Silver Wheaton's (SLW) forte lies in its ability to finance mining projects with upfront payments in order to secure the future supply of silver at a cost of approximately US$4 per ounce. Established in 2004, Silver Wheaton has quickly positioned itself as the largest metals 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, at a low fixed cost, all or a portion of the silver production from 16 high-quality operating mines and three development stage projects around the globe. Without adding to its current agreements, the growth profile is substantial with a target of 25 to 26 million silver equivalent ounces for 2011, including 15,000 ounces of gold. Looking further out these projections rise considerably to approximately 43 million silver equivalent ounces, including 35,000 ounces of gold.
So we can see that the fortunes of this company are totally dependent on the price of silver, which has been out of favour lately as it staggered to a low of around $27.00/oz. However, the new year brought with it a positive change for both gold and silver prices with both performing unbelievably well in the first two months of 2012. Silver has moved up dramatically from the $27.00/oz level to close today as $36.93. From what we can glean the shorts were caught off guard as the cash returned to this tiny market sector and so they have had to cover some of their positions for fear of a real rout. The new buyers and the short covering has forced the silver price to higher ground. The effect of this upswing is reflected in the stock price of Silver Wheaton as it to was down at the $27.00 level and has moved rapidly to close at $39.90 today.
Whilst SLW was heading south and being sold off by disgruntled investors, not us by the way, it was hard to remain firm with our price target of $100.00 per share. But we did and we are still holding firm to that prediction. To put a time line on it, on 19th October 2011 we wrote that we are looking for SLW to double in 12 months to $60.00 and hit $100.00 in 18-24 months. So by October 2012 we should be at $60.00 and by March 2013 at $100.00. We recognize that the first milestone, this October, is approaching fast, however, we are of the opinion that silver prices will challenge and overcome its previous all time high this year, dragging SLW with it.
An upcoming event to watch for this month is the release of 2011 Fourth Quarter and Full Year Results On 22nd March, 2012. This will be interesting as SLW has only beaten the analysts expectations on 2 of the last 11 quarters, as the chart above shows. In terms of Earnings Per Share, a consensus of analysts have the 'mean' for the 4th quarter at $0.43, with the low being $0.37 and the high being $0.64. A consensus of 9 analysts had predicted a third quarter EPS of $0.50 and were disappointed when the figure of $0.38 was released. However, if SLW can produce the unexpected with an EPS in the order of $0.47 plus, then this would bode well for further advances in the price of the stock.
Taking a quick look at the chart below please note the upswing of the 50dma, should it cross the 200dma, which looks likely, it would form what is generally known as a golden cross, this would be positive for SLW. However, the technical indicators suggest an overbought situation, so there may be a pullback in the short term.
Also worthy of note is that gold is heading higher and the Gold/Silver Ratio is decreasing and now stands at 48.36, which tells us that silver prices are moving faster than gold prices at the moment. Should this continue to be the case then silver bugs will be in for one wild white knuckle ride.
Silver Wheaton Corporation has a market capitalization of $14.10Bln, a 52 week low of $25.84 and a high of $47.60, average volume of shares traded is between 5.00Mln and 7.00Mln, so the liquidity is good, with 353.50 million shares outstanding.
Silver Wheaton Corporation trades on both the NYSE and the TSX under the symbol of SLW.
For disclosure purposes we do own this stock and it currently forms the largest part of our core position in the silver market, so we do have a leaning towards them which you should bear in mind.
In terms of expectations in general, be prepared for some extreme volatility to come our way, the problems are still unresolved in Europe, although they may have bought some time and the spotlight will return to the U.S. shortly with the dollar coming under pressure once again. It is election year and that usually means that the sweeteners will be handed out in large amounts to boost the feel good factor, however, such boosters are usually short lived.
Disclosure: I am long SLW.