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Silver Wheaton Corp (SLW) is a pure play on silver mining with a unique business structure. The company has contracts with five different mines to purchase their silver production at a fixed contract price. These mines - in Mexico, Peru, Greece and Sweden - are primarily mining another metal and silver is a byproduct of the mines' primary operation.

Silver Wheaton has purchased the silver rights to these mines for upfront cash purchases, then retains the right to buy silver at $3.90 per oz. The company has almost no overhead with a half dozen employees and a structure to pay little or no taxes. All contracts are is U.S.$.

The company expects to sell 15 million ounces of silver in 2007 and grow that to 23 million ounces in 2009. During the same period they will be paying off the debt incurred with the up front payments associated with some of the contracts.

The stock trades at a rich 29 times current earnings. Earnings per share have been flat at about 10 cents for the past year, and analysts projections have them staying flat for the next six quarters. The share price has dropped in the last month from a high of almost $15 to currently price of $11.13. This is somewhat in line with the decline in silver prices.

I think the company is going to show some robust earning growth over the next few quarters, contrary to what analysts are predicting. Digging through their literature leads me to believe the silver productions should start increasing soon. The company is 49% owned by Goldcorp (GG). Goldcorp also owns two of the mines that Silver Wheaton has silver contracts with, which means Goldcorp has a vested interest in Silver Wheaton receiving as much silver as possible for resale.

The downside items for Silver Wheaton are three:

1. The high PE does not provide any relief for negative earning surprises.
2. Falling silver prices directly impact the bottom line.
3. Silver production fails to grow at the planned rate (see #1).

I think the positives outweigh the negatives and I am adding this stock to my 20 Stock Portfolio. (Up to 2 now!)

Disclosure: I hold a long position in Silver Wheaton

Source: Silver Wheaton's Unique Structure Should Drive Growth