Silver Wheaton: Growth Coming from Every Direction

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

Comments

[doubleguns:]

I like the way you think. At an average price of $4 an oz with a 1% inflation adjuster they should make money if silver gets gutted. I don't think that is going to happen but all the same it means they shold make money and lots of it.

Oct 19 04:48 PM

[yellowhoard:]

SLW is a buy it and forget it stock.

I plan on holding it for many years.

Oct 19 04:53 PM

[PastTense:]

I don't understand this stock: why are the companies who have made these $4/ounce deals with SLW going to remain satisfied with such low royalties? Won't these deals run out fairly shortly and have to be renegotiated to much higher payments?

Oct 19 05:29 PM

[Hyperinflation:]

They get up-front financing to fund larger projected are move their pipeline along at a faster pace. Almost all of these companies from which silver is purchased are gold miners, of which silver is a bi-product. So for those companies needing financing, especially when mining these metals is so lucrative, it becomes a win-win situation.

Oct 19 06:15 PM

[Hyperinflation:]

Agreed, you are likely aware of the tax arrangements with the government as in they have to reinvest all excesss profits ( which the windown of opportunity is closing with each passing day) or they have to distribute them as dividends ( which they have already began discussing at the latest conference call). Of all the mining companies out there, this is one of the few I plan on holding for more than a decade.
- You Make A Good Point


On Oct 19 04:53 PM yellowhoard wrote:

> SLW is a buy it and forget it stock.
>
> I plan on holding it for many years.

Oct 19 06:23 PM

[Mildred Pierce:]

I think the author means Goldcorp's Peñasquito Project rather than El Penon which is a property of Yamana Gold and is not subject to a silver royalty stream.

Oct 19 07:42 PM

[Hyperinflation:]

Yes- Thanks for the correction


On Oct 19 07:42 PM Mildred Pierce wrote:

> I think the author means Goldcorp's Peñasquito Project rather than
> El Penon which is a property of Yamana Gold and is not subject to
> a silver royalty stream.

Oct 19 08:49 PM

[Slvrizgold:]

Hyper, you really freaked me out on the El Penon/Pensaquito thing. I thought I was losing my mind or I was so poor at due diligence that I was unaware of something so huge. Its understandable. Getting up to speed on the precious metals universe can be "information overload". I hope you continue to promote stocks I own (big grin) First Majestic was making a new higher ground today. Only a matter of time before Jaguar starts to pull back to $12 before it really breaks out $15+++. You are a smart guy and I notice that of all these Seeking Alpha posters your thinking seems to be "on my page." I will agree with yellowhoard, SLW is a buy and forget stock and I plan on holding a core position for many many years especially if they start to throw off a dividend. I CANNOT BELIEVE I was able to buy this at $2.61. I only wish that I bought more at that price, but I had to settle for adding more after it recovered. I owned a decent stake in Silverstone at a really low price so that helped me out big time.

Who are the babes in your photo? They are better looking than you but you can only see half the faces. I'm just joshing you buddy. Regards.

Oct 19 10:48 PM

[Hyperinflation:]

As long as central banks around the world continue to debase the currency, I will continue to promote stocks like Silver Wheaton, jaguar, Coeur d'Alene , Yamana, etc. I have found so many gems that are going completely unnoticed like Kirkland Lake Gold, Bear Creek Silver, ECU silver as well as many oil sands companies such as BQI among others.

-Take Care


On Oct 19 10:48 PM Slvrizgold wrote:

> Hyper, you really freaked me out on the El Penon/Pensaquito thing.
> I thought I was losing my mind or I was so poor at due diligence
> that I was unaware of something so huge. Its understandable. Getting
> up to speed on the precious metals universe can be "information overload".
> I hope you continue to promote stocks I own (big grin) First Majestic
> was making a new higher ground today. Only a matter of time before
> Jaguar starts to pull back to $12 before it really breaks out $15+++.
> You are a smart guy and I notice that of all these Seeking Alpha
> posters your thinking seems to be "on my page." I will agree with
> yellowhoard, SLW is a buy and forget stock and I plan on holding
> a core position for many many years especially if they start to throw
> off a dividend. I CANNOT BELIEVE I was able to buy this at $2.61.
> I only wish that I bought more at that price, but I had to settle
> for adding more after it recovered. I owned a decent stake in Silverstone
> at a really low price so that helped me out big time.
>
> Who are the babes in your photo? They are better looking than you
> but you can only see half the faces. I'm just joshing you buddy.
> Regards.

Oct 20 12:33 AM

[kevin2:]

I know the stock very well so i all think that this will happen soon..... bit.ly/VYjwN

Oct 20 02:13 AM

[tripleblack:]

Silver Wheaton is an amazing success story, and an idea that when I first heard of it boggled my mind. I am buying this on the dip, for a long term position.

Oct 20 03:31 PM

[chux08:]

As an HAPPY, LONG TIME investor in Alexco Resources (AXU) I know Silver Wheaton paid $50 million for 25% of the silver stream from AXU's future silver production at their Bellekeno Project in the northern Yukon, to get that mine into production. This decision is near though not made formally yet but they're fooling nobody by pretending they're still thinking about this. You have enough money now with SLW's....contribution of $50 million dollars to bring one of the richest silver ore deposits (over 60 ounces of silver per ton of rock) anywhere in the world fully into production and these guys are still thinking about this?? Ya right....
It's probably not as large as some of their other royalty earnings but to Alexco, SLW played a key role in helping this company in becoming a highly profitable silver producer.

Oct 21 02:20 AM

[Hyperinflation:]

I have a feeling they are in talks for another acquisition and have been for quite some time. If you follow their track record, management is very methodical in their approach concerning new acquisition. For example, the Barrick deal had been discussed for 8+ months before coming to fruition. I still feel there are four likely candidate from which the next streams may be purchased:
1)Kinross - They need additional funding to move their South American pipeline along, which will take some political risk away as their mine in Russia has definitely held back many investors from pursuing this as an investment.
2) As I expect another financial crisis to unfold (likely regional banks), commodity prices could come under pressure again, thus I would think the purchase (or partial purchase) or Tech's mine on Alaska's silver belts could be beneficial to both parties.
3) I know Silver Standard has numerous projects in the pipeline that require substantial funding. A purchase of a portion of a stream from one of these mines would also benefit both parties.
4) MAG Silver - They have a great resource base and mines that hold significant potential. The aren't expected to generate profits until 2011 or 2012. This would increase the NPV of their future earnings as MAG is currently many years away from reaching meaningful production based on the current funding. This again would benefit both sides.


On Oct 21 02:20 AM chux08 wrote:

> As an HAPPY, LONG TIME investor in Alexco Resources (seekingalpha.com/symbo...)
> I know Silver Wheaton paid $50 million for 25% of the silver stream
> from AXU's future silver production at their Bellekeno Project in
> the northern Yukon, to get that mine into production. This decision
> is near though not made formally yet but they're fooling nobody by
> pretending they're still thinking about this. You have enough money
> now with SLW's....contribution of $50 million dollars to bring one
> of the richest silver ore deposits (over 60 ounces of silver per
> ton of rock) anywhere in the world fully into production and these
> guys are still thinking about this?? Ya right....
> It's probably not as large as some of their other royalty earnings
> but to Alexco, SLW played a key role in helping this company in
> becoming a highly profitable silver producer.

Oct 26 09:21 PM