There are many reasons to be bullish on precious metal prices and in particular silver. Additionally, the companies that mine and/or sell the silver are great long-term buys. The endless central bank easy money policies that have been put into place worldwide will debase fiat currencies globally. This will translate into the purchasing power of those currencies diminishing, thus strengthening precious metal demand. Further, it is well known that gold, and to some degree silver and platinum, tend to have an inverse relationship with the dollar. The debt crisis in the United States that is eating the value away of the dollar over time further strengthens the case for the precious metals. I have outlined the bullish case in further detail in sections of prior work, and have also opined that silver could outperform gold in the next few years.
In this article, I highlight yet one more reason to get behind Silver Wheaton (SLW), which in my opinion, represents the best silver stock in the industry. At the time of this writing, SLW currently trades at $35.70 and has a 52-week trading range of $22.94 to $41.30. The stock is down about 7% since the start of the year and still represents a good opportunity to initiate or add to a position. On average, about 3.65 million shares exchange hands daily, and most trading sessions volume has been around this number. The company trades at a 21.8 P/E multiple but only a 0.62 PEG ratio and currently yields 0.8% (the company temporarily reduced its quarterly dividend to 7 cents and I anticipate it returning to prior levels this year). SLW's earnings per share are estimated to grow at a rate of 36% in the next five years. The company also has a strong balance sheet with a debt-to-equity ratio that is decreasing. SLW also has more proven and probable reserves of silver in its portfolio than other major silver companies as discussed in this recent piece.
Quick Review of SLW's Business
Before sharing the most recent buy signal for SLW, I'd like to briefly share with readers unfamiliar with the company what SLW does to make money. SLW is a worldwide silver streaming company. Streaming is a very unique and long-term solvent business approach in the gold and silver space. The company offers a superior alternative to traditional precious metal mining stocks because in general the approach SLW takes offers a stronger opportunity for revenue growth with lower long-term overhead than mining companies, many of which are in unstable jurisdictions. Rather than mine for metals directly, SLW generates its profits by providing up front financing for other companies in the mining space looking to expand and drill for precious metals. In exchange for the up-front financing of these companies, the SLW acquires the right to purchase a portion of production generated from the mines at a fixed cost. SLW has contracts with companies around the world to purchase silver production in bulk at prices well below market value. Once SLW acquires the silver at the predetermined upfront investment cost, it then proceeds to sell the silver at higher prices.
Most Recent Development
So why did I feel it necessary to write another article on SLW? Well, it is because the bullish case just got a little stronger with a major deal that was struck this week. SLW just announced that it has entered into an agreement with a subsidiary of Brazilian mining company Vale (VALE) to purchase one quarter (exactly 25%) of the entire lifetime gold production from Vale's Salobo Mine in Brazil. In addition, SLW will also have the rights to 70% of the gold production from the Vale's Sudbury Mines in Canada over the next 20 year term.
As part of the agreement, SLW will pay Vale just under $1.9 billion in cash as well as give Vale 10 million warrants to the company for a term of ten years, at a premium price of $65 each. SLW will also pay ongoing allotments of $400 or the market price, whichever is cheaper, for each ounce of gold delivered. The beauty, is that SLW can than turn around and sell that gold and market and pocket the difference. SLW expects the deal to add 110,000 ounces of gold a year over the next 20 years (equating to 2.2 million ounces) and believes both of Vale's mine locations offer incredible expansion possibilities, further increasing the value of SLW's upfront investment. In the press release, SLW stated that the agreement will boost company revenues derived from gold from a previous average of around 12% to a peak of around 25% for the next five years.
Silver Wheaton CEO and President Randy Smallwood stated that "Vale has a history of mining success spanning decades, and we are confident that Salobo and Sudbury will deliver substantial long-term value to both companies' shareholders. These gold streams will significantly increase Silver Wheaton's overall growth profile, which, given our unique dividend policy, should also translate directly into dividend growth."
Global central bank stimulus will undoubtedly debase currencies worldwide, and thus, the tailwinds are in place to sustain a long-term bull market in precious metals. The dollar is likely to only weaken in coming years due to the United States' addiction to high debt and easy money policies. Precious metal streaming is an excellent business model as the risk is much lower compared with traditional mining companies. I believe SLW's actions to purchase a stream from Vale indicates the company is taking the proper direction to increase revenues and return capital to shareholders. Thus, at current levels, SLW is a strong buy for the long-term.
Disclosure: I am long SLW.