Silver and Gold Streaming: Will the Profits Flow to Your Portfolio?

gold streamingSilver and gold streaming businesses are enormously popular with investors. The model allows ordinary investors like you and I the opportunity to own a stake in several different gold and silver mining operations.

Silver and gold streaming companies are really just financiers in disguise. In exchange for an upfront cash payment, a streaming company receives their share of their preferred metals from a mining operation in perpetuity.

 

Here’s how silver and gold streaming works:

  1. Miners need capital to start a new mine or expand on an existing mine.
  2. Streaming companies offer a certain amount of money in exchange for a share of the gold or silver produced from the mine.
  3. Each month, quarter, or year (as defined by the contract) a mining company delivers on their end of the bargain.

Both the miner and streaming company benefit. The miner gets access to the capital necessary to develop a mine. The streaming company enjoys the delivery of metals over the life of the contract, which, ideally, results in more gold, silver, or gas (volumetric payments are common in oil and gas financing) than the company originally paid for.

In effect, streaming companies are financiers who offer cash in exchange for years and years of gold or silver. Agreements vary. One silver streamer might offer a certain payment in exchange for the right to buy a known percentage of the mine’s production at a given price. For example, a streamer might offer $100 million to buy 20% of a mine’s silver production for the life of the mine at $4 per ounce. As long as silver is worth more than $4 per ounce, the silver stream has value to the buyer.

 

What Makes Silver and Gold Streaming Attractive

Streaming is attractive for investors because it offers a new way to play commodity prices. Here’s how streaming companies differ from direct plays on gold and silver miners or oil and gas drillers:

  • Limited Surprises – Anyone with any experience in miners and energy firms know that they always need more money. Cost overruns are very real. There are fewer surprises in streaming companies because they do not have to directly pay for the capital expenditures necessary to open and run an effective mining operation. Streaming companies usually pay one time; the remaining costs and excess are entirely the responsibility of the mine they work with.
  • Leverage – Streaming companies offer leverage to a commodity’s pricing. For example, suppose a streaming contract required the payment of $1,000 for each ounce of gold. If gold were $2,000, that contract would have twice as much value than if gold were $1,500. The difference between $1,500 and $2,000, however is only 33%. A 33% move in gold prices, then, could lead to a double in the value for the streaming contract.
  • Diversification – Silver and gold streaming agreements are made with a multitude of different miners. The result is powerful diversification against a downturn at one or more firms. Whereas you can have diversification to different mines by buying shares in a major mining firm, you still run the risk of centralizing control and financial trouble should that miner run into cash flow problems. A streaming company has exposure to many different mines from many different miners, insulating the investor from company-specific risks.
  • Future Opportunity – Streaming contracts derive the bulk of their value from the future. Should gold, silver, oil, or gas – whatever commodity is listed in the contract – rises in value in the future, streaming contracts have leverage to rising prices in the future.

These three advantages to silver and gold streaming are part of the reason why streaming has been so extraordinarily profitable for streaming companies. Silver Wheaton (SLW), the biggest silver streamer in the world, combined leverage, diversification, and a lack of surprises into incredible upside for investors as the price of silver rallied over the past decade. Silver Wheaton stock was levered to the underlying prices in silver, giving investors a 9-bagger from 2008, when silver prices bottomed. Likewise, Sandstorm Gold Ltd. (SAND) provides investors with a way to stream gold from major mining operations.

 

Why Silver and Gold Streamers Might Not Be For You

We couldn’t have upsides without having the downsides. Streamers offer unique opportunity to play silver, but they have some drawbacks:

  • They’re Growth-Focused – Unlike…say, MLPs, which pay out almost all of their cash flow in distributions, streaming companies are typically focused on growing the number of contracts in their portfolio. This means that little to none of the cash flow generated from each contract is returned to the investor in the form of dividends. Thus, investors must believe that the underlying commodity’s price will be constant or rise for years and years on end in order to pay for years of future earnings power.
  • Risks Exist – Streamers are, by their very nature, specialty financiers. Whereas Wells Fargo will generate cash flows from its mortgage portfolio regardless of commodity pricing, a streaming company makes money only when the prices of the underlying commodity are higher than the price at which it has a right to buy production.
  • Complexity – Mining and drilling are complicated industries. When the assets of multiple commodity players are combined together to create a streaming company, the company ends up owning a very complex basket of assets which are owned and controlled by multiple companies. Owning a streaming company requires that you understand the economics and practicality of many different mining operations.
  • Lack of Control – Streaming companies do not own the mines. Rather, they own only a portion of the production that comes from that mine. Thus, a streaming company makes money only when a mine is active. If a miner chooses to temporarily slow or stop production at any given mine, the streaming company loses valuable revenue in the short-term. Streamers also have to swallow the opportunity cost. If a streaming company signs a contract only for a miner to delay the project by 5 years, capital is unnecessarily tied up for the period, generating no real return for investors.

 

Should You Go Long on the Streamers?

I have no exposure to gold or silver in my portfolio.

However, if I were to make gold and silver a part of my portfolio, I’d certainly look at the streaming companies first. Unlike many gold and silver miners, streamers are very, very profitable with minimal surprises in costly capital expenditures.

Plus, unlike gold and silver bullion, streaming companies are taxed at the current capital gains tax rate, not income tax rates. Favorable taxes and simple economics (invest once, stream for years) makes gold and silver streamers a worthy play for investors who want long-term, levered exposure to silver and gold.

What are your thoughts on silver and gold streaming?  Ever thought of this alternative to investing in the commodities?

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Comments

  1. says

    I can honestly say this is the first time I have ever heard of commodity streaming companies in my investing career. I use direct commodity exposure for diversification in my portfolio, so it’s unlikely I will invest in these companies for growth. Especially since their performance seems to be a rather complicated derivative of commodity prices and the mining industry (which itself is a derivative of commodity prices).

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