Silver Wheaton (NYSE: SLW)
Silver Wheaton (NYSE: SLW) is the largest silver streamer in the world.A “silver streamer” is essentially a company that purchases the silver byproduct
from base-metal miners. Simply put, when a copper miner (or zinc miner or iron miner) extracts ore from his mine, that rock likely includes
a lot of minerals other than copper -> including silver. The copper miner doesn’t want the hassle of smelting and dealing with the silver from
his mine. Approximately 70% of the world’s silver is produced as a byproduct from other metal mines… So a silver streamer, like Silver Wheaton, is there to
take it off his hands. Silver Wheaton will swoop in and make a deal upfront for the silver. It’s a good deal for the base-metal miner because he gets guaranteed income for his silver. And it’s a great deal for Silver Wheaton because it gets a guaranteed supply of silver without the hassles and risks of actually mining it.
Silver Wheaton has dozens of long-term agreements across 23 gold and silver mining assets with companies like Barrick, Goldcorp, Glencore Mining, and Lundin Mining. In 2013, Silver Wheaton’s streaming agreements produced about 26.8 million ounces of silver equivalent in 2013. Over time, other mines already covered by agreements with Silver Wheaton will be built, and the company expects production to hit 48 million silver ounces
by 2018.
To understand exactly how these deals work, let’s look at Silver Wheaton’s agreement at Penasquito, the second-largest mine in Mexico. It’s a worldclass
gold/silver/lead/zinc deposit. Silver Wheaton’s flagship deal is an agreement with Goldcorp for 25% of the silver produced at the Penasquito mine… for the life of the mine. This is the largest silver deposit in the world. Even a 25% stake ranks among the planet’s top 20 silver deposits.
In April 2007, Silver Wheaton paid Goldcorp $485 million. At full capacity, the company expects to average 28 million ounces of silver per year for 13 years. That’s an average of 7 million ounces per year for Silver Wheaton.
In 2013, the company sold 5,317 ounces of silver from Penasquito for an average price of $23.81 per ounce. The average cash cost per ounce was a mere $4.12. That means the company’s profit from each ounce of silver was $19.69. Silver Wheaton’s fundamentals are nearly perfect.
This company has negligible debt, billions of ounces of silver equivalent reserves, an operating margin of around 50%, and a secure cash flow from mines in 10 countries. By 2017, it will produce about 53 million ounces of silver. That’s almost double last year’s production. Silver Wheaton’s strategy has paid off so far… but its results will get even better as the price of silver rises. Silver Wheaton’s costs are fixed. So as we saw with the Penasquito example, any increase in the silver price goes straight to its net profit.
According to the company’s third-quarter 2014 filings, it pays an average of $4.16 per ounce of silver it receives. If you look at Silver Wheaton’s share price compared with its earnings, you’ll see a direct relationship to the price of silver. In other words, as the silver price goes up, people will pay more for the stock.
It turns out, the last time one could buy the company at a discount to total assets was back in October and November 2008. During that time, you could
have bought the company for up to a 30% discount to total assets. The stock soared from lows around $3 per share at that time to as high as $47
in early 2011 when silver was also trading at multiyear highs of about $48 per ounce. As of September 30, 2014, the company’s total assets equal $4.3 billion. The company carries no goodwill or intangible assets on its balance sheet, so we’ll use its total assets valuation. The company’s market cap sits more than $10 billion. That’s more than 90% premium based on its total assets valuation.