Striking it rich in the precious metal business is a goal far older than the United States.
In the 19th century, many Americans' ancestors traveled west across the country with dreams of building new lives. Some ventured west to find freedom and land, others moved west in search of fortune. It was the lure of riches -- in the form of precious metals -- that attracted these fortune-seekers to the faraway land of California.
Known as the California Gold Rush, over 300,000 fortune hunters traveled from all over the world to find wealth in the form of gold nuggets. Known as forty-niners in reference to the gold rush of 1849, many of the early gold seekers struck it rich while gold was easy to find and retrieve.
As the numbers of fortune seekers increased, however, it became more difficult to discover new sources of gold. Soon, the equation shifted, with most of the new miners losing money on their venture. The easy pickings were gone forever, and only the merchants selling mining supplies and the dream continued to create wealth.
Today, it is still possible -- though far more difficult -- to build great wealth in the precious metal business. Investors no longer have to face the hardships of the original forty-niners to profit from skilled mining companies. However, high risk still remains when investing in miners of precious metals. While this risk is no longer to life and limb, as it was for the forty-niners, heavy monetary risk remains for investors in this sector. In addition, the miners themselves face several layers of risk.
I recently learned from my father-in-law, a skilled and knowledgeable precious metal investor, of a clever way that certain mining companies use to greatly mitigate their risk factors while retaining the upside of striking it rich. These companies benefit from multiple mining operations, which spreads out these firms' risks, and actually lock in the purchase price of the mines' production, regardless of market price. Sound too good to be true? At first, I thought so, too, but a little research confirmed this remarkable strategy.
These companies are called streaming companies. At its essence, a streaming company is a firm that provides capital to mining companies in exchange for an agreement to purchase all or some of their precious metal production at a low pre-negotiated price. This arrangement eliminates market price risk and spreads the streaming company's risk out across many companies, mines, regions and projects.
In addition, streaming companies obtain leverage from the ability to purchase precious metal at a significant discount to market price. The streaming company also does not have to carry the significant costs of exploration, extraction, and production. It's all upside without the common risks associated with direct mining companies.
Two streaming companies are Silver Wheaton (NYSE: SLW) and Sandstorm Gold (NYSE: SAND). As their names suggest, Silver Wheaton focuses on silver miners, while Sandstorm targets gold miners. Let's take a closer look.
Sandstorm Gold is a Vancouver-based company that secures streaming agreements in exchange for funding from advanced-stage development projects and producing mines. The company has 16 projects under agreement, including a variety of gold, copper and zinc mining excursions. Sandstorm CEO Nolan Watson says his company has $100 million to deploy for future projects but is waiting for the bottom in the mining sector to execute the deals.
Technically, SAND bounced from the $4 area before finding resistance at the 50-day simple moving average in the $5.60 zone.
Also based in Vancouver, Silver Wheaton is definitely the better known of the two companies. The world's largest precious metal streaming company, Silver Wheaton boasts 20 long-term silver streaming agreements and 23 gold related mining properties. In this year's second quarter, the company reported record silver production of 8.6 million ounces and 35,600 ounces of gold, a 28% increase from the previous year. However, revenue was down 17% and earnings were off by a significant 50% during the period.
Technically, Silver Wheaton has dropped from highs near $29 before finding support at $22. Price has bounced from this support to find resistance at the 50-day simple moving average.
Risks to Consider: Mining companies have fallen on difficult times, and streaming companies rely on miners being successful and honoring their agreements. Although streaming companies have less overall risk, the industry's struggles pose a broader inherent risk. Always use stop-loss orders and position size properly when investing.
Action to Take --> Silver Wheaton and Sandstorm Gold are both speculative companies dependent on the metal mining sector. As the mining sector improves over time, streaming companies are well positioned to capture long-term profits. Entering both SLW and SAND on breakout closes above their 50-day simple moving averages makes good sense. My 36-month price targets are $39 for Silver Wheaton and $11 for Sandstorm Gold.