Why Wheaton Precious Metals Rallied in August

Shares in gold and silver mining "streamer" Wheaton Precious Metals (NYSE: WPM) rallied 37% in August, according to data from S&P Global Market Intelligence.

Not only did the price of both gold and silver rebound during August, but Wheaton Precious Metals also delivered a strong second-quarter earnings report. The impressive results showed that Wheaton continues to be an asset-light way to play the gold and silver mining industry.

Wheaton shines in August

Wheaton is a "streamer," which means it finances parts of mining projects worldwide in exchange for an equivalent portion of the mine's output. Streamers offer a win-win scenario for miners, as miners don't have to raise as much capital or take on as much debt to fund their capital-intensive mining projects. Meanwhile, streamers can develop a diversified portfolio of projects, limiting their own risk. However, if the price of the underlying mined commodity spikes over time, streamers can earn exceptional returns.

During August, the prices of gold and silver surged roughly 10% and 17%, respectively. Wheaton Precious Metals' portfolio consists basically one-half gold and one-half silver, with the second quarter's revenue at 46% from gold, 52% from silver, 0.3% from palladium, and 2% from cobalt, so it's no surprise that the stock did well last month.

There weren't any large, obvious catalysts for the moves higher in both commodities. Each commodity's price had sold off in the preceding months after going on strong multi-year runs. Gold is generally seen as a "haven" amid geopolitical tensions and inflation, while silver also has applications in solar panels and electronics.

But it also appears Wheaton is executing exceptionally well, as its reported second-quarter numbers came in ahead of expectations, even though investors already knew what silver and gold prices did in Q2. Wheaton reported earnings on Aug. 6, just shortly after the start of the month. Q2 revenue surged 84.7% relative to the year-ago quarter to $929.2 million, while net earnings per share rallied an even higher 89.7% to $1.195 per share. Both figures exceeded analysts' expectations.

Management also forecast an increase in production in the back half of the year to about 900,000 gold-equivalent ounces (GEOs) at the midpoint, which would mark an acceleration from the 414,000 GEOs produced across Wheaton's portfolio during the first half of the year. Rising production against rising prices is a good backdrop.

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The longer-term plan could be a gusher

Furthermore, Wheaton reiterated its longer-term guidance of 50% GEO growth by 2031 to 1.2 million annual GEOs, with a plan to keep produced ounces flat between 2031 and 2035. Wheaton currently has streaming agreements for 22 operating mines, 20 development projects, and 15 exploration-stage projects. So, Wheaton expects its investment cycle in the non-operating projects to peak in 2030, which is why it projects a flattening out thereafter.

Around 2031, investors should probably expect the company to harvest much more of its operating cash flow rather than reinvest it for growth. At that point, Wheaton's cash returns via share repurchases and dividend payments should increase. Today, its dividend yield is roughly 0.5%, and the stock trades at about 30 times this year's earnings estimates.

While that doesn't seem particularly cheap, production is expected to grow by 50% between now and 2030. If underlying commodity prices also increase between now and then, the stock will likely look much cheaper in a few years, with a much higher cash payout.

Billy Duberstein and/or his clients have positions in Wheaton Precious Metals. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.