On August 31st, Silver Wheaton's (SLW) stock price moved higher by 5.2% on above average volume. The reason that the stock rallied was because Ben Bernanke had indicated that the Federal Reserve might be willing to initiate quantitative easing for the third time (QE3). Mr. Bernanke made it clear, that the possibility of QE3 will remain a reality as long as the unemployment rate remains above 7%. Quantitative easing is a strategy that the Federally run Central Banks use to increase the money supply by buying government securities, as well as other securities from the market. Quantitative easing helps precious metal prices because it dilutes the value of paper assets like the dollar, and floods the financial markets with cash which tends to lead to inflation. For these reasons, investors view owning hard assets such as silver and gold as a hedge against a reduced dollar value and inflation.
Silver Wheaton is a silver streaming company. This means that Silver Wheaton does not directly operate any mines. The company "contracts with other miners to pre-purchase the production of those miners at a predetermined price. In most cases, Silver Wheaton secures these contracts without the need to outlay any upfront capital." This means that the company bears very little operational risk." Consequently Silver Wheaton's earnings will have a high correlation to the price of silver. The increased prospects for a QE3 was totally attributable for the August 31st rally in the stock price of Silver Wheaton. In the past QE's have worked out very well for the price of silver. Following QE1 the price of silver rallied by almost 69%, and after QE2, the price of silver moved higher by nearly 82%.
Since August 30th Silver Wheaton's stock price has moved higher every day by a total of 10.5%. Incidentally, the price of the iShares Silver Trust (SLV), which tries to mimic silver prices moved higher by 10.8% over the same period. I think that it is likely that Silver Wheaton's stock price will continue to move higher at least until the Federal Open Market Committee (FOMC) meeting on September 12th and 13th. After that meeting, we will have a better idea about Mr. Bernanke's thoughts on QE3. It is almost certain that the price of precious metals will be affected by Mr. Bernanke's announcement after the FOMC meeting. If Mr. Bernanke announces a QE3, or leans towards a QE3 in the future, the price of silver will probably move higher, and as a consequence so will the stock price of Silver Wheaton. If Mr. Bernanke indicates that he is unlikely to implement QE3 then the stock price of Silver Wheaton is likely to move lower. Unfortunately for silver investors while the economy is moving slowly it is still moving forward. For that reason, I think that Mr. Bernanke will not implement QE3, and that his announcement will be non-committal in regards to QE3. I also believe that Mr. Bernanke who tries to be nonpolitical would be unwilling to implement QE3 during the presidential campaign season.
Recent Silver Wheaton News
On August 8th, Silver Wheaton acquired HudBay Minerals (HBM) for $750 million. The acquisition included 100% of the life of mine silver production from HudBay's 777 Mine in Canada and 100% of the life of mine silver production from HudBay's Constancia mine located in Peru. In the agreement, Silver Wheaton also acquired 100% of the life of mine gold production from HudBay's 777 Mine until Constancia meets a completion test, or the end of 2016, whichever comes later. At which time, Silver Wheaton's share of gold production from the 777 mine will be reduced to 50%. Silver Wheaton will also be required to make ongoing payments of the lesser of $5.90 per ounce of silver and $400 per ounce of gold (subject to an inflationary adjustment) or the prevailing market price per ounce of silver and gold delivered.
As a result of the HudBay acquisition, Silver Wheaton will increase silver production by 4.2 million ounces and gold production by 68,000 ounces until the end of 2016.
Silver Wheaton is perhaps the most popular investment choice for those who are willing to invest in silver production. The company's stock has been a favorite for two reasons. The first is that since the company does not actually operate any mines it does not have the operational cost or risk that mining companies have. The second is that the company has significantly stronger operating margins than its competitors. For example, Silver Wheaton's operating margin is 75% while Coeur d'Alene Mines (CDE) operating margin is 20% and Pan American Silver's (PAAS) operating margin is 51%. With a Price to earnings ratio of 23, Silver Wheaton's valuation ranks between its two competitors. Cour d'Alene's price to earnings ratio is 32, and Pan American Silver's price to earnings ratio is 10.
I believe that Silver Wheaton is the best investment amongst the silver stocks, primarily because of its high operating margins. Those who invest in silver Wheaton will probably benefit if they pick the right entry point. But, I expect that Silver Wheaton's stock will take a slight hit after the September 12th and 13th FOMC meeting if Mr. Bernanke does not announce a QE3.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.