Silver Wheaton: What's Next?

| About: Silver Wheaton (SLW)

Summary

Silver Wheaton has benefited from the growing concerns over a possible Brexit.

The dovish Fed and low interest rates have also helped drive up SLW.

It seems that SLW's share dilution had a very short-term impact on its stock as silver prices rallied.

Moreover, silver will keep leading the way in moving SLW even if there is another share dilution in the future.

It wasn't long ago when Silver Wheaton (NYSE:SLW) decided to raise cash and reduce its debt burden by offering its shares at a discount. Back then, the company raised $550 million. And the market reaction at the time was negative as shares dropped to the price offered and then even took another hit. Since then, however, shares of SLW have rallied and even outperformed the price of silver. The recovery of SLW was mostly related to the recent rise in demand for precious metals as the market prepares for a possible Brexit that will drive up Let's look what's next for this silver company.

Brexit woes - good for bullion

Gold and silver prices have rallied in recent weeks as the market fears a possible vote on Friday in Britain to leave the EU could result in a rise in the chances of global recession, and in times of economic uncertainty people tend to stock up on gold and silver. But this wasn't the only factor that helped drive up bullion prices. The Federal Reserve has also taken a step back and lowered its outlook (as derived from the dot plot) to the cash rate in 2017 and onward. Lower expectations about the direction of the cash rates also tends to bolster the demand for precious metals, and in the process, Silver Wheaton also benefits from this shift in market sentiment. In fact, SLW has outperformed silver: The former gained nearly 9% over the past month whereas silver rose by only 4.5%. This shouldn't come as a surprise to investors as SLW tends to react more favorable in times of rising bullion prices and vice versa. So if the vote goes against a Brexit - and in the past few days, the market has become a bit more convinced that Britain will remain in the EU - SLW is likely to suffer, at least in the short run. And even though the company could dilute its shares again in the future, it seems to have very short-term ramifications on its shares.

Don't be surprised if it happens again

The company's decision to dilute its shares shouldn't have come as a surprise to its investors considering the silver streaming company has a low debt burden - the debt to equity ratio stands at 0.32 as of the end of Q1 2016 - and less than $90 million in cash; this suggests if the company were to strike another streaming deal - and these deals tend to require putting a huge amount of cash upfront - then SLW may resort to raise cash again by offering its shares at a discount. But even though the stock reacted to this news unfavorably and will do so again in the future, the company's stock is still mostly moved by the direction of silver and gold - as was the case in recent weeks.

Where is silver heading?

Besides the possible impact of Brexit vote, it seems the silver market will still do well in the short run mainly on account of the growing concerns for a possible recession, as indicated by the ongoing decline in long-term interest rates. It also suggests that even though the Federal Reserve raised rates back in December of 2015, long-term rates have actually declined - which only helps drive up silver prices and SLW.

Final point

Although Silver Wheaton didn't help its investors by diluting its shares a few months ago, the company's stock will still be strongly affected by the direction of silver and gold. The British referendum could bring back down SLW if the vote goes towards remaining in the EU; but looking beyond this vote, the precious metals market will still do well if the Fed keeps rates low and interest rates continue to decline. So that by the end of the day, the direction of SLW will take its lead from the silver market. And even if there is another shares dilution down the line, the reaction may be again short lived, especially if the price of silver continues to recover. For more please see: Will Higher Physical Demand for Silver Drive up Its Price?

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.