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Monday July 26, 2010
Royalty model boosts Silver Wheaton (SLW)
by Adrian Day, editor The Global Analyst  Silver Wheaton (SLW) remains an undervalued stock on our buy list.We note that Silver Wheaton is not a mining company. Instead, in a business model similar to a royalty model, it acquires the stream of revenue from the silver output of other miners. The company usually enters these arrangements with miners for whom silver is a by-product. In a typical arrangement, Silver Wheaton pays a certain amount up-front plus a per ounce payment in exchange for all the revenue from the silver output. 
Thus Silver Wheaton has a known and (relatively) fixed cost while retaining all the upside from silver. Recently, Silver Wheaton has been reporting record ounces per share as well as record earnings following the addition of two huge, long-life silver streams. First, in a deal with Barrick, it paid $625 million, and guaranteed $3.90 an ounce, for the silver output from four of Barrick’s Latin American mines, including 25% of the silver from the new Pascua Lama, the third largest silver deposit in the world. Second, Goldcorp’s Penasquito, on which Silver Wheaton has a silver stream, is ramping up, with development on time and on budget. SLW is to receive 25% of the silver production over the initial 22-year mine life, or approximately seven million ounces a year, after full production ramp-up which is on-track for early next year. The company also bought two smaller, but advanced silver streams this year. With a solid balance sheet—no net debt, $280 million cash and $400,000 undrawn on a line of credit—and continued growth, as well as two large mines, Pascua and Penisquito, moving towards full production, Silver Wheaton is in a strong position to benefit from internal growth as well as any advance in the price of silver. We would hold and look to buy on a pullback. Learn more about this financial newsletter at Adrian Day's The Global Analyst. |
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