Silver Wheaton: A Hidden Gem 28 comments
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One of the most dynamic companies I have ever come across is a hidden gem. Silver Wheaton (SLW) should be a core position in everyone's portfolio for the following reasons.
The first reason is obviously valuation - I mean this is the stock market after all. It recently acquired Silverstone, increasing previous guidance of 14m/oz to 18m/oz. The company will then reach 25m oz in 2010, 29m/oz in 2011 and 33m/oz by 2012.
But isn't mining a very risky business? Yes mining does come with its share of risks, but that's the thing. Silver Wheaton does no mining. It is purely a royalty company, which is now comprised of 12 streams around the world. For those who don't know, a royalty company pays money up-front to miners in need of financing in return for a contractual percent of the future product. So yes, Silver Wheaton has been a very risky company in the past, and has come close to being unable to service its debt. But that is all in the past now - the company had $220m in debt just 6 months ago and has reduced that to just under $150m, which excludes the debt repaid so far this quarter, most likely in the neighborhood of $40-75m.
WAIT, HOW DOES THIS WORK? Well it is rather simple, and anyone capable of doing elementary math can calculate a rough estimate of operating income. Silver Wheaton pays on average $4/oz for each oz of silver produced from its streams (technically $3.93 for 2009 and subject to a maximum increase of 1% per annum). Silver, which is currently trading at $14/oz as I write this, would provide $10 of operating income per ounce. I expect silver to skyrocket over the next 3-5 years, which essentially makes SLW a pure play on this precious metal. The company has 5 people in the entire company (remember no actual mining takes place), whose combined salaries don't even make it to the financial statements due to the insignificance of that amount.
WHAT ABOUT TAXES? Though a Canadian based company, Silver Wheaton was allowed by regulators to be headquartered in the Caymans. I think we all know that means NO Income Tax! That's right, unless the tax laws change, SLW will only pay capital gains tax on investments. So putting this all together, GROSS REVENUE- INTEREST EXPENSE = NET INCOME = FREE CASH FLOW. For those unfamiliar with the meaning of the latter, free cash flow is the true measure of earnings for investors. What about net income? Well yes, net income is the true measure of earnings for the company, but in order for the business to continue operating, a significant portion of that must be reinvested into such things as inventory, plant, property, equipment, and cash (in order to ensure that viability, should the company hit hard times). SLW will likely continue to make additional purchases should the opportunity present itself, but it can continue operations for over 20 years even without doing so. It gets better - as mines develop, they often lead to additional reserves, thus either increasing annual production for SLW or an extended royalty life (depending on the conditions of the contract).
WHY SILVER? Chances are you have stumbled upon this because you believe there will be substantial Inflation in the near future. Gold and Silver have historically been inflation hedges throughout history. They are and have always been recognized as international currencies (although not recognized by the government). This has to do with the history behind them, as they have been used for over 5,000 years. Gold has been for larger purchases and silver for the small denomination every day purchases. As silver prices rise, the contracted purchase price can only increase 1% per year of the previous year’s purchase price. This means inflation is a positive because net margins increase!
IS THAT THE ONLY REASON? Not by a long shot. Silver is being used more and more in technology (Silver will play a substantial role in the future of batteries, not to mention other technological equipment) and as we all know, it is important for industrial production. The majority is mined as a byproduct from base metals (which have come to a halt due to the recession). In other words, the supply has drastically fallen without the market taking notice. A clear buy signal is flashing as there is currently more gold above ground than silver, yet the industrial demands for silver will rebound in the near future, and when they do, you'd better watch out.
Even if inflation were to be low to moderate in the future, Silver is still compelling as it is used heavily in solar panels. The “Green” craze the world seems to be in, will cause the demand to increase even if all these alternative energy theories turn out to be nothing but hogwash. But what has really caught my eye in my research is the fact the next generation of batteries, both those used for everyday electronics and the much larger ones, will contain substantially more silver than the current lithium Ion batteries.The next generation batteries currently referred to as Silver-Zinc or ZMP have many advantages over the current standard. Most importantly is the fact that they can keep their charge and maintain that amount of energy throughout the life of the battery. They last 40% longer than lithium-ion batteries and are 95% are recyclable which will garner the attention of the "green crowd". There have been talks of this battery rolling out as soon as the fall of this year. As laptops, cellphones and other semi-conductor equipment switch over the demand will increase much faster than the supply every could.
