Markets for the most part have held up. There are a couple of weak areas. The NQ has lagged both the...
2 Very Clean Precious Metals Stocks
10/05/2012 11:15 am EST
It looks to be the time to get back into precious metals, and here are two that are worth your consideration, according to Paul Goodwin of Cabot Wealth Advisory.
With gold back near new highs, interest in miners is extremely high. Gold mining companies can get a boost from higher prices or unexpected discoveries.
But the downside of mining stocks is also significant. I remember the flooding that took Cameco’s (CCJ) Cigar Lake uranium mine out of production for several years. The fallout (sorry) of this unfortunate occurrence was severe for both Cameco and the price of uranium. And other mines have been hit by labor disputes, cave–ins, and cash crunches.
My favorite approach to mining stocks is to find companies that stand to benefit from the rising price of metals without the risks of actually digging in the dirt. I call them clean–fingernail miners, and I know of two.
The first is Royal Gold (RGLD), a Colorado–based company that buys royalty positions in precious metal mines around the world. The company’s 39 producing interests produced an 85% jump in revenue in 2010 and 59% in 2011, when gold prices were appreciating steadily.
That revenue growth slowed to 22% in 2012, but a new rally in gold prices that began in August has the potential to kick Royal’s revenue stream significantly higher. In addition to its producing interests, the company has a string of 26 development–stage interests, 40 evaluation–stage interests, and 88 exploration–stage interests.
Whatever the price of gold, Royal Gold’s lower cost per ounce to acquire its royalty interests will keep its performance ahead of its dirt–digging partners.
The second company is my old friend Silver Wheaton (SLW). The company buys purchase agreements with mining companies—many of whom are happy to have the cash infusion to finance mining operations—and gets the rights to the metal at a discount.
Silver moves largely in parallel with gold prices, but the industrial uses of silver give it a longer–term stability. As of the end of 2011, Silver Wheaton owned proven and probable reserves of almost 800 million ounces of silver and 220,000 ounces of gold.
Of the two companies, Silver Wheaton has always been a favorite of mine for the consistency of its management’s skill at negotiating profitable agreements. Silver Wheaton is also larger (market cap of nearly $14 billion versus Royal Gold’s $5.73 billion) and pays a bigger dividend (trailing dividend yield of 0.9%, compared to Royal Gold’s 0.6%).
Personally, precious metal investments involve a little too much crystal–ball gazing for me; I don’t think I have much insight into how the global economy is likely to affect gold and silver prices. But with price momentum pushing both metals higher right now, a little position in either SLW or RGLD makes good sense.
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