Precious metal has been the best performing segment in the market this year. Many stocks in the segment have witnessed double or triple-digit gains, and Silver Wheaton (SLW, Financial) is no exception to it.
When worldwide growth prospects plummet, precious metals, especially gold, turn into a popular investment option. It becomes an exclusively fascinating investment with yields on interest-bearing assets heading lower.Â
Silver Wheaton shares various characteristics as Royal Gold (RGLD, Financial), comprising very stumpy costs. The company’s average cost for gold is approximately $400 per ounce and $4 per ounce of silver, which accounts for around 60 percent of its production. However, the company’s shares have not performed well compared toRoyal Gold’s. This was mainly due to the tax clash between Silver Wheaton and the Canadian government.
Finally, the Canadian government declared that the company is not accounting for its top-line appropriately and owes back taxes, interest as well as penalties. Considering the facts, it looks like the total amount could be approximately $400 million. However, that is a huge amount for the company, which concluded the first quarter with almost $90 million of cash. At present, the company still has $700 million left on a revolving credit facility.
All in all, if the company wins the case, stockholders will look more positively on the shares, conceivably ignoring the performance gap with Royal Gold.
One significant reason
Silver Wheaton’s aggressive focus on low-cost gold streams is the most significant reason surging gold prices will have a fruitful effect on the company’s production profile.
Let’s take an example. Vale’s Salobo mine accounts for the most significant gold assets for the company as its production has surged rapidly. In November 2012, it was commissioned at 12 mtpa but later in 2014, it was prolonged to 24 mtpa. Furthermore, it is highly likely that there will be additional expansion of 12 mtpa.
Keeping in mind that Silver Wheaton gets 50 percent of this mine's gold streams and Salobo is in the first cost quartile, the company will be able to achieve additional gold at lesser prices, which should act as a tailwind going forward.
Conclusion
Worldwide growth prospects are still dim, which bodes well for precious metal stocks like Silver Wheaton. The company should sustain its upward trajectory moving forward, thereby making the stock a decent pick in the current market.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
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