Looking at the big picture, BRIC countries in addition to the next generation of emerging countries drive the demand for silver and therefore the price for a prolonged period of time coupled with the future of silver, and its uses should send the long term price of silver to the mid-20's or higher.
So how much could it be worth? Call me crazy but I think the intrinsic value of SLW is in the range of $40-$50. No I'm not the type to make such a bold call, but those are my conservative estimates. Avoiding any dragged out calculation, let's just project 2012 profit. Assuming we experience the inflation of the late 70's (which is very conservative), silver will trade between $30-40/oz if the money supply had not changed. But to make it simple, we will assume it only increased 2- to 3-fold. 65 is a good number. So $65-$5 = $60 profit per ounce. SLW will produce approximately 32-35M oz. So $60*$30M = $1.8 billion. If the company has a current market cap of around $2.4 billion and should make at least a billion dollars (to be conservative) over the next decade, then wow! Of course I expect $65/oz to be the peak as was $50/oz in the 70’s. More important is the long term silver price, which I think will be at least $20/oz, likely in the $22-$28/oz range.
Below is a published DCF valuation using conservative inputs. It is open for editing as I published via Google docs. A 5-8% discount rate is appropriate in my opinion because it is a royalty company with a diverse portfolio of silver streams, whereas if it did actual mining, 13-18% would be appropriate.
View SLW's valuation here.
Disclosure: Long Silver Wheaton
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This article has 28 comments:
It has 287 million shares, "Insiders" and "Institutions" own 62% of that, leaving about 109 million for the "Trading Float". It averages 5 million shares a day over a 10-day and 3-month period. That means it turns the public float every 21 days.
Needing out in a hurry, or something?
current price at the moment: $8.51
Not too hard to figure out fair value. Maybe I'm wrong but for now, the Street seems to agree.
Yet there are some big assumptions here:
Assumption #1: 1970s style inflation by 2012 (are you aware that some very fine economists foresee only minimal inflation and lots of deflationary trends, and that the US govt's printing of all that money is not affecting the wider money supply, only being absorbed by banks' balance sheets?)
Assumption #2: "65 is a good number" (for silver's price). That silver's price is going to peak at $65 seems unlikely and, anyway, is a non-sequitur following from your prior sentence ("we will assume it only increased 2- to 3-fold").
I'd be quite happy to see silver reach into the low $20s and stay there, up from its current ~$14.
SLW would be handsomely profitable at that price.
>"Assuming we experience the inflation of the late 70's (which is very conservative), silver will trade between $30-40/oz if the money supply had not changed. But to make it simple, we will assume it only increased 2- to 3-fold. 65 is a good number. So $65-$5 = $60 profit per ounce. SLW will produce approximately 32-35M oz. So $60*$30M = $1.8 billion. If the company has a current market cap of around $2.4 billion and should make at least a billion dollars (to be conservative) over the next decade, then wow! Of course I expect $65/oz to be the peak as was $50/oz in the 70’s. More important is the long term silver price, which I think will be at least $20/oz, likely in the $22-$28/oz range."
I agree with your opinion, but please subdue the exuberance. Billy Mays is dead; stocks don't need to be presented that way. Either this is just false build up or you haven't analyzed many companies. Hang in there.
I agree that you provide many good points about silver and why the price should go higher, but I'd stick to a company that actually has a physical deposit and can provide the barriers to entry and competitive advantages that are needed for sustainable growth.
