Yes I'm aware Silver Wheaton (SLW) is trading near its 52-week high, but like every company when it comes to investing, it is the foresight and patience that makes it possible to reap high returns. So although Silver Wheaton is trading much higher over the last month or so ( though it is still 20% or so below its all time high) , this is no reason to avoid initiating a position. While the Inflation Tsunami builds, Silver Wheaton has added a future flagship royalty stream, eliminated its more or less only competitor in this niche silver streaming industry, had great news from another flagship (El Penon - which is in the ramp up stage) and expected to add 7-9m ounces by 2H 2010.
While I am bullish for the upcoming earnings season regarding Silver Wheaton, the multi year double digit growth has just kicked into gear, with the results to be seen beginning this coming February as earnings season for the fourth quarter are announced. Not only has Silver averaged above $17/oz thus far, but Silver Wheaton will see silver production coming from El Penon as well as from Lagunas Norte, Pierina and Veladero. (This will supply production to SLW until Pascua - Luma commences production in 2013) That in turn will bring online an immediate 2.4-2.6m oz per year or 600-700k oz per quarter.
So aside from a few other royalty streams that will yield higher production over the coming quarters, El Penon will add 7-9m oz by 2011, with 5m+ likely coming online for 2010. Growth should level off a bit in 2012 and then see a dramatic spike in 2013 with Pascua-Luma contributing 4-5m oz, increasing to 8-10m oz by 2014. In other words, 2008 saw 12m oz of silver production, jumping up this year to 17m oz, 25m oz in 2010m, 31m by 2011, 34-36m by 2013 and peaking in 2014 at 41-43m oz. That's a 300% increase over a 6 year period.
This will put Silver Wheaton in the upper echelon of pure silver producers with a large comparative advantage relative to the rest of the complex. Though still present, mining risk is greatly reduced as it continues to rely on an increasing amount of royalty streams, reducing the impact of mining risk, at least in relation to its peers, who rely on a small number of mines. It will also not be subject to rising input costs (thanks to inflation), due to the fact it has an average purchase price of $4.00/oz with a maximum 1% inflation adjustment.
In other words, Silver Wheaton has growth (both short and long term) coming from every direction. The Silverstone acquisition provides 1m oz production growth for the next two on top of its base 4m oz. El Penon will add 5-6m oz a year starting in 2010 and 7-9m oz in 2011. The three Barrick mines will add 2.5m-3m oz per year immediately until 2013, at which time Pascua-Luma commences production, adding 9-10m by 2014.
This amazing growth story will not stop there in my opinion as 3 streams yet to commence production are in the pipeline along with several upside potential in Neves-Corvo Zinc (re-commenced production in august and not incorporated into current production estimates) and Aljustral (which will begin operations as soon as base metal prices improve).
Judging by management's tone during the Barrick (ABX) conference call, I think Silver Wheaton is in one or multiple talks to acquire additional streams (the company made its desire for one more flagship operation apparent), but deals that would add under 5m oz can't be ruled out either). Silver Wheaton has access to more than enough financing, and is likely through a draw down on its newest revolving debt facility possibly combined with the issuance of more equity as well through operating cash flow.
So for those who believe Inflation will be a moderate to severe problem as we enter into the next decade, Silver Wheaton provides incredible leverage to the price of silver (which will continue to grow along with production) as well as a more conservative way to play the mining industry (though mining-related risk is still present, just to a lesser degree). Should silver go up to $30 ( though I think it will surpass $40/oz), Silver Wheaton would boast an 80% profit margin as it is not subject to income taxes.
Disclosure: Long SLW