I’m sure many of you are precious metals investors. I am as well…
The idea of a tangible asset that withstands the test of time is not only comforting because you have something for when the world goes to hell in a hand basket, but also because — in the end — gold and silver never go to zero.
That being said, if you’ve invested in precious metals or miners, you know all too well how volatile they can be. It doesn’t take much to send gold or silver on a rollercoaster ride based on whatever the Fed cooks up, how the stock market performs, or what the dollar is doing. Those are some pretty serious considerations for precious metals investors and it can be seriously stressful to watch on a week-to-week basis. Especially since you have no control over what the government, bankers, or institutional investors are going to do at the drop of a dime.
Whether it’s good news or bad, precious metals can whipsaw around like a scarecrow in a hurricane.
But, unlike your typical miner that could go belly up in a gold or silver bear market, there is one group of companies that can maintain themselves in good times and bad.
These are called “streaming” companies.
They don’t own mines. They don’t produce gold and silver. But they do accumulate cheap gold and silver alongside shares in companies that do.
Streaming companies are pretty much like the bank for the precious metals industry. Here’s why the model has been so successful…
What’s great about streaming companies is that they don’t actually own the mines. It’s damn difficult to predict whether or not a miner has a big hole in the ground or a treasure trove of riches. As Mark Twain once said, “A gold mine is a hole in the ground with a liar standing on top of it.”
While that is a very cynical and simplistic way of looking at it, the fact is that many mines end up never turning a profit.
But with streaming companies, that risk is mitigated. The companies provide capital that allow their partner mines to continue operations. In return, they receive a percentage of the metals that the companies produce at a low cost. This gives them a huge leg up on traditional mining operations.
Jason Hamlin of Gold and Silver Commentary has a great rundown of the benefits of metals streaming:
1) Diversification — A streaming company has agreements with multiple miners, thus spreading and mitigating any potential risk. The larger companies have dozens of deals and multiple streams of income.
2) Unlimited Upside Potential — Since the deals they secure are usually for a percentage of the mine’s production for life, the streaming company stands to benefit immensely if new zones are discovered and actual production comes in higher than originally forecasted. This occurs all of the time in the industry, as drilling delineates new resources, either increasing annual production or vastly extending the life of the mine.
3) Limited Downside Risk — While a miner may see profit margins squeezed as the cost of production rises, the streaming company typically has a contract for a percentage of the gold/silver production, thus eliminating the issue of rising costs. Royalties are paid out of top-line revenue before any operating expenses are accounted for. In addition, the contracts usually contain a number of provisions protecting the streaming company in the event of fraud, misrepresentation, etc. This is all on top of the considerable due diligence that is exercised before entering into any streaming deal.
4) Favorable Tax Treatment — Streamers enjoy a favorable tax situation courtesy of the Canadian Government. As long as they reinvest their proceeds or pay it out as dividends, they are gifted with a tax rate in the neighborhood of 0-8%. That’s a huge advantage when it comes to net profit margin.
Silver Wheaton (NYSE: SLW) was the very first company to implement this model.
As you can see, it’s been extremely profitable…
That’s 513% since it launched in the U.S. market in July 2005. It is up 95.85% since this time in 2006.
Meanwhile the iShares Silver Trust (NYSE: SLV), which attempts to reflect the actual performance of silver prices, is only up 11.1% over the same time period. I love straight up silver, but I’d much prefer 10 times my money with a streamer.
But I’m more excited about this model being applied to an industry that is more lucrative than gold and silver today…
While precious metals companies are able to legally get financing from any number of sources, the legal marijuana industry is hamstrung by federal regulations against controlled substances like cannabis — even though it is totally legal in many states and provinces.
Since banks can’t touch the stuff it has been very hard for marijuana companies to get access to capital.
Consider the fact that there are currently around 1.4 million square feet of licensed medical marijuana production facilities in Canada. However, the demand, once full-on legalization hits next year, is expected to be 10 times that much. There are plenty of producers scrambling to cover that difference, but they’ll need capital to make it all possible.
That’s why this new company I just discovered could completely reinvent the entire industry. It is basically the new “Bank of Marijuana” — the first in a multi-billion dollar industry.
This brand-new company — it just started trading this week — is implementing this streaming model for marijuana. In fact, it has already partnered with 14 cannabis companies that will pay it in shares and in low-cost marijuana. (Silver Wheaton — for comparison’s sake — has streaming agreements with 22 operating mines).
The partner gets the capital it needs to grow its business and the streaming company gets access to a consistent supply of cannabis at close-to-wholesale prices. It’s a win-win situation for both.
It’s almost like the producer of a big blockbuster movie: they see the talent and potential, provide the funds to get the movie into theaters, then sit back and count the money rolling in.
