By Kersasp Shekhdar
Done right, silver streaming can be an all gain, no pain proposition. After all, it involves none of that drawn-out, grubby work of exploration, mining, and extraction. This specialty niche is occupied by Silver Wheaton (NYSE:SLW).
Companies like Silver Standard Resources (NASDAQ:SSRI), Pan American Silver (NASDAQ:PAAS), and Endeavour Silver (NYSE:EXK) are often listed as Silver Wheaton's competitors, but this is incorrect. All three engage in exploration, mining and extraction in some or another balance, whereas Silver Wheaton is a pure streaming play. It holds long-term purchase contracts at pre-set prices with mining counterparties for whom silver is a by-product and not a primary mining interest. As such, viewing this company as a mining company is an error; it should be seen as a brokerage or middleman office of sorts for a specific metal. Though other small silver streamers exist, given Wheaton's size, age, experience, and geographical diversification, it is an unique company.
Because the company does not engage in any exploration, mining and extraction, it incurs no capital expenditures to speak of. As a result, its debt levels are very low and cash pile is, relative to its size, high. As Silver Biz puts it, "The beauty of silver streaming is that the company does not have the same risk as traditional mining companies, such as tax increases or any other unforeseeable issues that could result in loss of revenue."
Though Silver Standard, Pan American, and Endeavour are not Silver Wheaton's competitors (for reasons explained above), it is helpful to compare their stock price growth and one or two fundamentals to examine the efficiency of Wheaton's silver streaming business model versus that of classical silver miners.
On this point, Silver Biz provides illuminating overlapping worms of share price growths of Silver Wheaton and its mining quasi-competitors, and also silver price growth. From 2004 until the present, competitors' share prices grew within a range of zero to 100% while the price of silver itself grew by about 400%. In contrast, Silver Wheaton's stock grew by a whopping 1,000% - tenfold growth. What is most revealing is that despite silver's significant growth gains, silver miners Silver Standard and Pan American's (and two other silver companies') share prices stagnated.
By market capitalization, Silver Wheaton at $10.37 billion dwarfs its three quasi-competitors, who are, on average, about one-tenth of its size. It's forward price-earnings is 12, whereas its competitors are marginally better off (in terms of value pricing), theoretically, at between 7 and 10. That said, Wheaton shows profit and operating margins (trailing twelve months) in excess of 75% while the runner-up is Silver Standard with a 54% profit margin. Its return on equity (trailing twelve months) is 22% on which comparison Pan American shades it at 24%. On diluted earnings-per-share, Pan American pips Wheaton $3.31 to $1.55, with the other two competitors not even in the game. Pan American is the only competitor showing quarterly revenue growth (year-on-year) of 8.5%, well behind Wheaton enjoying quarterly growth of 28%.
A share price side-by-side comparison between Wheaton and strongest quasi-competitor, Pan American, shows that the two companies' shares started off twelve months ago at between $35 and $40 and tracked one other fairly closely until mid-November, when Pan American began an abrupt fall. While year-to-date Wheaton's share price has declined by 30%, Pan American's has fallen by nearly 50%.
Finally, on the liquidity front, Wheaton trumps the competition - as one might expect - by sitting on a cash hoard of $626 million, which none of its competitors can touch. Though Pan American is a well-run operation, Wheaton is its equal on this match-up (i.e. efficiency) but is much more profitable and has posted better growth figures.
Silver Wheaton had secured long-term silver prices of a mere $4 to $5 with its mining counterparties while the market price of silver tops $30 today - a lucrative proposition. Add to that the fact that it has counterparty agreements with several miners, among them Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG), in nine countries on three continents, and this indicates that the company's geographical risk is negligible. Because of all these, and other, factors, Trefis believes that Wheaton's shares are undervalued at their current price of around $30 per share and are worth $40 per share.
Wheaton is geographically diversified, and it holds very attractive future purchase agreements with mining counterparties. However, it has put all its eggs in one basket - silver. In order to predict where Wheaton is headed, we need to predict where silver is headed.
Because of the phrases "gold and silver" and "silver and gold," silver is all too often misperceived as only a precious metal. It is a precious metal, certainly was one historically and is seen as one traditionally (along with the real 'precious' metals per se, gold and platinum), long having been used in making of jewelry, coins, mirrors, silverware, and for photographic development and printing, a use that has tailed off drastically since the advent of digital photography.
Though silver is, of course, still used in its traditional applications, in the Post-Industrial Age, silver is predominantly a Post-Industrial metal. It is now used in/for CDs/DVDs, nuclear reactor control rods, medical compounds, superconduction, water purification, photovoltaic cells, silver-membrane switches, printed circuit boards, jet engine bearings, plasma screens, food packaging, and nanotechnology. (For detailed information see The Silver Institute.) Demand for silver for all of these uses and applications is set to stay stable or rise - and rise steeply: Kitco News predicts, "The amount of silver used for industrial purposes is forecast to rise to 665.9 million troy ounces by 2015, which would be a 36% increase from the 487 million used in 2010, according to a report from the Silver Institute" because "the 'technical proficiency of silver' limits the ability to switch in favor of lower-cost alternatives, making the metal largely price inelastic."
That answers the question to a T. Silver demand will increase, probably exerting a positive pressure on the metal's price. Though we should probably take the opinion of The Silver Institute on the subject of silver with a pinch of salt, there is no gain saying the fact that technology is approaching science-fiction levels, and silver is a key component in cutting-edge technology. On silver it has to be a buy, and so - you do the simple math.
In sum, Silver Wheaton is not only a pure streaming play, it is a pure profit play. With demand for industrial silver showing no sign of a fall off and showing all signs of rising, be it steady or steep, and Silver Wheaton incredibly well-positioned on all fronts, at its present valuation the verdict on its shares can only be a strong buy recommendation.