The streaming model showed its strength during the precious metal price downside. Silver Wheaton (NYSE: SLW) continued to generate positive cash flows during the gold and silver price lows in 2015. The recent upside fueled a rally in Silver Wheaton's shares which increased from $10 to $18 in just two months.
Last year, the company was able to raise $800 million in an equity offering, acquired additional streams from Vale's (NYSE: VALE) Salobo and from Glencore's Antamina mine and grew its silver equivalent production to a record 47.7 million ounces.
However, these developments were not sufficient enough to offset pricing weakness and Silver Wheaton's shares lost 39% of their value in 2015. The rally at the beginning of this year was spectacular but the company's shares still trade below where they were in the beginning of 2015.
The company has recently published its fourth-quarter report, which was extensively covered by other contributors here on SA. Instead of telling you the numbers which you have already seen multiple times, I'll focus on another topic. Are Silver Wheaton's shares worth buying right now if you, like me, missed the boat - both on the downside and on the upside?
The business model
Silver Wheaton's business model is almost bullet-proof as long as the company can get access to equity and debt markets at reasonable rates. So far, both markets were pleased with was they saw - and Silver Wheaton was able to sell $800 million of equity at $20.55 per share in March 2015. The company's cash cost per silver equivalent ounce was $4.58 in 2015.
Of course, when prices fall, Silver Wheaton's margins are squeezed, but it's impossible to imagine that silver equivalent realized prices per ounce will drop below, say, $10 per ounce. Also, thanks to its ability to access equity markets, Silver Wheaton's debt remains under $1.5 billion - a modest level given the company's recent purchases.
Silver Wheaton is a "sleep well at night" company. Thanks to the business model, the management must do something really reckless to destroy the business. However, the "sleep well at night" part only guarantees (to a certain extent) that shareholders won't be wiped out completely.
Recent stream purchases lead to further production growth. The company was able to overcome the hit from delayed Pascua-Lama development, and expects to produce 54 million silver equivalent ounces in 2016. To go further than this, the company will have to deploy the $500 million of available credit plus some of its cash flows.
It is certainly doable if the market stays depressed for a while. Not surprisingly, best deals arise at times when gold and silver prices are low. So does the gold and silver miners' interest for streaming financing. So far, the management team has shown their skill in getting good deals for Silver Wheaton.
While some investors may view Pascua-Lama as a mistake, I'd argue that it was next to impossible for Silver Wheaton to foresee all the difficulties in the project and that having its presence at one of the most ambitious gold projects is a must for the world's streaming leader.
Silver Wheaton employs a flexible dividend policy, where 20% of the average of the previous four quarters' operating cash flows are distributed to shareholders. This dividend policy is very sustainable, but, alas, leads to low yields in the current environment. Silver Wheaton's first-quarter dividend was $0.05 per share, a yield of 1.13% at current prices.
One could argue that the dividend will increase if gold and silver prices increase, so, if you can get Silver Wheaton at cheap prices, your dividend will grow over time. However, the company's policy is heavily shifted towards growth rather than dividend payments.
The dividend is just a supplement to the precious metals' upside exposure. I don't think that Silver Wheaton is a good stock to income-focused investors. I'll go further and argue that the sector itself is not for income-searchers. There are plenty of opportunities elsewhere which involve higher yields and less volatility.
The tax problem
Silver Wheaton has an ongoing dispute with Canada Revenue Agency. The agency is trying to reassess taxes paid in 2005 - 2010 and 2011 - 2013. I've read articles here on SA arguing that the tax issue was priced in Silver Wheaton's shares. I don't think so. The outcome of the tax dispute will be determined in 2017, according to the company's statements during the quarterly conference call.
I am not a tax expert so I can't calculate Silver Wheaton's chances to win in the court, but it's obvious that the issue will continue to weigh on the company's shares and that the loss in court will be a significant negative catalyst for Silver Wheaton's stock.
In the end of February, I argued that gold (NYSE: GLD) was due for a pullback. So far, the thesis did not work well as gold fluctuated around $1250 per ounce. However, I believe that the thesis is still valid. The recent weakness of the U.S. dollar helped gold, but I don't see major upside catalysts that might take gold from $1250 to $1350 and beyond without a pullback. My thoughts on silver (NYSE: SLV) are similar. The fact that Silver Wheaton increased from $10 to $18 without any pullback makes me feel uncomfortable about entering at current prices.
What if a new major trend in precious metals just started and those who ignored it will miss the boat? I think that the fear of "missing the boat" is too great in the investment community. If you don't have a crystal ball, you will miss a lot of good trades during your life and this is normal. By chasing stocks, you increase your chances to fail. Nothing goes up in a straight line, so, even this is a start of a new major trend, Silver Wheaton will most likely allow more comfortable entry prices in the future.
Silver Wheaton is a solid company that is priced accordingly. The business model and growth targets bode well for the company's shares. However, the stock increased too far too fast and the tax dispute will still weigh on the company's shares until there is clarity in 2017. I think it deserves a hold rating and current levels are not suitable to initiate new positions.
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.