Falling gold and silver prices continue to put pressure on the world's largest silver streaming company Silver Wheaton (NYSE:WPM). Silver Wheaton is not alone, and gold royalty companies Royal Gold (NASDAQ:RGLD) and Franco-Nevada (TSX:FNV) are being hit as well.
As a streaming company, Silver Wheaton does not operate mines. It buys the rights to purchase silver and gold at a predetermined price in exchange for an upfront cash payment. This puts Silver Wheaton in a unique position in current environment.
Yet, investors are still worried, and the stock is down more than 40% this year. However, I think that the company presents value even if silver and gold prices remain depressed.
New gold streams
Silver Wheaton continues to grow its exposure to gold. The company has recently signed two new gold streaming deals. Silver Wheaton expanded its precious metal stream on the Peruvian Constancia project to include gold. The company is entitled to purchase 50% of the life of mine gold production in exchange for a $135 million upfront payment. Each ounce of gold will cost $400 for Silver Wheaton.
The company also announced that it entered into a gold stream agreement with Sandspring Resources for the Toroparu project in Guyana. According to the agreement, Silver Wheaton has the right to purchase 10% of the life of mine gold production from the mine in exchange for a $148.5 million upfront payment.
These two agreements show how Silver Wheaton remains cash-flow positive despite falling silver and gold prices. Given current mining costs, it's impossible to imagine that gold prices could fall as low as $400 per ounce. Royal Gold and Franco-Nevada enjoy similar benefits of this business model.
Pascua-Lama suspension hurts production guidance
Barrick Gold's decision to suspend the construction of its huge Pascua-Lama project seriously affected Silver Wheaton's 2017 production guidance. The company had to cut its 2017 production guidance from 49 million ounces of silver equivalent to 42.5 million ounces. However, Silver Wheaton secured an additional year of production from three other Barrick mines.
Pascua-Lama is a very attractive long-life deposit, and Silver Wheaton will try to stick to it as long as possible. Royal Gold is also affected, as the company has a gold royalty on the Chilean side of the project. Royal Gold's interest is rather small, so Barrick's decision does not change the outlook for the company.
While Silver Wheaton diversifies into gold, Franco-Nevada holds interests in oil properties. The exposure to oil helped Franco-Nevada outperform both Silver Wheaton and Royal Gold this year. Franco-Nevada expects that oil and gas revenue will exceed $65 million this year, up from the previous $55 million-$65 million guidance.
Although the Pascua-Lama suspension is bad news for Silver Wheaton, the company still forecasts a 45% growth in production in 2017. Even at current prices, this will be a significant increase in value for Silver Wheaton's shareholders.
The company's dividend policy is linked to operating cash flows, which ensures that the company distributes money to shareholders without harming its long-term financial stability. This also means that when gold and silver prices rise, shareholders enjoy a dividend increase.
Current environment offers a good opportunity for streaming companies to secure great deals. Some miners have little cash left to pursue their projects. They cannot go to the equity markets because miners' stock prices are depressed. Bond markets could demand unaffordable yields. Streaming companies emerge as a good alternative for equity or debt financing. I expect more deal-making from Silver Wheaton following recent gold streaming deals.
Silver Wheaton's stock price could be pressured even more should gold and silver prices continue to trend lower. However, the company is a great bet on precious metals in the long term.