Silver Wheaton Might Have An Issue With One Of Its Partners

| About: Wheaton Precious (WPM)

Summary

An additional issue hanging over the company is the San Dimas mine situation with Primero Mining.

The San Dimas mine is located in Mexico and mining activities have been suspended since the middle of February because of the employees going on strike there.

There is lots of room to make a deal possible but rather than a margins deal Silver Wheaton may have to work off of volume turnover.

Over the course of the past year shares of gold and silver streamer, Silver Wheaton (SLW), have taken investors on a rollercoaster ride, taking investors on a roundtrip tour from $15 to a high of $30 and back again to $17. The fluctuation in the stock price was dependent on several factors including the rise and fall of gold and silver prices, political turmoil, and the idiosyncratic issue hanging over the company with the Canadian Revenue Services. An additional issue hanging over the company is the San Dimas mine situation with Primero Mining (NYSE:PPP).

The San Dimas mine is located in Mexico and mining activities have been suspended since the middle of February because of the employees going on strike there. CEO Randy Smallwood considers this mine to be incredibly important to Silver Wheaton's revenue stream and that he is willing to redo a deal with Primero Mining to better improve the health of the mine should it be needed. The way the deal is currently structured has Silver Wheaton forecasting nearly 15% of 2017 revenues from this mine alone.

Currently the contract between the two companies stipulates that Primero will sell Silver Wheaton the first 6M ounces of silver produced each year from the San Dimas mines for $4.20 an ounce AND half of every ounce in excess with an additional 1% for inflation for the life of the mine. Silver is currently selling for $17.42, so there is lots of room to make a deal possible but rather than a margins deal Silver Wheaton may have to work off of volume turnover.

Embroiled in its own tax issues, Primero has initiated some cost cutting initiatives to drive for better margins. Additionally the company is considering some strategic alternatives which includes selling of some assets to better fortify the company's balance sheet. These are the best of times and worst of times for some precious metals companies as the ones who have haven't operated efficiently enough with the metals at their highs get smashed when the commodity pricing begins to move south. Alternatively, the companies that have been operating well get to pick up some assets from the poor miners for a song.

Any sort of deal involving the San Dimas mine is important to Silver Wheaton because the alternative would mean that the mine gets shuttered by Primero, and any cash flow is better than no cash flow. Perhaps the deal was destined for failure from the start when it was structured, but the San Dimas mine is touted as a gold mine with silver as a byproduct. Either way, if the deal was good or bad for both companies from the start I believe a restructured deal will benefit both companies immensely going forward.

I actually initiated my position in Silver Wheaton in late September and have been pretty upset with the purchase thus far. I will only purchase shares as long as they are below $22, because I believe that is where it offers additional value. I've selected $22 because that is my average purchase price currently. But I do believe the stock offers additional value up to $23 because that is the midpoint of the 52-week range.

I swapped out of O'Reilly (NASDAQ: ORLY) for Silver Wheaton during the 2016 third-quarter portfolio change-out because I ended up turning a profit in the name (0.1%, or 0.5% annualized) and wanted to lock in those profits. I have lost out quite a bit, as O'Reilly has outperformed Silver Wheaton since the swap. For now, here is a chart to compare how Silver Wheaton and O'Reilly have done against each other and the S&P 500 since I swapped the names.

Source: Google Finance

When it is all said and done, it matters what the stock has done in an investor's portfolio at the end of the day. For me, Silver Wheaton is one of my larger positions and has been an anchor, as I'm down 9.1% on the name, while the position occupies roughly 8.5% of my portfolio. I will only make additional purchases in the name as long as it is below $22 as I stated earlier. I own the stock for the speculation portion of my portfolio, and I will continue to hold onto the stock for now. My portfolio is up 18% since inception, while the S&P 500 is up 14.4%. Below is a quick glance at my portfolio and how each position is performing. Thanks for reading, and I look forward to your comments.

Company

Ticker

% change incl. DIV

% of Portfolio

Facebook, Inc.

(NASDAQ:FB)

15.1%

9.7%

AbbVie Inc.

(NYSE:ABBV)

12.3%

4.1%

PulteGroup, Inc.

(NYSE:PHM)

7.5%

3.9%

SEI Investments Company

(NASDAQ:SEIC)

2.8%

7.5%

3M Company

(NYSE:MMM)

2.8%

3.7%

O'Reilly Automotive, Inc.

(NASDAQ:ORLY)

0.9%

4.0%

V.F. Corporation

(NYSE:VFC)

0.1%

10.3%

Valero Energy Corporation

(NYSE:VLO)

0.0%

3.6%

Wyndham Worldwide Corporation

(NYSE:WYN)

-0.1%

3.6%

General Electric Company

(NYSE:GE)

-2.5%

6.8%

Silver Wheaton Corp.

-9.1%

8.5%

Gilead Sciences Inc.

(NASDAQ:GILD)

-15.0%

19.2%

Cash

$

15.06%

Disclaimer: This article is in no way a recommendation to buy or sell any stock mentioned. This article is meant to serve as a journal for myself as to the rationale of why I bought/sold this stock when I look back on it in the future. These are only my personal opinions and you should do your own homework. Only you are responsible for what you trade and happy investing!

Disclosure: I am/we are long SLW.

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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