Silver Wheaton (NYSE:SLW) is the largest precious metal streaming company in the world. The company has a number of agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver and/or gold production from high-quality mines located in politically stable regions around the globe. A few of the mines in the company's portfolio of low-cost and long-life assets include streams on Barrick's (NYSE:ABX) Pascua-Lama project, Hudbay's (NYSE:HBM) Constancia project, and Vale's (NYSE:VALE) Salobo and Sudbury mines. The unique business model of a streaming company provides shareholders leverage to the price of silver and gold while minimizing typical risks miners are exposed to.
Based on the company's current agreements, the forecasted production for 2013 is approximately 33.5 million silver equivalent ounces, including 145,000 ounces of gold. By the end of 2017, the company anticipates production will increase to approximately
49 million silver equivalent ounces, including 180,000 ounces of gold.
Utilizing SLW's expected production for 2017, the chart below was created to demonstrate the possible Revenue, Net Income, Profit Margin and EPS that may be realized given various silver prices. For the EPS calculation the chart utilizes the current amount of 354.9 million shares outstanding. The chart also makes the assumption that every ounce produced is also sold in 2017.
After an initial upfront payment the company has no ongoing expenses associated with the mine invested in and its associated production. The only increase in the price paid for its silver production is an annual adjustment for inflation. For this chart we took the all-in mining costs for the six months ending June 30, 2013, including cash cost per ounce, average depletion per ounce, general and administrative expenses and other expenses. The all-in cost per ounce for the first six months of 2013 was $11.87 per silver equivalent ounce. Adjusting this 4% annually the all-in cost per ounce for 2017, as used for this chart, is $13.65 per silver equivalent ounce.
The EPS data is extrapolated to multiple P/E ratios to give a price range at each possible average realized price of silver. The P/E of 17.6 is shown because it was the current P/E of SLW at the time of creating the chart and $23 was the approximate silver spot price.
When looking at the chart above one can see the leverage inherent in the streaming business model as well as the importance of high precious metals prices for Silver Wheaton's margins and earnings per share. Given the wide range of values presented, one can use their own ideas on the long term price of gold and silver to determine a reasonable price target. Given that a P/E ratio is simply the measure of the market's expectations of growth, an investor can expect SLW to trade at a lower multiple during prolonged periods of lower precious metals prices and at a higher multiple during long periods of high precious metals prices.
Disclosure: I am long SLW. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.