Silver Wheaton: Goldcorp Overhang Now Gone

Silver Wheaton (SLW) is a pure play on silver. This company basically purchases byproduct silver at guaranteed pricing form gold mines and resells it. Much of the production purchases were contracted below $5.00 per ounce and with the recent pop in silver prices the company has enjoyed a nice run up in profits and its stock value. One of the overhangs to the stock, however, was the rumored intention of Goldcorp (GG) to sell its 48% stake in Silver Wheaton in order to fund its own capital needs. Needless to say, having 48% of shares dumped on the market would have had a negative impact on the stock price. As it turns out, a block sale was negotiated at roughly $14.50 per share (the deal priced in Canadian dollars which are currently close to parity with U.S. dollars).

Silver Wheaton traded yesterday in the $15.00 range. This stock is worth a look for several reasons. First, it is a play on the “inflation fear” and the commodity story. Secondly, the Goldcorp overhang is now gone. I believe that the large investors behind this deal do not day trade stocks and that the 48% interest is moving from weak hands to strong ones and will remain off the market.

Also, you also have to ask yourself if a larger stake (like 100%) is maybe their ultimate objective. Moreover, although the deal priced below market, it make sense that it would given the magnitude of the sale and the current market environment. I think that you may see the deal price serve as a floor (don’t want to spend $1.5 billion and look silly do you?). Finally, a couple of sites I have read point out that the CEO has come out and stated that the 48% stake by Goldcop impeded Silver Wheaton as miners did not want to work with a company whom they viewed as a proxy for Goldcorp. That impediment is now gone.

If you are an aggressive investor you can sell February or Mach $15 puts and your net basis if the stock gets put to you will be at or below where these huge players bought their stake. Do your own research on this; here is the company profile from their website and the press release on the sale:

Profile:

Silver Wheaton (SLW) is the largest mining company with 100% of its revenue from the sale of silver. Having silver purchase contracts with five separate mines, the Company expects to sell approximately 13 million ounces of silver in 2007, growing to 25 million ounces by 2010. The Company purchases all or a portion of the silver production from Goldcorp mines in Mexico, Lundin Mining's Zinkgruvan Mine in Sweden, Glencore's Yauliyacu Mine in Peru and European Goldfields' Stratoni Mine in Greece . Silver Wheaton's unique and simple business model is designed to create long-term shareholder value, providing for strong upside potential with downside protection. Silver Wheaton is unhedged and well positioned for further growth.

Press Release:

VANCOUVER, BRITISH COLUMBIA--(MARKET WIRE)--Jan 31, 2008 -- Silver Wheaton Corp. announced that Goldcorp Inc. and Silver Wheaton have entered into an agreement with a syndicate of underwriters co-led by Macquarie Capital Markets Canada Ltd., Genuity Capital Markets and GMP Securities L.P. (the "Underwriters"), with Macquarie Capital Markets Canada Ltd. and Genuity Capital Markets as co-bookrunners, pursuant to which the Underwriters have agreed to purchase from Goldcorp, on a bought deal basis, 108,000,000 common shares (the "Common Shares") of Silver Wheaton at a price of C$14.50 per Common Share (the "Issue Price") for aggregate gross proceeds to Goldcorp of C$1,566,000,000 (the "Offering"). The Offering represents the sale of Goldcorp's entire 48% interest in Silver Wheaton. Silver Wheaton will not receive any proceeds from the Offering.

Disclosure: Author has a long position in SLW

Comments

[fxtrader07]

nobody knows who the buyer is /buyers are, so talking about "overhang gone" seems premature.
some or all of these investors might as well be satisfied in making a quick buck (10-20%) so that might as well cap SLW at 16-18 for the next several weeks/months
I am suspcicious that GG sold the entire stake and that one of their objectives was to retire old debt.
makes me wonder why they preferred retiring debt bearing a 8-9% interest rather than holding on to at least a part of their slw position

[Georealist]

There are, of course, always reasons for second guessing that usually result in investors outguessing themselves. I'd take Goldcorp at their word..retiring debt by selling a holding that has had a nice run and thereby freeing up capital for any number of uses makes sense.
No one knows if the buyers of SLW will sell at 16 or 26..these are, to say the least speculative and largely inconsequential issues..
The rubber hits the road in silver price..SLW is a monster of buy low sell high silver. Investors get the best of several worlds..a profitable business that has embarassingly low overhead..a call on an asset that could suffer a parabolic drop and still make them money...and a future where they could conceivably be selling at $25-35 an oz something they paid cup of coffee coin for..
Nice article on a very underappreciated money machine.

[RichShinnick]

fxtrader07

I know that the sale might establish a bottom AND the gravity of the sale may establish a top, that is why I like the put selling strategy in the February and March 15 puts (or covered calls).

[fxtrader07]

Hey Rich, that is certainly a strategy worth considering. in fact, that's the way i bought slw's common - via selling OTM-puts and i have written covered calls on them until a few days ago when i liquidated the entire position. though i confess, it was based not only on GG's sale but also on the seasonal and technical considerations that speak very loud in favour of a correction in bullion prices. simply too many potentially negatives (short-term) as i would like to hold through. what worries me a bit is slw's rather small cash position that limits future business and might result in a secondary somewhere down the road
but i might consider selling some april otm puts because apart from those issues raised i do regard slw a great quality silver play

[RichShinnick]

fxtrader07

I think that we are both on the same page. I look at SLW as biased to the upside in the short term and it may simply be a great options trading vehicle for the next couple of months. But, I really don't think that 48% stake is coming on the market anytime soon.