Until a few days ago, silver had been the hottest trade of the year. Its price spiked from about $70 an ounce at the start of the year to over $110 an ounce at its peak. People have been piling into precious metals due to concerns about inflation and government policy. However, with President Trump picking Kevin Warsh as the next Fed Chair (who appears less supportive of lower interest rates than other potential candidates), silver has lost some of its luster, tumbling into the low-$80s. That's still well above its year-ago level in the low-$30s.
Higher silver prices are a boon for silver mining stocks. However, one company stands out for its ability to cash in on silver due to its rock-bottom costs: Wheaton Precious Metals (WPM 1.02%). Here's why it's my favorite silver investment right now.
Image source: Getty Images.
A unique way to invest in precious metals
There are lots of ways to invest in precious metals like silver. You can buy jewelry, coins, bars, silver ETFs, and mining stocks. Each option has its benefits and drawbacks. Investing in a mining company, for example, enables you to potentially outperform the rise in the price of a precious metal like silver as the mining company increases its production and profitability at a higher rate than the metal's rise. However, mining stock investments have their drawbacks, as mine development cost overruns and other issues can cause an individual mining company to underperform the price of the metals they sell.
Wheaton Precious Metals has a unique and lower-risk business model. It provides capital to mining companies to fund development and expansion projects through streaming agreements. In exchange, it receives the right to a percentage of a mine's production at a fixed cost. For example, Wheaton made an upfront payment of $485 million to support the development of the Peñasquito mine, the second-largest silver mine in Mexico. In exchange, Wheaton Precious Metals can buy a quarter of its silver output for the life of the mine at a starting price of $4.56 per ounce (with annual inflation adjustments based on CPI).
NYSE: WPM
Key Data Points
Lots of low-cost silver (and gold)
Peñasquito is one of the 23 operating mines in the company's portfolio. Last year, Wheaton Precious Metals expected its streams to produce 20.5 to 22.5 million ounces of silver, 350,000 to 390,000 ounces of gold, and another 12,500 to 13,500 ounces of other metals, such as cobalt and palladium. Given last year's metal prices, the company expected to get about 39% of its revenue from silver streams, 59% from gold, 1% from cobalt, and 1% from palladium.
Wheaton Precious Metals' streams enable the company to buy silver at an average price of $5.75 per ounce through 2029 and to purchase gold at an average price of $473 per ounce. In addition to locked-in pricing, Wheaton Precious Metals will benefit from volume growth as its mining partners expand their production. The company has another 25 streams tied to development and other projects, many of which should start producing in the coming years. The company expects its production volumes will rise 40% by 2029.
Cashing in on silver
Few companies are in a better position to capitalize on higher silver prices than Wheaton Precious Metals. Its streaming contracts enable it to lock in low prices to purchase silver and gold from its mining partners. As a result, Wheaton Precious Metals should produce a lot of cash in the coming years, even if silver prices continue to lose some luster.
For example, a $70 silver price (and $4,300 an ounce for gold) -- which are both well below recent pricing -- would enable Wheaton Precious Metals to produce over $3 billion in annual cash flow through the end of the decade. That would give the company plenty of money to pay dividends (it recently raised its payout by 6.5%) and invest in new streams, enabling Silver Wheaton to continue growing value for shareholders.
