Troubles with Iran... a "Christmas gift" from North Korea... a trade war with China...
You never know what turbulence or disasters lie in the future. That's why it's always a good idea to hold at least some portion of your net worth in physical metals, as a "chaos hedge." And there is a place for miners in every hedged portfolio, like we covered with Barrick Gold (GOLD) and Kirkland Lake (KL) earlier this year.
Regular Stansberry Research readers know you can gain exposure to precious metals in multiple ways.
You could buy gold or silver ETFs. You could buy the physical metal (bullion). Or you could buy a mining stock.
But today, we're covering our favorite way to gain exposure to precious metals: streaming and royalty companies.
Developing a mine is a long and expensive process. It requires extensive testing, studies, permitting, and environmental remediation plans to be in place beforehand.
Streaming and royalty companies provide the upfront capital to mine operators to get these projects started.
In return, they receive a percentage of sales (the royalty) or the right to purchase metals at a predetermined cost (the stream). They collect revenue based on a mine's production – not its profitability.
As part of their agreements, royalty and steaming companies receive a fixed percentage of revenue (or a fixed metal price), regardless of the price of precious metals. Plus, they aren't exposed to risky capital expenditures ("capex") such as ongoing exploration and production costs.
And yet, they still get a cut of any new discoveries the miner makes on the property in which they hold a royalty.
Wheaton Precious Metals (NYSE: WPM) is a perfect example...
It's one of three companies that dominate the streaming and royalty space, alongside Royal Gold (RGLD) and Franco-Nevada (FNV).
Wheaton maintains a portfolio of 19 operating mines and nine development projects, partnering with all the major mining operators. These mines and projects are well diversified by metal and geography.
And these projects are in generally "mine-friendly" areas, like the U.S., Mexico, and Canada. This means the mines are usually free of any political risks, though there can be some hiccups.
In 2019, Wheaton expects annual production to bring in 390,000 ounces of gold and 24.5 million ounces of silver. Royalty streaming companies typically convert all production into "gold equivalent production" (GEO) for reporting purposes.
And the Wheaton mix equates to just shy of 700,000 ounces of GEO – or roughly a 50/50 mix between gold and silver.
Production is only going to increase from there.
According to the company's most recent earnings release, production should average 750,000 ounces of GEO for the five years ending in 2023.
Wheaton's financials are solid.
Through the first three quarters of 2019, Wheaton brought in $638 million in revenue.
On the balance sheet, Wheaton has just over $1 billion in debt on the books, which is far more leverage than its royalty and streaming peers. But this debt load is manageable.
Management has already demonstrated a commitment to paying down this debt. Over the past four quarters, Wheaton slashed its debt from around $1.4 billion to around $1 billion – a reduction of more than 25%. The cash balance now tops $150 million − its highest level since 2014.
And it generates plenty of our favorite metric – free cash flow ("FCF").
FCF is simply a measure of a company's cash profits minus capex. (Cash profits are the cash a company generates from its operations. Capex is the cash needed to maintain equipment and invest in new buildings and equipment.)
So far in 2019, Wheaton has brought in nearly $375 million in FCF. That's an incredible 58% of sales.
With all this FCF, Wheaton can reward its shareholders and pay down debt (as we covered above).
As for its dividend, Wheaton returned nearly $100 million to shareholders so far this year.
Over the last 12 months, Wheaton's shares outperformed the impressive rally in precious metals.
Geopolitical tensions and "easy money" policies from global central banks caused gold prices to rise 18% this year. And silver prices jumped 15%.
Shares of WPM, on the other hand, returned more than 50% over the same time frame.
With global central banks committed to low interest rates, precious metals have a huge tailwind. And the U.S.' political tensions with China, North Korea, and Iran will continue to support demand for safe-haven assets.
Wheaton's position as a leading royalty and streaming company makes it one of the safest ways to play today's rally in precious metals.
Sometimes investing is simple.
In July, the Stansberry's Investment Advisory team recommended Wheaton Precious Metals to their subscribers. Readers who followed their advice are sitting on gains of 23% in a little under six months. If you'd like to learn more about Stansberry's Investment Advisory, click here.