Wheaton Precious Metals (WPM) Q2 2021 Earnings Call Transcript
WPM earnings call for the period ending June 30, 2021.
Silver is an important precious metal that is in demand by both consumers and industrial businesses. Silver is the best electrical and thermal conductor of all the metals, making it highly valued for electrical applications. Unlike the demand for gold, more than half of silver’s demand comes from the industrial sector.
Silver is also highly valued by investors because it shares many of the same investment characteristics as gold. A safe-haven metal, silver can help investors to hedge against inflation and weather economic downturns.
Many companies in the metals sector mine silver. But most mining companies focus on a variety of industrial metals such as iron ore, copper, and aluminum, and they may also mine precious metals such as gold, meaning that silver generates a relatively minor portion of their revenues. While this limits the available investment options, investors can still consider these three top silver stocks:
|First Majestic Silver: (NYSE:AG)||A precious metals mining company that gets the majority of its revenue from silver.|
|iShares Silver Trust: (NYSE:SLV)||An exchange-traded fund (ETF) that seeks to track the price of silver.|
|Wheaton Precious Metals: (NYSE:WPM)||A precious metals streaming company with significant silver exposure.|
Source: Company investor relations websites
Silver mining generated 60% of First Majestic Silver's revenue in 2020, making this Canada-based company one of the purest plays on silver in the sector. Most other companies that mine silver expect the metal to account for only 30% to 47% of their revenues in 2021.
First Majestic focuses on Mexico because it produces more silver than any country in the world. The company currently operates three mines in Mexico and has several other silver mines under development. This large pipeline is helping to support the company's goal of becoming the world's largest silver producer.
Silver stocks like First Majestic have opportunities to outperform the price of silver, but they are also vulnerable to operational problems and cost overruns. Mining issues, management missteps, and exposure to other commodities can weigh on the performance of a silver mining company's stock. Silver mining companies that increase their silver production while reducing mining costs are most likely to outperform the precious metal.
First Majestic anticipates that silver will account for 57% of its revenue in 2021, representing a slight decline from 2020. The company purchased the Jerritt Canyon Gold Mine in Nevada in early 2021 to diversify its operations.
Wheaton Precious Metals is a precious metals streaming company. Instead of operating physical mines, Wheaton provides mining companies with cash up front to cover portions of their mining costs. In exchange, the company receives rights to buy at fixed prices some of the metal produced by the mines.
Wheaton expects its silver streams to generate 40% of the metals it purchases between 2021 and 2025. The company's exposure to silver is the highest among its streaming competitors. Wheaton has the contractual right through 2025 to purchase the precious metal for an average price of $5.81 per ounce, meaning that any silver price above that level generates profit for the company.
The company's focus on streaming enables it to generate plenty of cash, which it uses to invest in new streams and pay dividends to shareholders. Wheaton's business model enables it to profit from rising silver prices in the same way as a mining company but without assuming the risks and potential cost overruns associated with physical mining.
The iShares Silver Trust is an exchange-traded fund that focuses on physical silver. The ETF aims to track the performance of the price of silver by owning physical silver bars, which are stored in bank vaults in London and New York City.
Because the ETF holds physical silver, it is succeeding at closely tracking the precious metal's price. The chart below demonstrates how the price of iShares Silver Trust shares have changed alongside the price of silver:
While the ETF has slightly underperformed silver over the long term, that’s entirely due to the fund's annual expense ratio of 0.5%. That’s overall a good ETF expense ratio and a small price to pay for portfolio exposure to silver without having to own the precious metal.
The price of the precious metal has surged higher over the past year, jumping 55% from mid-2020 though the middle of 2021. The fast-growing solar energy and electric vehicle (EV) industries are two notable industrial demand drivers, and many investors are focusing on silver because of concerns about inflation.
Most investors choose to own silver stocks over the physical metal such as coins and bars. When the demand for silver is rising, silver companies can often pursue profitable growth opportunities that enable generation of profits above the price increase of silver itself. Not owning the physical metal also enables investors to avoid the hassles and risks of acquiring, storing, and insuring a physical asset.
As a unique precious metal with industrial, consumer, and investor demand, silver is playing an increasingly important role in the economy. The stocks of silver companies and silver-focused ETFs could be attractive additions to many portfolios.
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