By Matthew DiLallo
Silver Wheaton (NYSE:SLW) is the world's largest precious metal streaming company, and as its name implies, it dominates the silver market. However, a steady stream of gold acquisitions in recent years put it in the position to cash in on the rising price of gold. Because of that, investors looking for exposure to the upside to the gold market should dig what Silver Wheaton has to offer.
A steady stream of golden cash flow
Streaming companies Silver Wheaton and rivals Royal Gold (NASDAQ:RGLD) and Franco-Nevada (NYSE:FNV) don't make their money by producing precious metals. Instead, these streamers pay miners an up-front fee during a mine's development to lock in low-cost supplies once it comes on line. In Silver Wheaton's case, it was able to spend a mere $401 per ounce of gold last quarter. However, it sold that gold for $1,267 per ounce, pocketing the difference of $866 per ounce. Contrast this with leading gold miner Barrick Gold (NYSE:ABX), which had all-in sustaining costs of $782 per ounce last quarter. That higher cost is due not only to mining expenses but the fact that it is paying Royal Gold on several royalty and streaming agreements. The net result is that Barrick Gold's margins per ounce are much lower than streaming companies.
On the other hand, the low fixed costs associated with streaming mean that these companies can earn good margins when prices are low and exceptional margins when prices improve. For example, Franco-Nevada's margin last quarter was 78.9%, which was up from 75.1% in the second quarter of 2015. Meanwhile, Silver Wheaton's gold margin was as high as 81% in 2011 before drifting down to 66% last year due to the slumping price of gold. That said, its margin is poised to move much if gold continues to rise.