Why Silver Wheaton Can Soar Another 40%

| About: Wheaton Precious (WPM)

Summary

SLW’s production will increase in the long run substantially while its costs will remain almost flat since it gets 96% of its production from assets in the lowest cost quartiles.

Since SLW is a streaming company, it has the lowest administrative cost in the industry as it does not need to maintain any mines and only collect production streams.

Due to its low costs and strong precious metal pricing, SLW’s earnings are expected to grow at a CAGR of 17.5% over the next five years.

At this rate of earnings growth and its forward P/E multiple, SLW can deliver 40% upside going forward.

In recent articles on Silver Wheaton (SLW), I had explained how a rally in both gold and silver prices will prove to be a tailwind for the company as it will be able to improve its margins. But, at the same time, Silver Wheaton will be able to keep its costs predictably low, which will allow the company to take further advantage of strong pricing in precious metals.

So, in this article, we will take a look at how Silver Wheaton's low costs are expected to lead to rapid earnings growth, while also gauging the impact of the earnings growth on the stock price.

Silver Wheaton has been enhancing production from low-cost assets

Over the next four years, Silver Wheaton expects to produce 31 million ounces of silver and 330,000 ounces of gold on an annual basis. The good news is that these production levels will be achieved at consistently lower costs since Silver Wheaton has entered into streaming agreements with miners whose assets carry one of the lowest costs in the industry.

In fact, 69% of Silver Wheaton's production will come from assets in the first cost quartile, with another 27% coming from the second cost quartile. This means that 96% of the company's production will be driven by assets where costs are low. As a result of its focus on enhancing production from low-cost assets, Silver Wheaton will be able to keep its gold and silver cash costs at consistent levels.

For instance, in 2015, Silver Wheaton's cash costs stood at $4.17 per ounce of silver, while gold cash costs were $393 per ounce. Now, over the next four years, the company's silver cash costs will rise only 8% to $4.52 per ounce, while gold cash costs will rise just over 2% to $403 an ounce. Hence, due to a low cost portfolio, Silver Wheaton's costs will not be increasing by a huge margin in the coming years, while at the same time, the company's production will grow at an impressive rate, as shown below:

Source: Silver Wheaton

What's more, due to the virtue of being a streaming company that takes gold and silver streams from other miners that produce precious metals as by-products, Silver Wheaton has really low administrative costs since it does not have to maintain any mines. In fact, Silver Wheaton has the lowest administrative costs as compared to the industry average, which is shown in the chart given below:

Source: Silver Wheaton

Therefore, driven by its low cost base, Silver Wheaton is set to deliver strong earnings growth, which will eventually translate into strong upside. Let's see how.

Judging the potential upside

The improvement in precious metal prices and Silver Wheaton's low cost base will translate into robust earnings growth this year. More specifically, Silver Wheaton's bottom line is anticipated to increase 15% as compared to last year. In comparison, the growth is expected to be even stronger in 2017, with Silver Wheaton's bottom line expected to increase 33% to $0.81 per share.

More importantly, the growth in Silver Wheaton's bottom line is anticipated to continue in the long run as well, as analysts' forecasts indicate that its earnings will grow at a CAGR of 17.5% for the next five years. This means that as compared to earnings of $0.53 per share in 2015, Silver Wheaton's earnings will grow to $1.19 per share by 2020.

Now, Silver Wheaton currently has a forward price to earnings ratio of 21.7. At this P/E ratio, the company's stock price will grow to almost $26 per share given projected earnings of $1.19 per share in 2020. This means that as compared to the current price levels, Silver Wheaton is expected to deliver 48% upside going forward in the long run.

Conclusion

Silver Wheaton has enjoyed a strong run on the market this year, rising in excess of 40% so far. Given the points discussed above, I won't be surprised if the company is able to sustain its momentum going forward as a combination of valuation and earnings projections indicate that Silver Wheaton is set for more upside.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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