Summa Silver Corp. (TSXV: SSVR, OTC: SSVRF, FRA: 48X)
Silver Lives Here
Typically, When gold prices surge, mining stocks are the better picks. But when there is uncertainty about the metal, royalty stocks may shine brighter.
As of today, when the price of gold is pulling back after hitting an all-time high of $3,500 per ounce, Wheaton Precious Metals (TSX:WPM) could be a better investment compared with traditional gold miners like Barrick Gold Corp.(TSX:ABX) and Newmont Corporation(TSX:NGT).
Unlike miners that own mines and actually carry out operations, Wheaton is providing upfront capital to traditional gold miners, who then set up operations and begin mining. In return for the upfront capital investment, Wheaton is able to negotiate a discounted price for a certain amount of the precious metals that the mine will later produce.
For example, as of Monday (28 April), the latest traded prices for an ounce of gold and silver were $3,300 and $33, respectively. However, under the royalty agreements Wheaton has signed, the purchase price per ounce of gold could be as low as $450 to $500 after discounts, and the price of silver could be in the range of $5 to $6 per ounce.
Once Wheaton receives the promised metal from the mine where it signed the agreement with, it has the option to sell or hold it at the current market price. Either way, this allows it to maintain high profit margins and fully recoup its initial investment. The risk is much lower compared to traditional gold miners.
Moreover, Wheaton is not limited to a single miner or a single type of precious metal; the company has signed agreements with various miners covering different metals and has active mine projects in more than a dozen countries on several continents.
In addition to this, Wheaton is also involved in projects in the development phase, where the growth potential cannot be ignored. The company is actively seeking to significantly increase production from these development projects over the next five years.
The company has strong financials, resulting in stable cash flow, significant growth potential and a well-covered dividend, and Wheaton recently reported record revenues of $381 million, record operating cash flow of $319 million, and adjusted net income of $199 million in the previous quarter.
Wheaton has declared attributable gold equivalent production of 187,500 ounces. The company had a cash balance of $818 million for the quarter, with no debt and an unused $2 billion revolving credit facility.
Wheaton pays a dividend based on the average operating cash flow for the previous four quarters, and the dividend yield is currently 0.91 per cent. Therefore, it is prudent to own a small amount of Wheaton stock as part of a larger, diversified portfolio.
