Why I Like Gold Streaming Stocks More than Gold Mining Stocks

Personally, my preferred way to own gold would be to buy a physical bar or coin and store it myself. It is tangible. It is outside the financial system. There is no counterparty risk.

Many investors disagree. They prefer convenience, which is why physically backed gold exchange-traded funds (ETFs) are popular. Others want even more torque and turn to gold mining stocks.

Miners can act like leveraged bets on gold because of how their cost structures work. When gold prices rise meaningfully above production costs, profits can surge. In favourable environments, miners often outperform bullion.

But that leverage cuts both ways. When gold prices fall, margins compress quickly. Earnings can evaporate. If I am going to take equity risk in the gold space, I prefer streamers over miners. Here is why.

Why streamers take some of the risk out of gold investing

Gold miners face a long list of operational and geopolitical risks.

Start with all-in sustaining costs (AISC). This metric represents the total cost to produce one ounce of gold, including mining, labour, sustaining capital expenditures, and overhead. If gold prices fall near or below that cost, margins disappear. A miner that looked wildly profitable at $2,200 gold per ounce can look stressed at $1,500. Share prices usually react violently.

Then there are operational risks. Mining is capital-intensive. Projects frequently go over budget. Equipment fails. Labour disputes occur. Environmental regulations tighten. A delay of even a few months can damage returns.

There is also geopolitical risk. Many gold deposits are located in emerging markets. Expropriation refers to a government seizing private assets, often with limited or delayed compensation. Nationalization is similar but typically involves the state taking ownership of an industry or resource.

A country facing fiscal stress could decide that foreign-owned mines are too valuable to leave in private hands. Even if a miner is headquartered in Canada, the U.S., or Australia, its key assets may sit in jurisdictions with less predictable legal systems.

In contrast, gold streaming companies operate differently.

A streamer provides upfront financing to a mining company in exchange for the right to purchase a portion of future gold production at a predetermined price. They do not operate the mine or hire workers. They do not manage equipment or environmental compliance. Think of them as royalty businesses tied to gold production.

Because they do not dig metal out of the ground, they avoid many operational risks. They are also capital-light and carry less debt. Margins tend to be significantly higher because their costs are fixed by contract rather than fluctuating with fuel, labour, and equipment prices. While they are still exposed to gold prices, they are insulated from many of the headaches miners face.

Two gold streamers to watch

Two of the largest and most established gold streaming companies in Canada are Franco-Nevada Corporation (TSX:FNV) and Wheaton Precious Metals (TSX:WPM).

Franco-Nevada has a market capitalization of roughly $67 billion, while Wheaton Precious Metals is even larger at about $90 billion. These are not speculative small caps. They are global leaders in the streaming and royalty space.

The financial metrics reflect the capital-light model. Franco-Nevada posts operating margins around 70%. Wheaton Precious Metals is slightly lower but still exceptional at roughly 66%. Balance sheets are conservative. Wheaton holds more than $1 billion in cash against minimal debt. Franco-Nevada carries no debt at all, though it holds less cash.

Neither company is immune to gold price volatility, but both avoid many of the operational and geopolitical risks that can cripple mining companies. If I am going to invest in gold stocks, I would choose streamers over miners every time.

The post Why I Like Gold Streaming Stocks More than Gold Mining Stocks appeared first on The Motley Fool Canada.

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Fool contributor Tony Dong has no position in any of the stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. The Motley Fool has a disclosure policy.