive. Yes, its silver exposure has it out of step with investors today, but that could easily change. Precious metals are commodities prone to swift and dramatic price swings. It is still benefiting from extremely low gold prices just like its peers, and relatively out-of-favor silver could turn into a net benefit at some point -- in fact, the history of the two metals suggests that at some point it will. If you are looking to add some precious metals exposure to increase your portfolio diversification, don't dismiss Wheaton. The extra silver exposure, in the long run, could be a hidden benefit.