From
Peter Schiff Fan
I'm a Ted Butler fan. Silver is ridiculously undervalued due to COMEX manipulation.
genreally SLW pays 1 times NAV and trades at two times nav so there is a mathimatical accretion to earnings....slw got into trouble with too much debt and had to iisue shares.....
as such in an environment where gold/silver shines and all else fails..the base metal mines where SLW gets their income will close....for instance silverstone was recently acquired by SLW and its big source of silver was a copper mine by product.....
in an environment where all commodities are rising and more so silver slw will do well....
i owned silverstone (a smaller junior silver royalty) and now moved in fortuna silver fvi.v ...
It provides initial funding for several junior mining companies
That is risky
When you provide 15M of financing with a junior miner with no cash flow and a 60M market cap, you are taking on risk
They do get to avoid employee safety and environmental issues, but that is about
If you want a "hidden gem" research the silver miners that Silver Wheaton funded (I have one and I keep adding to my position)
The only barrier to entry in SLW's business is money and mining expertise.
SLW is my DD expert
I invest in junior miners they finance
Hidden Gems = Viable Junior Miners
DEFLATION, not inflation much less hyperinflation is what is happening. Overcapacity meets shrinking money supply (debt defaults are happening faster than monetary base expansion and that is deflationary).
SLW is a good PUT candidate over the course of 2010.
Gotta love this market.
By the way, are the Fed's press operators taking the fourth off?
On Jul 02 05:10 PM Did U Think The Ponzi Scheme Would Last? wrote:
> Silver metal is plummeting and you want me to buy a silver company?
>
>
> DEFLATION, not inflation much less hyperinflation is what is happening.
> Overcapacity meets shrinking money supply (debt defaults are happening
> faster than monetary base expansion and that is deflationary).<br/>
>
> SLW is a good PUT candidate over the course of 2010.
"Everyone who uses laptops or cell-phones these days is at least partially aware of the battery technology everybody uses in those devices. Lithium-ion and lithium-polymer batteries have literally changed the world of portable devices, making them lighter, while also extending useful battery life. They have become the most common type of battery used in consumer rechargeable devices. The alternative comes in the form of silver-oxide or silver-zinc technology. Silver-zinc batteries can run up to 40% longer than the equivalent lithium-ion battery. Over 95% of the primary elements in the battery can be recycled. There are no heavy metals or toxic chemicals in modern silver-zinc batteries. Plus, their water-based chemistry make them free from the risk of thermal runaway, fire, and explosion.
There is little doubt that these batteries are a safer, greener, longer-running choice for laptops and cell-phones. With a little more development, their future looks very bright. The technology has the backing of some heavy hitters, as well. For example, Intel Capital has invested in a silver-zinc battery manufacturer named Zinc Matrix Power (ZMP).
Laptop manufacturers are in the process of examining silver-zinc batteries for use. ZMP claims at least one laptop maker already has designs in the queue with an eye toward introduction in their high-end laptops in mid 2009. Eventually, we may even see after-market, drop-in replacement batteries engineered to retrofit older laptops with this safer technology. Expect advertising to tout extended run times and the "green" aspects as major selling points."
It will also be a key metal for obama nation for the construction of solar panels (even though I think solar energy is bogus). For those not in the inflation camp, here is a modified version of the previous mode
Silver Wheat Valuation: spreadsheets.google.co...
I think a long term silver price of $20/oz is fair to say the least I also put a maximum of $40/oz at the height of inflation 4 or so years from now. Remember this is still below the $50/oz it hit in the Volcker era. Even increasing the disount rate to 10% (which is high for a royalty company ) gives SLW a fair value of $27 or so, which excludes the premium the arket places on over a billion ounces of resources.
So when all is said and done Silver use in Jewelry approx 12%, Coins and Bullion 8% , Industrial Prodution 56% , Photography 12%, etc, Silver has many catalysts to drive the price up over the next several years. But only time will tell, and when all is said an done I think it is the best in the silver complex. I did consider it a hidden gem and I initiated my position in Nov-Dec, when it was left for dead. I also think they will purchase 25-50% of Tech's mine along the silver belt in Alaska.
