Gold has been one of the biggest stories in the market over the past few years. Back in 2021, you could still buy an ounce of the stuff for less than $2,000. Today, the price is $4,647, more than double and climbing fast. But that's a steep asking price for a single ounce of anything. So, what's an investor looking for gold exposure on the cheap to do?
Conventional wisdom would be to buy a gold mining company like Newmont (NEM 0.08%). It's only trading for a little over $110 a share at the moment and has outperformed gold in the last 12 months, 182% to 76%.
Image source: Getty Images.
But I put it to you that the better option is a streaming company. No, not Netflix, I'm talking about a gold and silver streaming company like Wheaton Precious Metals (WPM 0.11%). It might not have had as much of a run as Newmont over the past 12 months, but a 132% win is still mighty impressive.
And Wheaton has a more profitable, less risky, and safer business model than Newmont, which makes it more attractive for a long-term gold investment in my view.
Let's get into it.
There's gold in them thar hills
Newmont's business is pretty simple: It mines and sells gold. But that's a fairly capital-intensive industry and one that often requires companies operating within it to carry a lot of debt. When you account for machines, labor, safety, and environmental regulations, mining gets expensive fast.
A typical open-pit gold mine project might run $100 million to $150 million just to get started. And then you're at the mercy of the market, hoping gold prices stay high enough to keep your mine profitable.
NYSE: WPM
Key Data Points
Right now, Newmont's mines are plenty profitable. It's running a net income margin of 33%, and its three-year revenue compound annual growth rate (CAGR) is sitting at 21%. Debt isn't terrible at $5.65 billion, but that's almost as much as the $5.97 billion Newmont holds in its cash reserves.
There's also gold in the next step in the process
Enter Wheaton, a streaming company. Wheaton contracts with copper, zinc, and other mines to buy the gold and silver that they often find mixed in with the ore of the metal they're actually trying to extract at a set price and then sell at market.
Wheaton can profit from the growth in the price of gold without carrying the liabilities that come with owning and operating a mine. Most of the benefit, much less of the risk.
In practical terms, it looks like this: Wheaton holds cash reserves of $1.16 billion to total debt of just $7.9 million, enough to pay off its whole debt many times over. Its net income margin is 54.7%, much higher than Newmont's as it isn't saddled with the expenses of mining.
Newmont does have a slight edge in revenue growth, as Wheaton's three-year CAGR is 18.2%. But by my math, a 3% growth difference doesn't outweigh Wheaton's considerable profitability advantage and much lower debt relative to its cash reserves.
All in all, Wheaton might have a slightly lower return than Newmont over the past 12 months, but it still manages a triple-digit return with far fewer of the risks that come with the mining industry.
If you're considering a gold mining stock, give Wheaton a look first and see if it's the streaming service you've been looking for.
