Have Metals Stocks Turned into Just Another Shiny Object?
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Given the historical price rise over the past few years of gold and other precious metals, investors have had good reason to own these shares. But, with the stock market up from its lows of 2008 and 2009, are metals' shares still producing good value? In this article, I will discuss why I believe that metals companies such as Silver Wheaton (NYSE: SLW) are still a nice offering for investors.
Although the Fed has given hints that it may cease its quantitative easing (QE3) efforts in the near future, as of now the dollar is still greatly devalued, providing investors with continued reason to keep buying gold as a hedge against inflation. And, the U.S. government continues to buy back roughly $40 billion per month in mortgage-backed securities as well as printing money to push out into the economy.
In this regard, the CEO of Silver Wheaton, Randy Smallwood, feels that the price of gold and silver will continue to move higher, provided that QE3 efforts also continue. If so -- as been the case for years -- precious metals become a story of value. Unlike cash, metals simply can't be printed in order to increase supply. Therefore, while Silver Wheaton remains bullish on precious metals in both the short and long term, the company is striving to better position itself in the overall gold space.
It is estimated that the revenue generated by Silver Wheaton from gold will rise roughly 12%, equating to its gold streams adding approximately 110,000 ounces of gold production per year. Those who are looking further ahead will see positive predictions over a 20-year timeframe. These estimates equal just a little less than six million silver equivalent ounces.
Near the end of 2012, Silver Wheaton stated that it had produced a record 7.7 million equivalent ounces throughout the 2012 third quarter. This was largely a result of the company's production from its Hudbay 777 mine.
In addition, an announcement in late 2012 that the company will also soon be purchasing two gold streams brought additional positive news. These streams are coming from Vale S.A's subsidiary from the Salobo Mine located in Brazil. Silver Wheaton is also acquiring 70% of the gold production, for a 20-year term, from some of Vale S.A's Sudbury Mines that are located in Canada.
Silver Wheaton paid a total cash consideration to Vale of approximately $1.9 billion, plus provided Vale with 10 million Silver Wheaton warrants with a term of 10 years and a stock price of $65 per share. In addition, the company will also pay Vale just over $130 billion for the 25% of gold production from Salobo, and another $570 million for the 70% of the Solobo production. The production accrued retroactively to January 1, 2013.
Currently, Silver Wheaton pays a quarterly dividend of $0.28, which equates to an annual dividend yield of .9%. While that may not as impressive as some other income producers, the company's shares are estimated to rise by more than 54% over the next 12 months.
Other metals companies are also of note. Rio Tinto (NYSE: RIO), for example, has given its investors a steady dividend and yield. Although the firm's most recent earnings per share are in the red at -$1.62, the company is paying its investors a dividend of $1.87 per share, equaling a dividend yield of 3.60%. In addition, the share price is expected to rise over the next 12 months by more than 45%.
Rio Tinto recently chose a new CFO. Chris Lynch, the former BHP Billiton finance chief, will be replacing Rio's Guy Elliott who will be retiring later this year. Lynch actually left BHP back in 2007, when he had been overlooked for the company's top job. Lynch will be taking over in April 2013, and will place a large focus on cutting the company's costs by approximately $5 billion, which should help in improving shareholder returns, as the company has written down over $20 billion since 2007.
Alexco Resource (NYSEMKT: AXU) is another mining stock that is seeking to reach better cost efficiency, as well as improving its production targets. One of the key highlights for Alexco is its operations in the Yukon. Since the 1950s, the area has been responsible for producing more than 217 million ounces of silver -- and it is estimated that there is a great deal more to be mined. In addition, the company also expects to mine lead and zinc in this area.
In addition to Alexco's Bellekeno silver mine, the company has plans to get two more mines -- the Onek and the Lucky Queen -- running later in 2013. The company is currently producing 500,000 ounces of silver per year. While its earnings per share are only $0.04, the share price of Alexco is expected to rise by more than 60% over the next year.
One of the others that is expected to have a sharp share price in the mining arena is Cliffs Natural Resources. Although this iron ore producer also has negative EPS of -$6.32, share price here is anticipated to increase by more than 40%.
Freeport McMoRan Copper & Gold (NYSE: FCX) is another that investors should hang on to for both growth and income. Currently paying a dividend of $1.25 per share, this company is yielding approximately 4%. With a one year share price target estimate of more than $40, investors could see share value growth of 29%.
Overall, considering its forward moving production outlook -- coupled with its current production results -- I feel that Silver Wheaton is a great stock to own, especially if metals continue to maintain their high value thanks to continued QE3 efforts. With the addition of new mines, Silver Wheaton's growth is projected to continue over at least the next twenty years, providing investors with a nice long-term play.
StockCroc1 has no position in any stocks mentioned. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!