Silver Wheaton's Innovative Structure Tweaks Pure Silver Profit

The mining industry is tough. It’s no wonder most mining companies never make it. First they must raise capital and buy mineral rights to a particular property they believe contains some natural resources. Then they must spend years and millions of dollars exploring and drilling the property to find resources. Then, if lucky enough to find something, they must drill some more to increase the proven and probable resources on the property.

Even if they have found something there is a lot further to go. They must conduct feasibility studies to determine if the project is worth building a mine. Then they must spend lots of money on environmental studies and eventually apply for governmental approval. Then (if they manage to get this far!) they must spend time (often years) to build the mine (depending on the size). Then, only after infrastructure has been built, people have been hired and trained, and the mine is ready to begin operations, may the company begin to extract its first resources. It’s a long process and it can burn through investor money fast.

That’s where Silver Wheaton (SLW) comes into play. Silver Wheaton’s business structure should be taught in business schools. It is perhaps the most innovative financing system in the mining industry. Silver Wheaton creates a win-win situation: It provides financing to mining exploration companies that have found resources and need money to build a mine. Silver Wheaton doesn’t act like a bank though. In return for financing these projects, Silver Wheaton receives a contract to buy silver produced at the mine at fixed prices (often $3.90 per ounce - but it can adjust with inflation). Silver Wheaton then sells the silver at the current market prices.

The current price of silver is $15.30. Silver Wheaton pays $3.90.

Now why would any mining company sell its silver in this fashion? Silver is often a byproduct for mining companies. A mining company might have a property that is mainly a gold producing property - but also contains some silver. Instead of issuing shares (diluting the shareholder’s capital) or taking on debt (which is risky to service without cash flow), they can sell contracts for the silver in their mine to Silver Wheaton. This allows them to raise the capital to get the mine built. Then, to top it off, Silver Wheaton still pays them $3.90 an ounce for the silver. As recently as 2001, silver traded in the $4.00 to $5.00 range - so $3.90 ain’t that bad of a deal for them.

This unique business structure enables Silver Wheaton to claim they are the only pure silver company in the world with 100% of revenues derived from silver. This claim makes the company a perfect investment for investors wishing to invest in silver and is a great alternative to a Silver ETF. If the price of silver was to go up 100%, Silver Wheaton’s profit could go up by 134%!

$15.30 - $3.90 = $11.40 Gross Profit

$30.60- $3.90 = $26.70 Gross Profit

There are several ways for Silver Wheaton to earn more money: the price of silver can increase, the amount of silver produced could be higher than projected AND they can acquire more silver contracts from other mining companies. If Silver Wheaton has extra cash on hand it can also purchase shares in mining companies that show promise - which can be very profitable investments. The Company states that its main driver of growth is the volume of silver produced and the price of silver.

Silver Wheaton has just 9 employees and yet earned $85 million in 2006 off revenues of $158 million. Silver Wheaton currently sells about 13 million ounces of silver a year. By 2012, Silver Wheaton expects to be selling more than 28 million ounces of silver. Silver Wheaton is originally a spin off from GoldCorp (GoldCorp owns 49% of Silver Wheaton).

Full Disclose: The author DOES own shares in Silver Wheaton (Silver Wheaton Class B Warrants [SLW.WT.B]) at the time of writing this article.

Comments

[poet1]

If SLW is so great, than why is GG selling its shares of it? How much cash do they have on hand to purchase new contracts? SLW was just downgraded, but the target price is still $19.00.

[RobertNabloid]

SLW does have less cash on hand because they have recently signed new contracts and have taken on a large amount of debt... just watch the debt is what I'd suggest...

GG is selling it for several reasons, but one of them is to take advantage of the appreciation and increase their cash on hand... it's not that they think SLW will do bad, its just GG is in a capital intensive business and it might make more sense for them to sell SLW and use that cash for their own projects...