Looking to invest in precious metals? Streaming companies may be the way to go. Instead of mining metals themselves, streaming companies essentially lend to miners — but instead of collecting interest, streamers receive part of the mine’s future output at a steep discount. It’s a great business model that allows streamers to both diversify revenue streams and seize unique opportunities.
The largest streaming company in the world (by revenue, not market capitalization) is Wheaton Precious Metals (NYSE:WPM). Wheaton began as a silver streaming company in 2004 under the name Silver Wheaton, but the company began seeing opportunities in gold around 2013, and in 2017 it changed its name to Wheaton Precious Metals to signify its diversification.
Just last week the company started a new chapter, announcing its first streaming deal in a third metal: cobalt.
A bet on… electric vehicles?
“I’ve owned a Tesla (NASDAQ:TSLA) for five years and I will never own a gas vehicle again.” That’s a quote not from Al Gore or Elon Musk, but rather Wheaton CEO Randy Smallwood. His decision to stream cobalt is exactly that: a bet on EV adoption. It’s also a bet that cobalt, which currently plays an important role in today’s EV batteries and will continue to be an important component of future battery technology.
Today just 0.67% of new car sales are electric, but that number is set to grow many times over, with some analysts anticipating EVs will make up 10-16% of new sales by 2025.
Cobalt is usually mined only as a byproduct of mining operations for other metals, such as copper and nickel. So even if cobalt prices go up, supply could remain constrained if the prices of nickel and copper languish. Making things even more complicated, 55% the world’s cobalt is mined in the Democratic Republic of Congo (DRC). In March, the DRC made things harder for cobalt miners, declaring cobalt a “strategic metal” and hiking royalties to 10%, up from 2% before.
This anticipated demand and concern over supply has caused cobalt’s price to quadruple in just two years. The Congo’s actions indicate its leaders also believe the cobalt story, betting foreign companies will continue to invest there in spite of these new increased costs.
Wheaton’s new streaming deal is with Brazilian miner Vale (NYSE:VALE) at its Voisey Bay nickel mine in Newfoundland, Canada. Wheaton, along with smaller Canadian streaming company Cobalt 27 Capital Corp., will invest a combined $690 million in Vale’s $1.7 billion expansion of the mine. Vale’s initial plans have been delayed since last August, when the price of nickel declined; however, thanks to Wheaton and Cobalt 27, the mine will be expanded and will begin producing cobalt by 2021.
Wheaton will pay $390 million of the $690 million, and will be entitled to 42.4% of production until it receives 31 million pounds. After that, Wheaton’s share will drop to 21.2% of the mine’s output.
When it receives cobalt, Wheaton will pay only 18% of spot prices to Vale (earning a gross margin of 82%) until its initial costs are recovered; after that, Wheaton’s payments will increase to 22%.
At current spot prices, management says the deal should yield over $75 million in operating cash flow per year for the first 10 years. For perspective, Wheaton made $538.8 million in operating cash flow last year, so the stream would add roughly 15% to that figure, all else equal. Of course, if cobalt spikes further, Wheaton could do even better.
Great deal or risky endeavor?
“We’re taking a gamble and investing in cobalt and if cobalt doesn’t wind up getting used, then we didn’t win,” said Lockwood, admitting the risks to Wheaton’s investment. One significant risk is a drastic reduction in cobalt use in battery chemistry. As an example, Tesla just recently touted its new battery, which is defined by — you guessed it — lower cobalt content, which Tesla has gotten down to an 8:1:1 ratio of nickel to manganese to cobalt ratio (with cobalt comprising 10%). That’s a big improvement from the 15%-cobalt ratio of traditional batteries, and could give Tesla a future cost advantage in EVs.
While it would be bad for prices if less cobalt is ultimately needed, Tesla’s efforts to limit cobalt may be a bullish sign that Tesla management also anticipates tighter future cobalt supply.
While we don’t have a particular opinion on the prices of gold, silver, or cobalt, we do think Wheaton’s management is doing a great job diversifying the company’s portfolio and innovating with the times. As a lower-risk way to gain exposure to these metals.