“This Silver Stock Set to Soar in 2010”

Revealing one of StreetAuthority's "Top Ten for 2010"

By Travis Johnson, Stock Gumshoe, January 12, 2010

We haven’t taken a gander at any silver stocks in a while now, but the metal’s price is still holding up pretty well after a nice move of 50% or so from the summer lows, and the “poor man’s gold” is getting plenty of attention as an inflation hedge, an industrial metal, and a possible basis for some hypothetical commodity-backed currency in the future.

So this is the most recent silver stock teaser to jump through the Gumshoe hoops — it’s from the StreetAuthority folks, one of their “top ten” stocks for 2010 …

“Our Top Silver Stock for 2010 Is Cashing In On Soaring Demand

“This unique stock gained +122% last year and is set to soar AGAIN in 2010…”

And they have a bit more basic info at the top of the tease:

“Profit Catalysts:

“Spurred by inflation worries and increased industrial usage, silver demand is soaring (with silver prices following suit)

“New purchasing deals will give this company millions of ounces of silver at a rock-bottom cost of only $4 an ounce — about 75% cheaper than what everyone else pays for silver

“This company’s unique business model lets the firm reap all the benefits of appreciating silver but without the costs of digging and maintaining its own mines”

OK … so we’re taking it a bit easy on a chilly and quiet Tuesday here at Stock Gumshoe Headquarters — but we can start with a basic rule for your teaser deciphering convenience: when the newsletters tease you about a unique silver stock, it’s almost always Silver Wheaton (SLW)

And yes, today is no different. Silver Wheaton does match the clues they provide, it’s in the “silver streaming” business (and is almost alone in that business), has an operating margin of 42%, projected earnings per share growth of 12%, was recently priced at $16, and went up more than 122% last year. As of December 16th it was up almost exactly 122% from the January 2 close, so perhaps that’s close enough, though for the full year SLW stock was actually up something like 128%, unless I’m doing my math wrong. Still, pretty close.

When they go into some of the details, though, it’s clear that we needn’t have any qualms about the slight variations from the teaser numbers — there’s only one Silver Wheaton. Here’s what they say about it:

“As the world’s largest silver streaming company, the firm buys future silver production from gold miners for relatively fixed prices, often below $4 an ounce. These deals are a win-win for both parties: The mine owners get upfront cash for what they consider to be a byproduct, while our favorite silver company gets mounds of silver without having to shell out a penny for mine exploration or maintenance.

“Management recently locked up an agreement that will hand over 25% of whatever silver is dug up from Goldcorp’s Penasquito mine in Mexico. That deal alone is expected to yield 7.2 million ounces of silver annually for the next 22 years. The firm has 16 other agreements in place that will generate as much as 40 million ounces by 2013.

“That increased production could send sales soaring +135% within the next four years without any increase in silver prices. Keep in mind, the company has minimal future capital expenditures, so any incremental sales growth will be converted into earnings.

“In a recent quarter, sales of just 4.3 million ounces resulted in a record-shattering cash flow of $45 million, a +70% year-over-year increase. The combination of new deals and buoyant silver will send that total soaring over the next couple years.”

And yes, that’s all Silver Wheaton — in the most recent quarter it was actually 4.6 million ounces of silver equivalent sales, netting operating cash flow of $45.4 million, but close enough, and it was roughly a 70% increase year over year (though less than a 30% increase per share — Silver Wheaton issued a lot of new shares in 2009).

Silver Wheaton is one of a small class of companies who are essentially cash investors in mining projects at all stages and who receive some sort of royalty for their investment. Firms like Royal Gold, Franco-Nevada, and International Royalty are a little bit different in that they’re more strictly royalty investors, typically buying into a mining project for a set royalty based on the cash brought in from gold (or whatever else) sales.

One often used type of this investment relationship is the net smelter return royalty, for example, whereby the royalty owner gets a set percentage of the net proceeds from the “smelter” — which really means, in effect, that they get a specific percentage of the gross sales of whatever the mineral is from whatever the site is. That means they don’t have to worry about mining costs, or about anything else other than the gross output of the mine (the confusing use of the word “net” in net smelter return means the net output of the refining process, which is effectively the gross economic output of the mine).