On Jul 02 08:14 AM Ridge Hill Capital wrote:
> silver wheaton derives its revenue from by product silver streams
> of base metal producers
>
> genreally SLW pays 1 times NAV and trades at two times nav so there
> is a mathimatical accretion to earnings....slw got into trouble with
> too much debt and had to iisue shares.....
>
> as such in an environment where gold/silver shines and all else fails..the
> base metal mines where SLW gets their income will close....for instance
> silverstone was recently acquired by SLW and its big source of silver
> was a copper mine by product.....
>
> in an environment where all commodities are rising and more so silver
> slw will do well....
>
> i owned silverstone (a smaller junior silver royalty) and now moved
> in fortuna silver fvi.v ...
On Jul 02 07:58 PM Boxed Merlot wrote:
> Opinions are like...
> Gotta love this market.
> By the way, are the Fed's press operators taking the fourth off?
>
On Jul 02 05:10 PM Did U Think The Ponzi Scheme Would Last? wrote:
> Silver metal is plummeting and you want me to buy a silver company?
>
>
> DEFLATION, not inflation much less hyperinflation is what is happening.
> Overcapacity meets shrinking money supply (debt defaults are happening
> faster than monetary base expansion and that is deflationary).<br/>
>
> SLW is a good PUT candidate over the course of 2010.
On Jul 01 06:04 PM PeterSchiffFan wrote:
> Sounds like a tech company to me. What ever happened to barriers
> to entry and competitive advantages? If you're saying that costs
> are low and that 5 people with small salaries can run this masterpiece,
> what's stopping others in joining in, starting up their own and running
> up the costs?
>
> I agree that you provide many good points about silver and why the
> price should go higher, but I'd stick to a company that actually
> has a physical deposit and can provide the barriers to entry and
> competitive advantages that are needed for sustainable growth.<br/>
>
> From
>
> Peter Schiff Fan
once again it started by buying the palladium/gold streams from FNX mining and FNX, while didnt close the mines associated with the palladium/gold streams , closed its other mines.
Gold wheaton went on to buy First Uranium gold streams and had to issue stock a well below NAV.........now First Uranium is delaying production.......INCO is set to strike? and no ore will processed for FNX......
this demosntrates the riskyness of royalty streams....
also FRANCO and SLW are very expesnive stocks relative to producers...........in a deflationary environment watch these stocks collapse like they did in the fall 2008
BUYER BEWARE
FRANCO is the KING of royalties....it was silver wheaton that emulated FRANCO.....franco was taken private by Newmount and then newmount new ceo sold franco assets back into FNV and it went public........
On Jul 02 09:31 PM Hyperinflation wrote:
> Their dyanmic management made this possible. Silver Wheaton had been
> so accomplished by the time other entered the market, they merely
> bought them. By the way their are many copy cats like royal gold
> and Franco-Nevada.
On Jul 04 09:06 AM Ridge Hill Capital wrote:
> theres GOLD WHEATON same guys GLW.v
>
> once again it started by buying the palladium/gold streams from FNX
> mining and FNX, while didnt close the mines associated with the palladium/gold
> streams , closed its other mines.
>
> Gold wheaton went on to buy First Uranium gold streams and had to
> issue stock a well below NAV.........now First Uranium is delaying
> production.......INCO is set to strike? and no ore will processed
> for FNX......
>
> this demosntrates the riskyness of royalty streams....
>
> also FRANCO and SLW are very expesnive stocks relative to producers...........in
> a deflationary environment watch these stocks collapse like they
> did in the fall 2008
>
> BUYER BEWARE
>
> FRANCO is the KING of royalties....it was silver wheaton that emulated
> FRANCO.....franco was taken private by Newmount and then newmount
> new ceo sold franco assets back into FNV and it went public........
>
>
On Jul 02 09:31 PM Hyperinflation wrote:
> Their dyanmic management made this possible. Silver Wheaton had been
> so accomplished by the time other entered the market, they merely
> bought them. By the way their are many copy cats like royal gold
> and Franco-Nevada.
