In recent years, the prices of precious metals have tumbled, but theyhave rebounded abruptly this year. Precious metal stocks have also risen consistently but taken a breather in the last few weeks. The pullback should be seen as a buying opportunity as several factors point toward a further price increase in the near future.
The precious metal rally this year was driven by a few primary forces. For one interest rates no longer appear poised to surge as rapidly as initially projected, which was having a bad impact on the prices of silver and gold.
Moreover, the demand for gold is rising in India, which is the world's largest buyer of gold. India has started purchasing gold again after a strike by jewelers reduced demand. In the case of silver, demand is increasing manly due to solar panel manufacturing, which surged 29% last year.
Silver Wheaton (SLW, Financial) is one of the fastest-growing precious metal stocks, as its business model differentiates it from other miners. In fact, the company does not operate any silver mines but works as a streaming company. It makes an upfront payment to a miner to fund the expansion of a mine, and in return, it gets the right to buy a fixed percentage of that mine’s imminent silver or gold production at an agreed price.
Compared to Barrick Gold (ABX, Financial), which has the lowest all-in sustaining cash (AISC), Silver Wheaton usually earns high margins. In the prior quarter, the company paid only $4.46 an ounce of silver, which it sold at $17.15 an ounce, for an operating cash margin of $12.69 an ounce.
The most significant thing to notice is that the company’s prices will not escalate alongside the price of silver, which clearly means that if silver prices surge to $30 per ounce, the company will be in a great position to double its profit margin per ounce.
In addition, the company’s gold sales surged 40% in the prior quarter to go along with 5% growth in silver sales. That gradual surge output drove the company’s operating cash flow up 23% year on year, which is a bullish sign for the future.
Summing up
Silver Wheaton has retracted considerably from its 52-week highs. Due to the reasons mentioned above, however, its pullback is a great opportunity for long-term investors to initiate a position.
Disclosure: No position in any of the stocks.
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