Silver Wheaton (SLW) is a streaming company, it makes an upfront payment in return for the right to purchase a fixed percentage of the future silver production from a mine. As the mine owner delivers silver to Silver Wheaton, an additional delivery payment is made to them.
Silver Wheaton purchases silver from companies which get it as a by-product. Silver produced at base metal and gold mines is given a lower valuation by the market than the one produced by a designated company; that is why Silver Wheaton purchases silver at a very cheap price.
Silver Wheaton is the world's 2nd largest silver producer, second only to the Mexican mining company Fresnillo PLC (FNLPF.PK). Silver Wheaton's 2012 production guidance is for 25.9 million ounces of silver. SLW silver production in million ounces was 24.6 in 2011, 22,0 in 2010 and 16.3 in 2009.
The table and the chart below present Silver Wheaton's total cash cost, silver's average price and Silver Wheaton's cash operating margins for each year, from 2004 to 2011, and for the first half of 2012.
Data: Silver Wheaton
Data: Silver Wheaton Chart: Arie Goren
The table and the chart clearly show that the average total cash cost of silver to Silver Wheaton has hardly changed from 2004 to 2012: the total growth for this period is only 3.3% from $3.90 an ounce in 2004 to $4.03 an ounce in 2012. Since the price of silver has appreciated 321% during that period, the cash operating margins for Silver Wheaton have appreciated 685.3% at the same time period.
The chart below shows the price of silver and the adjusted price of SLW, so that they will start from the same level in August 01, 2005 (stock price for SLW are available since July 06, 2005). The price of SLW was adjusted also for dividends, but since the dividend yield of SLW has been low during this period, it has not changed the results significantly.
Data: Yahoo finance, TradeStation Chart: Arie Goren * SLW price has been multiplied by 2.075 in order to start from the same level.
Since August 01, 2005 to November 08, 2012, the price of silver had appreciated 345.7% from $7.26 an ounce to $32.37. This represents a Compound Annual Growth Rate (CAGR) of 22.8%. During the same period SLW adjusted price for dividends had appreciated 1,060% from $3.50 to $40.60, this represents a Compound Annual Growth Rate (CAGR) of 40.05%, a very significant difference undoubtedly.
Silver Wheaton highlights the reasons why investing in its shares is better than investing in silver or in other silver companies, following are some of them:
- Greater upside to increases in the silver price
- Fixed operating and capital costs
- No ongoing exploration costs
- Unique and sustainable dividend policy
- Greater diversity of assets
- Tax efficient business model
- Strong upside potential with downside protection
Silver Wheaton's business model has proven to be excellent, as can be seen from the actual results. Since 70% of mined silver is produced as a by-product from base metal or gold mines, this guarantees significant growth potential in the silver stream space. In my opinion, Silver Wheaton is the best way to invest in silver.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.