Streamers in Silver and Gold
06/21/2016 9:00 am EST
Silver and gold are suddenly back en vogue; investors are coming to realize that Fed fears have been overblown and the dynamics of supply and demand have reasserted control over the market, observes Jason Simpkins of The Outsider Club.
Of course, it's hard to say precious metals are out of the woods. They could still backslide. But the worst is certainly over. With that in mind, here are two precious metal stocks worth considering.
Silver Wheaton (SLW)
Silver Wheaton is the largest pure precious metals streaming company in the world. That is, it's not a miner.
Rather than spend billions on tools and labor, streaming or royalty companies offer upfront payments to miners for the right to purchase silver and gold at cheap prices in the future.
That's a good business to be in during a bear market because there are so many distressed miners looking for cash. Silver Wheaton is especially good at that. It's been in this industry for a very long time. Its management knows how to take advantage of industry slumps.
Silver recently closed at around $17 per ounce, and gold came in at $1,250 per ounce. So, you can see how Silver Wheaton makes its money.
Overall, Silver Wheaton pays an average of $4 per ounce for silver and $400 per ounce for gold. The higher precious metals prices go, the more money streamers like Silver Wheaton make.
Franco Nevada (FNV)
Like Silver Wheaton, Franco Nevada is a streaming company. Also like Silver Wheaton, the company has a proven track record of delivering gains for investors.
Since Franco Nevada's initial public offering in 2007, the stock has quadrupled in value. It's managed to absorb the shocks from lower gold prices, rising 124% since 2011.
Franco-Nevada has more than $136 million in cash sitting on its balance sheet, no debt, and access to $1.3 billion of capital through a credit facility.
This gives the company leverage to expand its asset portfolio and sustain its aggressive dividend policy.
Indeed, Franco Nevada has increased its dividend in each of the past nine years. Its current payout of $0.29 per share is good for a 1.23% yield.
Franco Nevada reported earnings results in May; it achieved revenues of $132 million — a 21% year-over-year increase — despite gold prices being 3% lower than they were in 2015. Its gold equivalent ounces jumped by 25%.
Given the choice between the two, Silver Wheaton is probably the better value right now. It ranks lower than competitors in terms of price/earnings, price/cash flow, and price/NAV.
Still, both are strong companies and solid bets. If the precious metals rally continues they'll enjoy a nice revenue boost.
But their margins are high enough that they can withstand a drop in prices should gold and silver regress.
Better still, they'd have yet another opportunity to collect producing assets at a steep discount.
By Jason Simpkins, Editor of The Outsider Club