Silver Wheaton: A Promising Silver Play

How times have changed. Three months ago when I reported on Silver Wheaton’s (SLW) 2nd quarter results, I put forth the opinion that the stock would be a good value buy if the share price dropped below $12 from its current $14 to $15 trading range. Well the shares were not a good value at $12 and they fell all the way to $2.56 on October 27.

The stock has been hammered for what I see as two reasons:

• Spot silver has fallen over the last 4 months from $17 per oz. to under $10.
• Falling base metal prices (lead, copper, zinc) may force the shut down of the mines where SLW gets its silver production as a by-product to the mine’s main focus.

I will respond to the second reason first. On the conference call management noted that it currently receives 85% of its silver from 3 mines that have been in production for over 100 years. There is almost no chance it will shut down and will probably shift to mining higher grade ores. It has been focusing on the lower grade ores that recent high metal prices made profitable and will now shift to higher yield ores to maintain profit levels.

As to silver prices, the online investment sites and discussion point to over supply, under supply, conspiracy theories and market manipulation. Silver Wheaton management believes that prices will recover next year, but at this point I think it is impossible to predict where precious metals will go. I do know that SLW purchases its silver at an average price of under $4 per oz. and will stay profitable at much lower silver prices if it comes to that.

The 3rd quarter earnings came in at 9¢ per share, right in the 9-11¢ quarterly earning it has been stuck in for the last 10 quarters. Silver sales have been stuck in the 2.7 to 2.9 million oz. per quarter range, defying company predictions of increased production from its contracted sources.

This time the company reduced its 2009 projections to 15-17 million oz. from its previous guestimate of 19 million oz. To invest in this stock means that you believe at some point in time silver production and sales will start ramping up significantly, increasing revenues and profits. This company does have 40%+ earnings per year growth in its future somewhere. When is the question.

Disclosure: SLW is a component of my site’s Opportunities Portfolio and last week I doubled the number of shares in the portfolio. The SLW position is currently about 2.5% of the portfolio.

Comments

[Robert Nabloid:]

I've always been talking about SLW for a while and think the latest prices are bargains... I see silver recovering, or I wouldn't be buying.

www.nabloid.com/silver.../

www.nabloid.com/my-fav.../

Most of my purchases were done around the $12 dollar mark over a year go. I wanted to buy some recently but there were too many different bargains on sale and didn't have enough money for all of them... I decided to invest in some riskier investments... to be honest, SLW is my most stable and "safest" mining company... in my portfolio at least.

2008 Nov 06 01:58 AM

[NOWHEREMAN:]

Like Silver? Go for the lowest priced highest output most hammered, unloved, disgusting one available. CDE

2008 Nov 06 03:30 AM

[leh:]

Or go with the real POS in the sector, SIL, if only for the enormous short interest. It's been among the strongest miners the last two days.

2008 Nov 06 08:16 AM

[capt Brian:]

ask yourself, when will we stop buying - wearing - eating using silver?


wanna buy it cheap? well, waht are u waiting for $2 silver?

2008 Nov 06 10:08 AM

[henarl:]

Silver & Gold miners should be part of everyones portfolio but not a large part. They will only pay off when inflation returns, which is inevitable but could be quite awhile yet. It takes patience but the reward will be huge.
I'm long CDE, GFI, SLW, & EGI but together they only comprise about 2% of my portfolio.

2008 Nov 06 10:28 AM

[sandspider:]

SLW is indeed an interesting business...and it is low in price. But possibly a long term play. Considering that the UAE and China and Saudi are all Gold buyers...Though Gold and silver are both being held down by we know who...Gold is the one straining at the reins. Silver is very flat and not moving with gold as it once did. If silver play does begin again watch for AXU which holds vast resources of the metal way up in the North country of Canada. They don't have the fiat currancy to go into production but they are sitting on thousands of hecters of good silver. SLW does not have the overhead of a mine and they have the savy it will just come down if they can continue to get the product...Watch for Dubai and Saudi set up their version of "Comex" then all hell will break lose and none of us will have as much as we want to have when that day comes. Look at mgt, cash flow, debt, political problems, etc etc and buy buy buy for the day is coming....

2008 Nov 21 03:32 PM