When I use the term dynamic I am also referring to mgmt as they had the foresight to make a substantial quantity of these royalty contracts, when silver was much lower. They have also done a wonderful job managing their debt (which some thought was a problem). It is down to under 150m, and unless they are looking at further purchases will pay down more debt in the Q2 (Which will be announced on the 30th) and Q3.
Franco is a great company, but their are differences even among these royalty companies. But this is just my opinion on the stock as I am more bullish on silver than gold at these prices, especially given the fact their is currently more gold than silver above ground due to the lack of mining base metals. But if you look into the next generation batteries, likely to be out in Q4 or 2010 the ZMV, Silver will benefit greatly.: from the above
"Everyone who uses laptops or cell-phones these days is at least partially aware of the battery technology everybody uses in those devices. Lithium-ion and lithium-polymer batteries have literally changed the world of portable devices, making them lighter, while also extending useful battery life. They have become the most common type of battery used in consumer rechargeable devices. The alternative comes in the form of silver-oxide or silver-zinc technology. Silver-zinc batteries can run up to 40% longer than the equivalent lithium-ion battery. Over 95% of the primary elements in the battery can be recycled. There are no heavy metals or toxic chemicals in modern silver-zinc batteries. Plus, their water-based chemistry make them free from the risk of thermal runaway, fire, and explosion.
There is little doubt that these batteries are a safer, greener, longer-running choice for laptops and cell-phones. With a little more development, their future looks very bright. The technology has the backing of some heavy hitters, as well. For example, Intel Capital has invested in a silver-zinc battery manufacturer named Zinc Matrix Power (ZMP).
Laptop manufacturers are in the process of examining silver-zinc batteries for use. ZMP claims at least one laptop maker already has designs in the queue with an eye toward introduction in their high-end laptops in mid 2009. Eventually, we may even see after-market, drop-in replacement batteries engineered to retrofit older laptops with this safer technology. Expect advertising to tout extended run times and the "green" aspects as major selling points."
So with a long term silver price of $20, SLW'S intrinsic value lie between 25-30/share, and at $16, it still would be in the neighborhood between $17-21/share
Well the fed has certainly downplayed QE after Geithner was laughed off the stage at the Univeristy of Peking. But now you answer this: did debt destruction take the 4th off?
Perhaps when you are not so full of yourself you will stop and consider this thing called the multiplier effect. When times were good, credit/debt creation was allowed to increase at a rate that was between 10 and 50 times the increase in the monetary base. Due to fractional reserve banking (which is the engine behind the multiplier effect) it was the credit and debt increases that created the inflation since the 50s to a much greater extent than the increases in the monetary base. Now that debt is being paid off or defaulted on at a record pace, there is no way the fed can keep up even if running the presses at the rate prior to Geithner's China visit. That is deflationary.
Pay attention now as:
-oil plummets back to below $20
-the Dow breaks down below 4k
-unemployment screams into the 15% rate as measured by bogus government stats (real number will be well over 20 perhaps 25% just like during the great depression)
- nothing that the politicians do seems to help in any way because the economy is bigger than the government.
On Jul 02 07:58 PM Boxed Merlot wrote:
> By the way, are the Fed's press operators taking the fourth off?
On Jul 01 06:04 PM PeterSchiffFan wrote:
> Sounds like a tech company to me. What ever happened to barriers
> to entry and competitive advantages? If you're saying that costs
> are low and that 5 people with small salaries can run this masterpiece,
> what's stopping others in joining in, starting up their own and running
> up the costs?
>
> I agree that you provide many good points about silver and why the
> price should go higher, but I'd stick to a company that actually
> has a physical deposit and can provide the barriers to entry and
> competitive advantages that are needed for sustainable growth.<br/>
>
> From
>
> Peter Schiff Fan
As of August 21 2009, SLW is forming the exact same pattern as it did in Spring/Summer of 2008, which was followed by the BIG DROP. The similarity is startling!
Have a look here if you are curious:
hubpages.com/hub/Chart...
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