I) The Record
Shares of Silver Wheaton (SLW) are down from a peak of $47 reached in April 2011 to $22 as of May 2013. During the same time frame price of silver has fallen from $45 per ounce to $21 per ounce. Shares of SLW had rallied from a low of $2.81 in November 2008 which was made when silver had dropped to below $10 per ounce.
II) Business and History
As per the company website:
“Silver Wheaton is the largest precious metal streaming company in the world, and derives approximately 80% of its revenue from the sale of silver and approximately 20% of its revenue from the sale of gold. The company has entered into twenty precious metal purchase agreements with fifteen operating partners, including Vale, Barrick Gold Corporation and Goldcorp Inc.”
III) Operations and Competitive Advantages
Information from the company fact sheet is as follows:
“Silver Wheaton’s industry-leading growth profile is driven by the company’s portfolio of low-cost and long-life assets, including streams on Barrick’s Pascua-Lama project, Hudbay’s Constancia project, and Vale’s Salobo and Sudbury mines. The company’s unique business model creates significant shareholder value by providing leverage to increases in the silver and gold price while reducing many of the downside risks faced by traditional mining companies. Silver Wheaton has an experienced management team with a strong track record of success and is well-positioned for further growth. Based upon its current agreements, forecast 2013 attributable production is approximately 33.5 million silver equivalent ounces, including 145 thousand ounces of gold. By 2017, annual attributable production is anticipated to increase significantly to approximately 53 million silver equivalent ounces, including 180 thousand ounces of gold. Other than its initial upfront payment, Silver Wheaton typically has no ongoing capital or exploration costs, and the company does not hedge its silver or gold production.”
Below is select information from the May 2013 investor presentation by the company:
Silver Wheaton is a leveraged bet on long-term silver prices (and of other metals to a lesser extent) and as such the company does not have any competitive advantages.
IV) Balance Sheet and Profitability
Silver Wheaton has a strong balance sheet with a net cash position in excess of $700 million. Below is information from the company 2012 annual report:
“As at December 31, 2012, the Company had cash and cash equivalents of $778.2 million (December 31, 2011 – $840.2 million) and working capital of $735.9 million (December 31, 2011 – $677.6 million). The Company invests excess cash in short-term, high credit quality, money market instruments. On February 28, 2013, the Company entered into two new unsecured credit facilities, comprised of (i) a $1 billion revolving credit facility having a 5 year term; and (ii) a $1.5 billion bridge financing facility having a 1 year term. In the opinion of management, the $778 million of cash and cash equivalents as at December 31, 2012 combined with the liquidity provided by the $2.5 billion of new credit facilities positions the Company well to fund all outstanding commitments as well as providing flexibility to acquire additional accretive precious metal stream interests. During the year ended December 31, 2012, the Company generated operating cash flows of $719.4 million compared with $626.4 million during the previous year, with the increase being primarily related to an increase in the number of silver equivalent ounces sold.”
The company had EPS of $1.65 for 2012, up from EPS of $0.83 from 2010. From 2010 to 2012 silver output increased 25% and silver price increased 50% which contributed to the doubling of earnings. Management expects silver ounce equivalent output to grow from 29 million ounces to 33.5 million ounces in 2013 and to 53 million ounces by 2017. Given that SLW cash costs are fixed (and increase modestly per year) if the price of silver stabilizes above $20 or increases cash flow and EPS could increase significantly over the next three to five years.
Randy Smallwood is currently president and chief executive officer of Silver Wheaton.
As per the company website:
“Mr. Smallwood is the President and Chief Executive Officer of Silver Wheaton. He holds a geological engineering degree from the University of British Columbia and is one of the founding members of the company. In 2007, he joined Silver Wheaton full time as Executive Vice President of Corporate Development, primarily focusing on growing the company through the evaluation and acquisition of silver stream opportunities. In January 2010 he was appointed President, and in April 2011 he was appointed Silver Wheaton's Chief Executive Officer. Mr. Smallwood originally started as an exploration geologist with Wheaton River Minerals Ltd., and in 2001 was promoted to Director of Project Development, his role through its 2005 merger with Goldcorp. Before joining the original Wheaton River group in 1993, Mr. Smallwood also worked with Homestake Mining Company, Teck Corp. and Westmin Resources. Randy was an instrumental part of the team that built Wheaton River / Goldcorp into one of the largest, and more importantly most profitable gold companies in the world, and is now focused on continuing to add to the impressive growth profile of Silver Wheaton.”
I believe Silver Wheaton is in a way a value investor in the precious metals and mining space. The management has done a good job since 2004 of making opportune deals and have been prudent to maintain a strong balance sheet and sufficient liquidity to take advantage of opportunities.
VI) Value and Price
SLW is trading in $21 to $23 range as of May 2013. Below is the price history of silver over the last 28 years and history of gold/silver ratio. [/b]
As per information from the "Silver Institute" the cash cost of mining silver in 2012 was $8.88 per ounce. It is interesting to note that "old silver scrap" was 25% of the total supply in 2012 and 80% of the demand in 2012 was for "fabrication and industrial use." As estimated by Morningstar equity analysts SLW share price of $19.20 would be equivalent to long-term silver price of $11.50 per ounce. This seems reasonable considering the fact the silver cash cost for SLW was close to $4 per ounce in 2012 and cash cost for 2013 for SLW would be substantially below the $9 per ounce to $11.50 per ounce mining cost.
Mritik Capital suggests that due to the volatile nature of silver prices rather than buying SLW shares at current prices it may be better option to consider selling the January 2015 $25 put for SLW at premium of $7.0 or above. If the put is assigned the investor will have an effective share price of $18 which would provide a significant margin of safety. If the put is not assigned then the investor would make a 17.7% annual return, i.e. $700 (per each put) income on at risk amount of $2,500 over the next 19 months.
1. An increase in silver price over the coming years.
2. Increased production growth over the next five years. Production growth forecast by the company over next five years is 80%.
3. Prudent capital allocation by the management leading to opportune acquisitions.
4. Increased mine type diversification over the next five years could lead to more stability of cash flows and dividends.
VIII) Specific Risk
1. Silver prices may decline further and stay low for longer duration leading to reduced cash flow and earnings.
2. There is a risk that some of the mining operations encounter problems. Construction of Barrick Gold’s Pascua Lama project is currently suspended due to legal challenges.
3. There is a risk of resource nationalization and government regulations adversely affecting company assets.
IX) Why Is This Cheap?
1. The price of silver is very volatile and there has been a sharp correction of SLV price from $35 to $21 over the last six months.
2. Precious metals and mining stocks are currently out of favor.
3. There is a risk of Barrick’s Pascua Lama project being delayed or cancelled.
I have sold January 2015 puts on SLW.
Comments and questions welcome.
SLW Investor Relations
Yahoo Finance - SLV
Yahoo Finance - SLW
I have used information from the SLW investor relations website, investor presentation, factsheet and financial statements. I have referenced information from Silver Institute, Yahoo Finance, Kitco.com, BullionVault.com.
About the author:
Please note that investing offers both risks and rewards. Before investing do your own due diligence and consult your financial advisor.