In a world containing headlines like "QE3 and the looming currency war" in mainstream publications, investors ought to consider precious metals. With the precious metal bull market now 12 years old, perhaps silver (SLV) will outperform gold as the secular bull becomes mature. Silver Wheaton (SLW) is the premier silver stock.
Silver Wheaton's business is more safe than traditional mine operating companies. Unexpected expenses do not creep into the cost structure with the stream business model. When the inevitable mine wall collapses, mine operators are responsible to address the situation. Greater diversification provides defense against governmental resource nationalism.
Shares of Silver Wheaton should be expected to outperform the price of silver:
- Silver Wheaton retains 80% of cash generated by operating activities to grow the business.
- Silver Wheaton shares yield 1.2%, while physical silver held has a carrying cost.
- Operating costs of a tinge over $4 per ounce of silver produced give Silver Wheaton modest leverage to the silver price.
Earlier this month Silver Wheaton acquired streams from Hudbay. This purchase was the first in two and a half years. Over this time Silver Wheaton strengthened its balance sheet. Management learned the value of a strong balance sheet during the 2008 financial crisis.
When announcing the recent purchase, Silver Wheaton's CEO noted "exploration upside potential" as a must for new streams. This is a meaningful change in attitude and the first time management trumpeted the idea in a stream acquisition announcement. In the past this important theme was not on Silver Wheaton's radar screen. The page has been taken from Franco-Nevada's playbook.
Silver Wheaton's already strong growth profile improved. The upside leverage to silver pricing adds speculative appeal. Mining costs remain the domain and concern of the operators.
Investors may consider Agnico-Eagle (AEM) shares as a source of funds. Last April in Agnico-Eagle: Golden Opportunity From A Stumble, the difficulties inherent in the mining business and Agnico-Eagle's troubles in 2011 were noted. The turnaround looks to have occurred with results and guidance improving. Shares have been on a tear, outperforming the Gold Miners ETF (GDX) by 50% since publication. Alpha was sought and found.
In another essay, Franco-Nevada (FNV) was considered as a favorite long term gold investment. The $1 billion gold stream financing anounced last week may be positive, yet will take years to play out and leaves Franco-Nevada shares devoid of catalysts. Further, this stream is a detour from its explorationist culture and more of a mundane financing. Consider Franco-Nevada shares as another source of funds for Silver Wheaton.
The idea is for the SLW share price to surpass AEM and FNV. Silver may lead gold as the secular bull market advances in age and looks to break out from a year long consolidation. Be sure to continuously monitor the precious metals complex with me.
Disclosure: I am long SLW.