Silver Wheaton Faces Possible Share Sale by Goldcorp

Shares of Silver Wheaton Corp. (SLW) have risen 50% in the past six months and climbed more than 12% on Wednesday alone.

The miner, which gets all of its revenue from the sale of silver production from companies like Goldcorp (GG), Lundin Mining (LMC), Glencore and European Goldfields, is benefitting from higher demand for the metal and related ETFs, as well as more interest from investors.

One of the issues that could cause overhang risk for Silver Wheaton shares in 2008 is the potential sale of Goldcorp’s 48% stake, which many consider a non-core asset, according to RBC Capital Markets analyst Michael Curran. As time moves on and as Silver Wheaton shares potentially climb higher, he thinks the chances rise that Goldcorp may look to sell some or all of its holdings.

Mr. Curran also noted that with only $8-million in cash and $446-million in debt at the end of the third quarter of 2007, Silver Wheaton likely does not have enough borrowing capacity to make further acquisitions. As a result, any such deals would likely require an equity offering, he told clients in a note.

Mr. Curran downgraded his rating on Silver Wheaton shares to “underperform” from “sector perform” for this reason, but primarily due to recent gains for the stock. His price target remains $19.

Comments

[The small A...:]

SLW is a unique company. SLW comes from the merger of of WHT, Wheaton River, primarily a silver producer but with substantial gold assets and Goldcorp. They merged to take advantage of the synergy and of Wheaton River's assets receiving higher valuation. SLW was spun off from Goldcorp as GG wanted to become a pure gold play (still with copper by-product) SLW is a unique company, it's income is all royalty based company, not a miner. It provides financing for silver companies pursuant to long term agreements by which the producer agrees to sell to SLW a substantial portion of its production at low prices. Part of this is a bet that silver will not go under say around $5. In other words there are NO operating costs. It is a pure silver play. With silver prices climbing and inflation to take the fore, I would be buying SLW. GG's recently raised the amount of silver that it expects to produce for SLW by 44% per year from 5.4 million ounces to 7.8 million ounces. As to Curran's statement regarding GG sale of SLW shares, while this could happen, If GG wanted to sell some it's SLW it would do it as a private deal, not on the market. Based on the depressed value of SLW, GG may be able to sell its shares at a premium. I am sure there a plenty of smart large investors who would want a pure silver play. I wonder what actual trading positions RIBC has taken on SLW? Maybe none. If the price of silver continues its rise, and it should, SLW will be printing money and its short-sellers will be needing money to make margin calls. Maybe RIBC and CIBC should buy some SLW from GG. I could be wrong, but Salman just raised its price target on SLW to C$25.50 (about US$25).

Disclaimer I do hold long positions in SLW.

2008 Jan 25 04:32 PM

[The small A...:]

Sorry about the typos. Trying to get it done too quickly. Also I should have used the phrase "could do it as a private deal" not "would do it ..." anything can happen.

2008 Jan 25 04:39 PM

[fxtrader07:]

as it turns out gg is actually selling its 48% stake at a discount of about 10% . and it looks strange that they sell the entire 48% at this price (keeping 10-15% certainly would have been possible and still had gg allowed to raise plenty of cash)
the entire deal does not bode well for slw, as gg , among other purposes, wants to rtire some debt from the proceeds.
onbviously, they think slw may rise less than the 6, 7 or 8% interest they pay on these debts.
disclosure: sold my slw-position after GG's announcement

2008 Feb 04 06:42 AM

[The small A...:]

Too bad you sold. Should pop now that the overhang is gone.

2008 Feb 24 03:25 AM