Miners seeking new capital have always had a variety of options: they could issue new shares, take out a loan, enter into joint-venture agreements, or divest non-core assets.
However, in the last decade, a new option has emerged called “precious metals streaming” – in which streaming companies essentially offer capital up front to mining companies in exchange for metal later. If properly executed, the end result is a win for both parties that can ultimately provide value to investors.
Precious Metals Streaming
Today’s infographic from Silver Wheaton explains the precious metals streaming model, and the arbitrage opportunity that creates value for both the streamer and the miner seeking to acquire capital:
The aforementioned arbitrage opportunity in precious metals streaming is key.
For a traditional base metal miner, the majority of forecasted mine revenue may come from a metal like copper or nickel. However, along with those “target” metals, smaller amounts of gold and silver may be produced from the deposit as well.
Investors would still value those by-product precious metals in a base metal miner’s portfolio, but the metals may be typically valued at an even higher multiple in a precious metal streamer’s portfolio. This allows the base metal miner to transfer these future “streams” to the streamer in exchange for up-front capital, which can be a win-win scenario for both parties.
In other words, miners use streaming to acquire non-dilutive financing, and to extract value from non-core assets. This allows them to deploy capital on purposes more central to their strategy. Major miners such as Teck, Barrick Gold, Vale, and Glencore all sold streams in 2015.
Meanwhile, streaming companies have been very successful since this model was first pioneered 12 years ago. They are getting gold and silver at a discount, and this has created significant amounts of value for investors over the last decade. Today, there are many valuable streaming companies out there, including the major ones such as Silver Wheaton, Royal Gold, and Franco-Nevada.
Volatile Returns: Commodity Investing Through Miners and Explorers
The companies that mine or explore for metals offer additional leverage to commodity prices, creating opportunities for astute investors.
Volatile Returns: Commodity Investing Through Miners
Investors consider gold and silver as safe haven investments. But the companies that produce gold and silver often offer volatile returns, creating opportunities for astute investors.
Volatility is a double-edged sword, particularly when it comes to commodity investing. During the good times, it can create skyrocketing returns. But during bad times, it can turn ugly.
Today’s infographic comes to us from Prospector Portal, and shows how investing in precious metals equities can outperform or underperform the broader metals market.
Capitalizing on Volatility: Timing Matters
Just like most investments, timing matters with commodities.
Due to the complex production processes of commodities, unexpected demand shocks are met with slower supply responses. This, along with other factors, creates commodity supercycles—extended periods of upswings and downswings in prices.
Investors must time their investments to take advantage of this volatility, and there are multiple ways to do so.
Three Ways to Invest in Commodities
There are three primary routes investors can take when it comes to investing in commodities.
|Direct physical investment||
Among these, commodity-related equities offer by far the most leverage to changes in prices. Let’s dive into how investors can use this leverage to their advantage with volatile metal prices.
The Fundamentals of Investing in Mining Equities
When it comes to commodity investing, targeting miners and mineral exploration companies presents fundamental benefits and drawbacks.
As metal prices rise, the performance of mining companies improves in several ways—while in deteriorating conditions, they do the opposite:
|Category||Rising Commodity Prices||Falling Commodity Prices|
|Outlook||- Improved outlook||- Deteriorated outlook|
|Stock Price Movement||- Equity growth||- Equity decline|
|Dividend Payouts||- Increased dividends||- Decreased dividends|
|Financial Performance||- Increased earnings||- Decreased earnings|
With the right timing, these ups and downs can create explosive opportunities.
Mining companies, especially explorers, use these price swings to their advantage and often produce market-beating returns during an upswing.
The Proof: How Mining Equities React to Metal Prices
Not only do price increases translate into higher profits for mining companies, but they can also change the outlook and value of exploration companies. As a result, investing in exploration companies can be a great way to gain exposure to changing prices.
That said, these types of companies can generate greater equity returns over a shorter period of time when prices are high, but they can also turn dramatically negative when prices are low.
Below, we compare how producers and exploration companies with a NI-43-101 compliant resource perform during bull and bear markets for precious metals.
All figures are in U.S. dollars unless otherwise stated.
|Mining Company||Company Stage||Primary Metal|
|Market Cap. |
Oct 31, 2019
|Market Cap. |
July 29, 2020
|Bull Market Performance|
(Nov. 1, 2019-July 29, 2020)
|Bear Market Performance
(Jan 02 – Dec 31, 2018)
|Auryn Resources||Exploration||Gold, Copper||$181M||$330M||60%||-39%|
|Wesdome Gold Mines Ltd.||Production||Gold||$1,104M||$1,885M||68%||110%|
|Red Pine Exploration||Exploration||Gold||$13M||$22M||29%||-55%|
|Revival Gold Inc.||Exploration/ |
|Erdene Resource Development||Exploration/ |
|Endeavor Mining Corp.||Production||Gold||$2,622M||$5,874M||54%||-13%|
|Yamana Gold Inc||Production||Gold||$4,572M||$8,279M||87%||-22%|
During the bear market period, the price of gold declined by 2.66%, and despite engaging in exploration activity, most companies saw a slump in their share prices.
