Silver Wheaton (NYSE:SLW), the world's largest precious metals streaming company, has been through a very rough time over the last one year. As silver prices sunk further last year in the backdrop of a meltdown in precious metal markets, SLW's stock value more than halved in last 52-weeks.
Unfavorable Macro Environment
The slump in the broader precious metal industry has been due to several factors, which include, a rapid appreciation of the U.S. dollar, falling industrial demand mainly due to a weakness in China's economy and disequilibrium in demand-supply.
Although the silver market witnessed a small yearly deficit between 2013 and 2015, prices remained under pressure as miners continued to increase the output, thanks to years of commodity boom cycle which brought robust investments thus increasing production capacity.
Global silver output climbed for twelve successive years till 2014. In fact, the global silver market witnessed a record output of 877.5 million ounces that year.
Even though the demand for silver coins and bars was solid last year, continued mining and overall fragile sentiment on precious metals clobbered silver prices, which in turn hurt margins of companies such as Silver Wheaton. Also, SLW was hurt after it took a big impairment charge in the third quarter related to 777 silver and gold mining facility.
Will 2016 prove to be a better year for Silver prices?
It could. It is worth noting that about 70% of silver output is a result of mining of other metals such as gold, copper and zinc. Prices of all these metals have fallen dramatically in last two years. A prolonged period of low-price environment in the industrial and precious metal markets has driven out high-cost miners. Also, big miners have been scaling down investments lately as it became increasingly difficult to raise finances in the backdrop of lower prices. Also, lower grades and aging mines have aggravated problems, which in turn should hurt the global production.
Limited silver supplies should further increase the deficit, which augurs well for silver prices in the long-term. Moreover, in my opinion, silver prices have bottomed-out. Silver has a positive correlation with gold. And lately, gold has started to gain, following last year's 10% slump.
Solar Industry demand
According to an industry report, the solar industry accounts for about 6% of total physical silver demand. However, the global solar capacity is increasing by 53%, every year, on average, for last ten years.
The momentum is likely to be sustained in the mid-to-long-term, especially after the recent Paris COP21 Climate Solution summit, where global leaders have pledged to increase the share of solar energy consumption in total energy-mix. Hence, demand for physical silver, which is used in solar cells as it is good conductor of electricity, is likely to remain robust, looking forward.
How Silver Wheaton is positioned?
SLW stands to benefit from these developments. Its business model, wherein it enters into long-term silver and gold purchase agreements at fairly lower prices with global miners in lieu of up-front payments without owning or operating mines, allows it to keep operational costs under control. Also, it currently has 19 long-term purchase agreements. That should help the company as widely anticipated fall in supplies, will fetch higher selling prices in the long-term.
I also expect SLW's margins to get better in the mid-to-long term. It has a comparative advantage over the industry in terms of cash-costs.
Average cash-costs, costs without capital expenditures, administrative overheads and exploration costs, for Silver Wheaton is about $4 an ounce, while those of the industry is roughly $7 an ounce. I believe that SLW is one of the few stocks in the mining sector that are worth a look right now.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
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.