Seeking Alpha
Long/short equity
Profile| Send Message|
( followers)  

While the stock market breaks to new highs, silver (NYSEARCA:SLV) remains under pressure. The precious metal is down 20% year-to-date. Silver has only managed a moderate 6% rebound after the recent fast drop in price. The world's largest silver streaming company, Silver Wheaton (NYSE:SLW), has been punished even harder than silver. SLW is down more than 31% year-to-date. I've been bullish on SLW for some time. I think that there is still time to join the SLW train before it leaves the station.

Let me start with a quick reminder on what silver streaming is, and why SLW is different from other silver companies. SLW makes upfront payments in return for the right to purchase a fixed percentage of the future silver or gold production from a mine. An additional delivery payment is made when the mine owner delivers the precious metal to SLW. SLW gets clear cost structure, miners get an alternative to debt. Everyone is happy.

Silver Wheaton is presenting its first quarter earnings results on May 10. Analysts are estimating a profit of $0.40 per share, down 2.5% from the first quarter results of 2012 (analyst estimates sourced from Yahoo Finance). Analyst estimates for the first quarter have been cut 19% during the last 90 days, while the estimates for the whole year 2013 have shed 20.5%. SLW has a mixed recent history of earnings reports. Out of 4 reports of 2012, two came better than expected and two missed estimates.

SLW has recently added more gold to its portfolio. In a deal with Vale (NYSE:VALE), SLW acquired rights to purchase 25% of total gold produced from Salobo, a mine situated in Brazil. This is an agreement for the life of the mine. It has also acquired rights to purchase 70% of total gold production from Sudbury, which is situated in Canada. This agreement would last for 20 years. Perhaps, it was first seen as a dubious move by some investors because SLW took debt to make upfront payments. Today, silver is down 20% year-to-date, while gold (NYSEARCA:GLD) is down only 11%. According to company estimates, silver revenue would average 76% in total revenue for the years 2013-2017. This number is down from 90% that was before the Vale deal. Clearly, the deal has brought more diversification and more opportunity for SLW.

SLW has a well diversified portfolio of mines. Nineteen mines are operating, four mines are in the development stage. One of the developing mines is Barrick Gold's (NYSE:ABX) Pascua-Lima.The Pascua-Lima project is facing pressure from the Chilean government due to environmental issues. As ABX has stated in its latest earnings call, construction on the Chilean side of the project has been suspended in response to a preliminary injunction from the court. ABX has stated that it would consider all possible solutions to the problem, including the suspension of the project. The Argentinean side of the Pascua-Lima project is not affected by this issue. Whatever the outcome of this situation, SLW would not be affected for two and a half years. Currently, there is an agreement with 3 ABX mines that ends December 2013. There is also an agreement that if Pascua-Lima doesn't deliver silver at all or delivers less than expected, the additional silver would be taken from these three mines. They are Lagunas Norte (Peru), Pierina (Peru) and Veladero (Argentina). They could not be affected by the decisions taken by the Chilean government.

Currently, SLW trades at 14.88 P/E and 12.73 forward P/E. I think that if you believe that silver prices would rise, SLW is a must for your portfolio. SLW offers a great business model, diversified portfolio of assets and attractive valuation. SLW offers a dividend that is directly connected to the price of silver. The company pays 20% of previous quarter's operating cash flows to its shareholders. Currently, SLW yields 2.28%. In my opinion, $23-$26 is a good range to consider a position in SLW.

Source: You Still Have Time To Buy Silver Wheaton