Tom Szabo

Silver Wheaton: Still Waiting for the Growth

If SLW can leverage the price of silver in the long term, it has yet to prove it. Owning SLV with none of the company risks has been a superior investment during the past couple of years (the same goes for just about every silver producer as well).

In any case, I don't think it makes sense to view SLW on an EPS basis--the prevent value of the assets on a discounted cash flow basis seems more appropriate. If we assume 25 million ounces annual production for 40 years (to match the 1 billion or so ounces in silver resources across all categories), $1 billion up front cost, $4/oz. cash cost and some long term silver price, and a risk free rate, we can get a pretty good picture of the investment merits. For example, let's use $15 silver and 5% interest rate, an Excel formula might be: =PV(0.05,40,-275,0)-10... The result is $3.7 billion. SLW basic market cap today is around $2.9 billion. Thus, the market seems to value some assumption less positively compared to these assumptions.

Is it the discount rate? The long term silver price? Annual production? Life of mine? Or likely some combination. Regardless, I find this simple method superior to analyzing EPS. One reason is that SLW financial performance is directly related to the price of silver, which will fluctuate from quarter to quarter.

Another advantage of PV is the ability to demonstrate leverage. For example, let's switch the long term silver price to $20. The Excel formula now gives us a present value of $5.8 billion. Thus, a 33% rise in silver price gives us a 56% rise in PV of SLW's assets (to be presumably matched by a similar rise in SLW share price). If we use $30 silver, we get $10 billion in PV, so a 100% rise in silver price gives us a 170% rise in SLW's PV. If we do this using a bunch of silver prices, what we see is that SLW should generate around 70% leverage to any rise (or fall) in the price of silver. One would need to determine for themselves if this is sufficient to warrant the risk that one or more of the mines providing the silver stream could falter or shut down, thus reducing the amount of silver produced for the benefit of SLW. Maybe the best way to use the PV would be as a buy and sell signal when SLW price reaches an extreme by comparison. The necessary info to build a historical model is available for each quarter end, which isn't a lot of data points but it would still be interesting to see what it says. Maybe if I get some quiet time I'll try to put something together and post it.