SLW: Growth Unleashes Bulls
The declining metal prices are driving away investors' attention from metal streaming companies. This provides an opportunity to be banked on before the market picks up. The recent surge in prices of Pan American Silver Corp (PAAS) and First Majestic Silver Corp (AG) makes their valuation, overvalued. One of the giants, Silver Wheaton (SLW), has been overlooked by investors to an extent, that its most obvious multiple such P/E is presenting a shining bet.
Silver Wheaton's attributes such as long-term contracts of silver at a fixed price, nominal operating cost and minimal capital expenditures are appealing to investors searching for a less risky investments in the metal streaming industry. The production of Silver Wheaton is expected to reach 53 MSEO by 2017 as compared to 29.6 MSEO in 2012, with an average yearly growth rate of 17%, which makes it extremely lucrative to investors with a long-term horizon. The acquisition of the Salobo and Sudbury gold streams from Vale S.A. ("Vale"), is expected to double Silver Wheaton's attributable gold production over the next five years. Coupled with a full year production from Hudbay's 777 mine, acquired in August 2012, from now onwards these cornerstone assets will drive the company's production growth in 2013.
As per the company's news release dated March 19, 2013, attributable silver and gold reserves increased to 851.4 million ounces and 4.96 million ounces, respectively, as a result of organic and acquisition growth, inclusive of the acquisition of gold streams from Vale's Salobo and Sudbury mines. Based on reserve estimates as of December 31, 2012, following the Vale transaction, silver equivalent reserves attributable to Silver Wheaton have grown to 1.12 billion ounces
Business Model of Silver Wheaton
The Silver Wheaton business model resembles an investment bank as SLW operates zero mines and has zero exposure to the seesaw of the energy prices that normal mining companies have. Silver Wheaton provides up-front capital to companies considering to produce silver. However, the subject company does not pay it from profits; instead it grants Silver Wheaton the right to buy a certain amount of the mine's production annually at a fixed price.
Silver vs. Silver Wheaton
Silver has the bullish potential from here on but it does not necessarily mean that one runs blindly in the marathon expecting that every single silver stock or ETF would make him richer. One still needs essential decision making when it comes to picking winners at the right time. Given my investment case following are the benefits of investing in Silver Wheaton;
Silver Wheaton vs. ETF
- Silver Wheaton provides leveraged exposure to silver price. In the last three years silver price increased by 147% whereas SLW price jumped up by 303%
- Silver Wheaton has achieved an annual growth of 20% since its inception in its reserves and resources, a strong upside potential that ETFs do not provide
- Silver Wheaton is a market leader in metal streaming companies; the success is mainly driven by its successful stream of acquisitions. Its strong balance sheet and operating cash flows depict that the company is well positioned to pursue additional lucrative opportunities in silver-streaming business
- The SLW dividend stream is linked to operating cash flows and 20% of the last quarter's operating cash flows are distributed as dividends
Silver Wheaton vs. Silver Producer
- Silver Wheaton provides pure upside potential to the silver price like no other company. Almost 97% of all company revenues are based upon silver
- Silver Wheaton does not have to incur on-going exploration cost like other companies, so it has essentially a fixed operating cost
- Silver Wheaton is more tax efficient than other mining companies
- Mining companies have to abide by environmental laws and regulations, Silver Wheaton, being silver streaming company, does not have any responsibility like that
- Mining companies face significant exchange rate risk due to their nature of business while Silver Wheaton business model is such that it does not have any exchange rate risk
- Mining companies are greatly affected by seesaw of energy prices, however Silver Wheaton is not exposed to energy price risk
- Mining companies incur significant exploration cost, which is quite significant, SLW by the virtue of its strong business model does not incur such cost
THE VALE DEAL will drive the future growth:
Silver Wheaton has recently entered into a long-term contract with Vale (VALE). Announced in Feburary 2013, this contract will act as a key growth catalyst for SLW.
Key Terms of Contract:
Upfront payment: SLW will make an upfront payment of $1.9B; $1.33 B for Salobo, and $570 M for Sudbury. In addition to upfront payment VALE will also receive 10 million SLW warrants with a 10-year term and strike price of $65.
Production Stream: This contract will allow SLW to receive 25% gold production of the Brazilian Salobo Mine for the entire life of the mine, and 70% of gold production from Canada's Sudbury mines for the next 20 years.
Production Payments: This contract will allow SLW to purchase gold at the predetermined price of $400/Oz and1% inflationary adjustment starting 2016 from Salobo mine and $400/Oz from Sudbury mine with no inflation adjustment for the next 20 years.
Salobo gross up clause: If the 24Mtpa expansion is not completed by the end of 2016, SLW is entitled to a temporary increase in the percentage of gold production based on the pro-rata achievement of the target production.
Balance Sheet Analysis: At the end of fourth-quarter 2012, Silver Wheaton has $778 million in cash and has access to $2.5 billion from its revolving credit facility and bridge loan (prior to any payments related to the recent Vale transaction - total cash consideration of $1.9 billion). Silver Wheaton has plenty of capital to fund the $1.9B upfront payment, as well as to undertake future deals.
Silver Wheaton 4Q 2012 Highlights
Operating Results: SLW produced 8.5 million SEO compared to 6.9 million in Q4 2011 and 7.7 million ounces in Q3 2012, representing an increase of 22% (YoY) and 10% (QoQ), respectively.
Sales: SLW has recorded silver equivalent sales of 9.1 million ounces compared to 6.0 million ounces in Q4 2011 and 5.1 million ounces in Q3 2012, representing an increase of 53% (YoY) and 78% (QoQ) respectively. While revenues stand at $287.2 million compared to $191.9 million in the same period previous year, showing an increase of 50% (YoY).
Earnings: SLW has reported net earnings of $177.7 million ($0.50 per share) compared to $144.7 million ($0.41 per share) in the same period the previous year, representing an increase of 23% (YoY). The company reported adjusted EPS of $0.51 versus consensus analyst estimates of $0.4.
Cash Flows: SLW recorded operating cash flows of $254.0 million ($0.72 per share) compared to $163.7 million ($0.46 per share) in Q4 2011, an increase of 55% (YoY )
Operating cash margin: SLW reported cash margin of $26.76 per SEO, compared to $28.06 in the same period previous year, representing a decrease of 5%.
Dividend: The company declared quarterly dividend of $0.14 per common share, representing 20% of the cash generated by operating activities during the three months ended December 31, 2012.
Company Financials, Reuters, CapIQ
Based upon P/E multiple, SLW is trading at a discount, compared to its peers, while P/S, P/BV and EV/EBITDA multiples depict that SLW is overvalued. Based on these multiples we cannot conclude that SLW is overvalued because these multiples do not capture the margins and profitability. Based upon the P/E, SLW is trading at significant discount to its peers and is also offering exposure to a future stream of silver production. Silver Wheaton production of silver is expected to increase significantly due to the addition of new mines. The production of Silver Wheaton is expected to reach 53 MSEO by 2017 as compared to 29.6 MSEO in 2012, with an average yearly growth rate of 17%. In light of above analysis I would recommend a strong Buy on Silver Wheaton.