Silver Wheaton (SLW) is a silver streaming company formed in 1999 to purchase the silver byproduct from mines in exchange for an upfront payment and then sell the silver in the global market at spot.
Because SLW purchases silver byproduct at essentially a fixed price of $3.90 it locks in costs and is open to increases in the price of silver without the capex, environmental, or maintenance costs associated with operating a mine.
SLW has relationships with 3 of the top 5 silver deposits in the world, Penasquito [Goldcorp. (NYSE:GG)], Pascua-Lama [Barrick/Goldcorp (NYSE:ABX)], and Navidad (Pan American Silver). The Penasquito and Pascua-Lama mines are gold mines with a significant silver byproduct while the Navidad mine is primarily a silver mine.
SLW was able to get such attractive terms because it was able to provide some of the necessary capital via an upfront payment to assist in the build out of the mine. In return they get a portion of the silver for the life of the mine.
One of SLW’s agreements is with Augusta Resources’ (NYSEMKT:AZC) Rosemont Project in Arizona where SLW will take the gold and silver production from Augusta in return for a payment of $230 million and ongoing production payments.
With all of the agreements SLW has attributable Proven and Probable (P&P) silver reserves of 944.6 million ounces and Measured, Indicated, and Inferred (MII) silver resources of 832.3 million ounces. These totals are likely to increase as deposits are expanded through additional drilling at the mines where SLW has an agreement to purchase all the silver production.
In the 4th quarter of 2010, SLW had sales of 5.5 million ounces of silver and 2,600 ounces of gold, an increase of 10% over the similar period in 2010 at cash costs of $4.02 per silver equivalent ounce, a decrease of two cents over the similar period in 2009.
Net income for 2010 rose to $290 million dollars or $0.84 per share from $117 million or $0.39 per share in 2009 on the back of increased attributable production and much higher silver prices.
As of December 31st, SLW had $428 million in cash on its balance sheet and just announced its first quarterly dividend of $0.03 per share or $0.12 per share annually.
SLW has been using the cash flow to invest in some juniors with significant silver projects.
Bear Creek Minerals (OTCPK:BCEKF) [14% ownership] has the Corani project in Mexico which contains 258 million ounces P&P and 108 million ounces MII of silver.
Revett Minerals (16% ownership) has 229 million Inferred ounces of Silver at the Rock Creek property.
Mines Management, Inc. (11% ownership) has 231 million ounces MII of silver at the Montanore property.
Sabina Gold and Silver Corp. (OTC:SBBFF) [7% ownership] has 264 million ounces Indicated and Inferred of silver at the Hackett River property
As Penasquito ramps up and Pascua-Lama comes online in the coming years SLW should continue their silver stream growth.
The beauty of the business plan for SLW is that it shares in the upside for the price of silver without most of the risks that tend to constrain producers. For example, there is no risk in construction problems or coming over budget during the build out of the mine. SLW does not share in any environmental liability that comes with owning a mine as well.
Silver Wheaton is the top stock in the silver industry and should be a core holding for all investors. Investors should realize that the daily and weekly charts are overbought with respect to SLW. If you are looking to establish a position it would be better to ease into a position buying into pullbacks at this point in time rather chasing the stock higher.
Disclaimer: Communications are intended solely for informational purposes. Statements made should not be construed as an endorsement, either expressed or implied. This article and the author is not responsible for typographic errors or other inaccuracies in the content. This article may not be reproduced without credit or permission from the author. We believe the information contained herein to be accurate and reliable. However, errors may occasionally occur. Therefore, all information and materials are provided “AS IS” without any warranty of any kind. Past results are not indicative of future results.
PAST RESULTS ARE NOT INDICATIVE OF FUTURE RESULTS. THERE IS RISK OF LOSS AS WELL AS THE OPPORTUNITY FOR GAIN WHEN INVESTING IN THE STOCK, BOND, AND DERIVATIVE MARKETS. WHEN CONSIDERING ANY TYPE OF INVESTMENT, INCLUDING HEDGE FUNDS, YOU SHOULD CONSIDER VARIOUS RISKS INCLUDING THE FACT THAT SOME PRODUCTS: OFTEN ENGAGE IN LEVERAGING AND OTHER SPECULATIVE INVESTMENT PRACTICES THAT MAY INCREASE THE RISK OF INVESTMENT LOSS, CAN BE ILLIQUID, ARE NOT REQUIRED TO PROVIDE PERIODIC PRICING OR VALUATION INFORMATION TO INVESTORS, MAY INVOLVE COMPLEX TAX STRUCTURES AND DELAYS IN DISTRIBUTING IMPORTANT TAX INFORMATION, ARE NOT SUBJECT TO THE SAME REGULATORY REQUIREMENTS AS MUTUAL FUNDS, OFTEN CHARGE HIGH FEES, AND IN MANY CASES THE UNDERLYING INVESTMENTS ARE NOT TRANSPARENT AND ARE KNOWN ONLY TO THE INVESTMENT MANAGER.
Before making any type of investment, one should consult with an investment professional to consider whether the investment is appropriate for the individuals risk profile. This is not intended to be investment advice or a solicitation to purchase any of the securities listed here. I will not be held liable or responsible for any losses or damages, monetary or otherwise that result from the content of this article.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.