Silver Wheaton (SLW) is one of the more appealing trades in the mining sector because the silver streaming firm is far less exposed to the increasing production costs that many firms in the sector are struggling to manage. The firm is able to pay extremely low rates for silver and then sell them at the increasing market prices driven by macroeconomic uncertainties. Despite the slow economic recovery in the US and improving unemployment statistics, confidence in the economy continues to waver, thus supporting the higher silver and gold prices, YOY. Speculation regarding impending inflation surrounding the ongoing QE3 implementation also supports a bullish outlook on these precious metals.
Barrick Gold (ABX), Goldcorp (GG), Pan American Silver (PAAS), and Coeur d'Alene Mines (CDE) are most comparable to Silver Wheaton because these firms are some of the top silver and gold mining firms worldwide. Silver Wheaton's price is 24.4 times earnings, 17.7 times sales, and 4.8 times its book value; Silver Wheaton's price-to-sales and price-to-book ratios are the highest among these firms. Coeur d'Alene Mines' price is around 39.1 times earnings, Goldcorp's around 26.7 times earnings, and Barrick's 9.6 price-to-earnings ratio is the lowest among the firms. Silver Wheaton's current ratio is around 6.3, and its debt-to-equity is around 0.07. Its annualized dividend is around $0.40 per share.
Silver Wheaton's EPS is around $1.60; its EPS has increased 249.1% in 2012, and is projected to increase by 27.3% in 2013. Barrick's $4.10 EPS and Pan American Silver's 2487.2% EPS growth in 2012 are the highest among these mining firms. Silver Wheaton's sales have increased 35.7% over the past five years. Its 21.4% ROE, 74.9% operating margin, and 73% profit margin are substantially higher than the aforementioned firms. Silver Wheaton's float short is around 1.14% while its 0.88 short ratio is the lowest among these firms. Its beta is around 1.5 and its average volume is around 4.5 million; its relative volume is around 1.1. This stock is up 26.3% YTD, up 9.6% over the past month and has increased around 22% since its last earnings release.
Silver prices have increased 25% during the third quarter; stimulus announcements from the Fed and Europe helped drive this increase. According to Bloomberg, hedge funds are more bullish on silver than they have been throughout the last half year. Exchange-traded products for silver holdings totaled 717.2 metric tons in the third quarter, valued at $797 million; this is the highest in the past year. Silver is becoming more attractive based on industrial demand and as a monetary hedge. Silver Wheaton has interests in 17 operating mines and four development stage projects; by 2016 its annual attributable production is projected to be 48 million silver equivalent ounces and 100,000 ounces of gold.
Silver Wheaton recently completed its agreement with Hudbay Minerals (HBM); the average price for silver that Silver Wheaton will pay from these two mines is $5.90 per ounce. The average price Silver Wheaton pays for silver on its entire portfolio is around $4.04 per ounce. Silver Wheaton will also receive a portion of gold production from the 777 mine as well. The projected life of the 777 mine is until around 2020. The Constancia Project is projected to have mine life of around 16 years; initial production is expected in 2014, and full production is expected in 2015. Hudbay believes Constancia further exploration efforts may yield higher grade mineralization in satellite deposits as well.
There are several indications that Silver Wheaton's capital appreciation and their market and growth, in revenues, can continue for the long-term. Over the last three years its revenues have increased around 335%, and its profit margin has increased around 53%. Silver Wheaton's EPS has increased 16,100%; EPS growth has outpaced the stock's 339% increase over the past three years. Silver Wheaton's 4,350% increase in net income over the past three years outpaced its 2,324% increase in free cash flow. Considering the growth in these financials alongside silver's increasing price, it's reasonable for shareholders to expect increases in the annualized dividend for the long-term. Over the past three years, Silver Wheaton's dividend has increased around 233% while its debt-to-equity ratio has decreased by 77% in the same period.
Silver Wheaton stock approached its 52-week high twice in the past year; it's reasonable to expect the stock to surpass its previous high and continue increasing in the market. If significant inflation or speculation does result from the ongoing QE3 implementation, current shareholders can expect Silver Wheaton stock to continue its growth. Silver will remain an attractive investment vehicle as long as there is speculation and perceptions of economic weakness in the US, Europe, and China. The possibility of another recession bodes well for stocks like Silver Wheaton. Silver is also attractive because its price and market activity is more volatile than gold.
Traditional mining firms do not offer investors the same upside as Silver Wheaton due to its unique operations model. Throughout the past three months, Silver Wheaton's share price has increased by more than 50%, whereas Barrick Gold and ETF SPDR Gold Shares (GLD) have only increased around 15%. Pan American's operating margin is around 36% whereas Silver Wheaton's is closer to 75%; this shows why Silver Wheaton is more capable of increasing its dividend payout in the near term compared to traditional mining firms.
The Hudbay agreement is pivotal as Silver Wheaton's current contract with Barrick Gold is set to expire in 2013. Combined with the current economic outlook, successful production at the 777 mine, and the Constancia project alongside adding more assets to its diverse portfolio should lead to significant upticks in Silver Wheaton's stock price and eventually increases in its dividend payout. Current shareholders should hold long-term while interested investors should initiate a position before the upcoming earnings release.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.