Wheaton's Silver Lining

Let’s face it, we’ve heard way too many inflation and mega inflation and hyperinflation stories, and while many will have you believe holding precious metals is the only way to go, there are a variety of new and innovative companies out there offering perhaps an even better outlook for the hedging investor.

Enter Silver Wheaton (SLW). Silver Wheaton is the largest silver streaming company in the world. The Company has long term contracts to purchase all or a portion of the silver production from mines in Mexico, Sweden, Peru, Greece, Portugal, Canada and the United States, at a low fixed cost. Silver Wheaton’s unique and simple business model is designed to create long term shareholder value, providing significant leverage to increases in the silver price while mitigating the downside risks associated with traditional mining companies. Silver Wheaton is un-hedged and well positioned for further growth (taken directly from the company website).

The current forecast for ’09 sales are between 16-18 million ounces of silver and approximately 30 million ounces by 2013 as a growth trajectory. Now that’s a lot of metal, and it certainly poses potential benefits to anyone seeking a good silver play. Now don’t worry, don’t let the KaChing P/E of 140+ fool you, this company has been battered by the market's tumble, and has started recovering back to its consensus pricing level near 10$.

SLW shares continue to trade below their historical multiples, and should outperform the peer group of silver producers in any silver price scenario from here. If silver rises, SLW has historically been a good leverage play among the silver producers. If silver prices fall, SLW has much lower overhead, and no capital projects to fund. If base metal prices continue to decline, other silver producers will be more negatively impacted with respect to their operating costs and profitability, compared to SLW.

Silver Wheaton shares are currently trading at a P/NAV multiple of 1.34x, a slight discount to the silver producer group average of 1.51x. The target price for Silver Wheaton employs a 1.75x P/NAV multiple and 17.5x forward CFPS, towards the upper end of target ranges for established silver producers (1-2x NAV and 10-20x CF).

Beyond strengthening silver prices, acquisitions will most likely be the most important catalyst for Silver Wheaton in the short term. The merger between Silver Wheaton and Silverstone Resources increased Silver Wheaton’s portfolio diversification, adding primary copper mines to its current slate of primary gold and primary lead-zinc mine sources. With low management overhead, no ongoing capital requirements, and no operating cost concerns, Silver Wheaton’s competitive position is improving versus the peer group.

Price targets

The shares in SLW offer investors a good exposure to silver equity with nearly 100% of sales directly tied to silver (among other much less significant gold sales). The company has no direct control over any of the operations in which it is streaming earnings and sales, and therefore it should be viewed as a hybrid royalty company. The price target would be in the 14-15$/share range, providing upside potential of approximately 40%. It is derived from applying a multiple of 18x to 2010 cash flow estimates of $0.80/share. Net debt is $0.37/share, which is an adjustment to cash flows, and will ultimately be applied against the 18x multiple that is most often applied to comparable royalty metals.

Key risks

The price of silver is most likely to keep on its current short-term and albeit long-term appreciative track, but the price itself poses potential risks to those interested in Silver Wheaton. Newly acquired streams in junior miners may pose some operational and developmental risks to SLW, while any reductions in output from any of the mines streamed can also pose revenue risks. The company is also significantly leveraged, and may endure some hardships (related to principal repayments and expense) on account of the financial crisis plaguing various areas in the markets at this time.

Disclosure: I hold SLW long in my stock portfolio on kaching. The portfolio is available for anyone to view or follow.

Comments

[optionsgirl:]

Good article summarizing all of the reasons SLW is a unique and attractive pick. Should silver fall, It would be a good opportunity to average down into SLW.

Jun 12 08:36 AM

[yellowhoard:]

Today looks to be a great entry point day for SLW.

Jun 12 08:56 AM

[Tim Plaehn:]

I have been watching SLW for 2 years and have traded in and out a few times. They just have not been able to bring in the growth in silver sales they have been projecting.

The business model is awesome but they have not had the growth in revenues and bottom line to justify the valuation.

Jun 12 10:12 AM

[Marco Hickey:]

SLW down over 3% today... Near low as of now. It has been on my watch list a while now. The way I am playing SLW is to buy the July 12.50 call options at a nickel a share- I have my limit set, but no luck yet.

Jun 12 02:08 PM

[Market Sniper:]

Nice piece. Am long the September 10 calls.

Jun 14 02:49 PM