In addition to its ability to boast several very strong metrics, Silver Wheaton (SLW) recently put up solid earnings figures and adopted a dividend policy that should be quite favorable for investors. The company also discussed a variety of acquisitions which will bolster its already dominant position within the industry as the world's best-run silver streaming company. Against the backdrop of strengthening silver prices and a recent decline in the company's share prices, the time appears to have arrived to begin acquiring this stock in one's core portfolio.
Precious Metals Drift Higher
As of the end of the week, December futures for silver climbed $0.26 leaving the iShares Silver Trust (SLV) at $27.26 per share and December gold futures were up over $13 on the week to $1622.80, leaving the SPDR Gold Trust (GLD) at $157.18. While neither of these runs is enough to generate legitimate excitement, they represent good signs. Shares are Silver Wheaton are heavily driven by the price of silver, so signs of firming in the precious metals space can been seen as bullish for the stock.
Why Silver Wheaton Should Have Been on the Radar
Given some of the strong metrics available from Silver Wheaton, the stock should have been on the watchlists of most investors. With figures such as an operating profit margin of 76.4%, a return of assets of 20% and 5-year projected earnings per share growth rate of 36.5%, the company looks very attractive. To put some of these figures in perspective, Coeur d'Alene Mines (CDE) has an operating margin of 21.6% and a return on assets of 4.3% and Pan American Silver (PAAS) has an operating margin of 41.9% and a return on assets of 8.9%. On these metrics alone the company is attractive at current levels.
While Silver Wheaton did not crush earnings, which were reported at $0.40 per share as compared to estimates that ranged from $0.42 to $0.35 per share, the number was in the high end of the range. Two of the most important figures that were released and must be put into the proper context were the change in the cash costs of the company's silver and the change in cash operating margin on a per ounce basis. In terms of costs, the company was actually able to lower costs to $4.04 per silver equivalent ounce. Keep in mind that Silver Wheaton is a silver streaming company, or a royalty collection company, not a full producer; the company contracts with various producers to buy production at a set cost and then Silver Wheaton earns the spread between the contract price and the market price. This means that the company is paying $4.04 for every ounce it receives and sells at current market prices. Given the company's expansive and growing reserves (discussed in greater detail below), this low cost puts Silver Wheaton in a very favorable position relative to the silver market.
The other statistic that will likely garner a high level of discussion is the fall in the cash operating margin on a per ounce basis. This level fell to $25.01 per ounce in the most recent quarter from $34.21 in the second quarter of 2011. This will form the basis of many arguments why the stock is in decline and should be avoided. Silver bears and those who do not like the stock will likely make this figure the star of their arguments, ignoring the fact that it is nearly irrelevant for the long-term health of the company. The equation here is very simple: the company pays just above $4 for silver; the price of silver fell; this margin fell; the price of silver is likely to rise; this number will rebound. One of the great appeals of this stock is that any investor can understand what he or she is buying - a stream of silver at a price well below where the commodity will likely ever trade again. The company is lean and well-run, so it will remain profitable.
In addition to its existing streams, the company announced that it had also acquired interests in additional mines, specifically the 777 flagship mine and Constancia development mine controlled by Hudbay Mineral Inc. These acquisitions should each be significant positives for the company. Chief Executive Officer, Randy Smallwood, stated:
"We are extremely pleased to add two new precious metals streams, on high-quality base metal mines, to our diversified portfolio which now includes 17 operating mines and four development stage assets." This transaction provides immediate cash flow, is accretive on all short- and long-term metrics, and maintains our policy of investing in low-cost, high quality assets. It also solidifies one of the strongest growth profiles in the precious metals industry. Hudbay has a history of mining success spanning decades, and as flagships in their asset portfolio, we are confident that 777 and Constancia will deliver significant long-term value to both groups of shareholders.
Overall, these acquisitions serve as a new catalyst to begin buying this stock for one's core portfolio.
While it may be early to call the $100 price target that one analyst mentions for the stock, the current position of the company is very attractive. The dividend policy - setting the dividend to 20% of the operating profit from the previous quarter on a per share basis - should be hugely favorable to shareholders and give them added incentive. Given the belief that the price of silver has significant upside potential from current levels, Silver Wheaton is a very attractive core holding and investor should begin acquiring shares at current levels.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.