Silver Wheaton: A Pure Play Against the Falling US Dollar

Silver Wheaton Corp.'s (SLW) US$485-million cash purchase of 25% of the life-of-mine silver production from Goldcorp's (GG) Penasquito project in Mexico is "getting the thumbs-up from analysts". With this new deal, SLW has secured a supply of silver at 3.9 USD and it is financed only with debt in US dollars! If you are a believer in the falling USD and rising silver prices, this is the place where a lot of money will come: this company is a "pure" silver play - all of its revenue is coming from silver sales and it has been profitable from day one.

SLW stock is followed by major investment banks as its market cap can accommodate big institutional investors and hedge funds. Its supply base is diversified between different producers and different countries. The technical picture points to an upside break out from its consolidation pattern. Acting like a "silver bank" the company's unique business model allows it to secure silver supply "deposits" at lower rates and sell them later at the market rates. Now, with this purchase, a very important step has been made and all of the new silver supply is secured by cash payment without any share dilution. With fixed silver supply prices in the range from 3.9 to 4.0 USD, and the market price flirting with 14.0 USD, Silver Wheaton has become a leverage play on rising silver prices and its earnings will rise with every uptick in silver prices.

Merrill Lynch analyst Michael Jalonen, who calls Penasquito a "world class asset" with proven and probable reserves of 9.98 million ounces of gold, 575 million ounces of silver and 3.62 million tonnes of zinc, rates Silver Wheaton a "buy." He has a US$13.50 price target on the stock, which represents an upside of 3% from yesterday's close of $13.10.

Tony Lesiak at UBS is more optimistic with a US$14.50 price target. "The deal provides significant growth for Silver Wheaton and financial flexibility for Goldcorp," he said in a note to clients.

Blackmont Capital analyst Richard Gray, who said the transaction was highly anticipated, sees Silver Wheaton shares hitting $16, 22% over yesterday's close.

RBC Capital Markets analyst Michael Curran raised his target price by US$1 to US$17.

"We believe Silver Wheaton shares have been held back as investors anticipated a medium- to-large equity financing requirement to fund a Penasquito transaction," he said in a note to clients, adding that this overhang could now vanish.

Disclosure: Author is long SLW

SLW 1-yr chart