In particular, exploration companies, or juniors, took a heavier hit, with returns averaging -31.66%. But even during a bear market, a discovery can make all the difference—as was the case for producer Wesdome Gold Mines, generating a 109.95% return over 2018.
- Average returns for gold producers including Wesdome: 24.83%
- Average returns for gold producers excluding Wesdome: -17.65%
During the bull market period for gold, gold mining companies outperformed the price of gold, with juniors offering the highest equity returns averaging 153.43%. Gold producers outperformed the commodity market, the value of their equities increased 69.61%—less than half of that of exploration companies.
Silver: Bears vs Bulls
Similar to gold mining companies, performances of silver producers and explorers reflected the volatility in silver prices:
|Company||Company Stage||Primary Metal|
|Market Cap. |
Oct 31, 2019
|Market Cap. |
July 29, 2020
|Bull Market Performance (Nov. 1, 2019-July 29, 2020)||Bear Market Performance (Jan 02 – Dec 31, 2018)|
|Pan American Silver||Production||Silver||$2,973M||$10,550M||125%||1%|
|Americas Gold and Silver||Production||Silver||$335M||$482M||10%||-56%|
|Dolly Varden Silver Corp.||Exploration||Silver||$28M||$74M||152%||-32%|
|Endeavour Silver||Production||Silver, Gold||$458M||$837M||72%||-10%|
During the bear market period for silver, its price decreased by 9.8%. Explorers and producers both saw a dip in their share prices, with the equity of silver producers decreasing by 21.63%.
However, the discovery of a high-quality silver deposit again made the difference for SilverCrest Metals, which generated a 116.85% return over the year.
- Average returns for silver exploration companies including SilverCrest: 8.32%
- Average returns for silver exploration companies excluding SilverCrest: -27.86%
On the other hand, during the bull market period, the price of silver increased by 34.33%. Silver exploration companies surpassed the performance of the price of silver.
- Average returns for silver producers: 69.04%
- Average returns for silver exploration companies: 95.36%
The potential to generate massive returns and losses is evident in both cases for gold and silver.
The Investment Potential of Exploration
Mining equities tend to outperform underlying commodity prices during bull markets, while underperforming during bear markets.
For mining exploration companies, these effects are even more pronounced—exploration companies are high-risk but can offer high-reward when it comes to commodity investing.
To reap the rewards of volatile returns, you have to know the risks and catch the market at the right time.
The World’s Gold and Silver Coin Production vs. Money Creation
In 2019, the value of global money creation was over 500 times higher than the world’s gold and silver coin production combined.
Global Gold & Silver Coin Production vs. Money Creation
Note: Data has been updated to correct a previous calculation error pertaining to Japanese Yen money supply.
Both precious metals and cash serve as safe haven assets, intended to limit losses during market turmoil. However, while modern currencies can be printed by central governments, precious metals derive value from their scarcity.
In this infographic from Texas Precious Metals, we compare the value of the world’s gold and silver coin production to global money creation.
Total Production Per Person, 2019
We calculated the value of global currency issuance in 2019 as well as precious metal coins minted, and divided by the global population to get total production per person.
Throughout, global money supply is a proxy based on the 5 largest reserve currencies: the U.S. dollar, Euro, Japanese Yen, Sterling Pound, and Chinese Renminbi.
|2019 Production||Ounces||Dollar Value||Dollar Value Per Person|
|Global Gold Coins||7,204,982||$10.9B||$1.42|
|Global Silver Coins||97,900,000||$1.8B||$0.23|
|Global Money Supply||$4.3T||$556.33|
All numbers are in USD according to exchange rates as of December 31 2019. Gold and silver values are based on the 2019 year close price of $1,510.60 and $17.90 respectively.
The value of new global money supply was 390 times higher than the value of gold coins minted, and 2,400 times higher than silver coins minted.
Put another way, for each ounce of minted gold coin, the global money supply increased by more than $593,000.
Change in Annual Production, 2019 vs. 2010
Compared to the start of the decade, here’s how annual production levels have changed:
|Global Silver Coins (oz)||95,900,000||97,900,000||2.1%|
|Global Gold Coins (oz)||6,298,331||7,204,982||14.4%|
|Global Money Supply (USD)||$2,936,296,692,440||$4,268,993,639,926||45.4%|
Annual increases to global money supply have increased by half, far outpacing the change in the world’s gold and silver coin production.
Even more recently, how has production changed during the COVID-19 pandemic?
The COVID-19 Effect
In response to the global pandemic, central banks have enacted numerous measures to help support economies—including issuing new currency.
The global money supply increased by more than $6.8 trillion in the first half of 2020. In fact, the value of printed currency was 930 times higher than the value of minted gold coins over the same timeframe.
Investors may want to consider which asset is more vulnerable to inflation as they look to protect their portfolios.
Want to learn more? See the U.S. version of this graphic.
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