But Silver Wheaton is a little different than the typical royalty investors — and they don’t call themselves a royalty firm, though the effect and the stock market valuation tend to be similar. They call themselves a silver “streaming” company … here’s how they describe that:

“The company has entered into seventeen agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver production, at a low fixed cost, from high-quality mines located in politically stable regions. Forecast 2009 production is 16 million ounces of silver and 17,000 ounces of gold, for total production of 17 million silver equivalent ounces. By 2013, annual production is anticipated to more than double to approximately 39 million ounces of silver and 20,000 ounces of gold, for total production of approximately 40 million silver equivalent ounces. No ongoing capital expenditures are required to generate this growth and Silver Wheaton does not sell forward its silver sales.”

So instead of investing in a mine in exchange for a royalty payment, Silver Wheaton essentially buys a call option on all (or part) of a mine’s silver output — sometimes that silver is available because the miner is focused on gold and is willing to take the chance of offloading the silver in exchange for an upfront payment, or because the miner wants to hedge against possible silver price collapse, or just because they need the money and SLW is ready to offer it. This means that SLW has a slightly different calculation to make — they have to make sure that the mine will produce enough silver to make it worthwhile, and that silver stays above their break-even price (the price they offer to the miner, currently averaged at about $4 an ounce, plus the pro-rated share of whatever they paid up front for the silver rights). So they tend to focus on large projects run by big miners, which should offer some stability.

Silver Wheaton is, of course, far from undiscovered — it’s a big company, with a market cap of almost $6 billion, and it is almost unique, so it occupies its own little niche that pretty much all commodity and precious metals investors know about. It’s also well-covered in the investing press, particularly by the newsletters, and it has long been a favorite of a few of the authors at the Motley Fool (here’s one bullish article). I also own some call options on Silver Wheaton and I’ve mentioned it many times in this space, though I don’t own the shares right now.

Silver Wheaton is likely to become the largest effective silver miner in the world, as soon as that big Penasquito production comes online, and they do it without getting their hands dirty, and with a fair degree of diversification — this might do them some good in the competition against other silver investments, particularly if South American political developments end up making investors nervous about some of the other very big silver producers like Pan American Silver (Peru exposure) or Apex or Couer d’Alene (Bolivia).

That said, this is basically a financial company, so figuring out the value relies on using the same inputs you would use if you were the one buying those silver contracts — how much silver are they going to be buying (ie, will production match the expectations at the mines where they’re “streaming” the silver), how much of a profit margin will they get above that fixed buy price (meaning, what will the spot price of silver be at the time — they don’t hedge), will they continue to make effective investments with their silver income (they’re rolling all that money into new silver streaming deals, they don’t pay a dividend).

So you have to make your own assumptions about silver prices and investor sentiment to decide how much the stock should be worth — this is neither an earnings nor a dividend play at the moment, though they are profitable and relatively inexpensive (their forward PE is about 20, lower than the other large royalty-type companies and than some of the big silver miners, but higher than Pan American Silver or Coeur d’Alene). Silver Wheaton doesn’t carry any debt to speak of, but that’s typical of the big names in this space.

Investors seem to be buying Silver Wheaton largely because they think it will be a good way to get a bit of leverage on higher silver prices with SLW’s significantly increasing silver “output” over the next several years (largely from expected Penasquito production), and without the risks inherent in relying on just one or two mines in politically unstable areas or worrying about spiking oil costs cutting into margins (they pay a fixed price for the silver regardless of mining costs). More aggressive silver investors may well find that SilverCorp Metals (SVM, big low-cost Chinese miner), Pan American Silver (PAAS), Silver Standard Resources (SSRI), or Coeur d’Alene (CDE) and the other silver-focused miners have more home run potential in a silver bull run, or that one of the scores of really junior miners could boom with a new discovery, but when I’m worried about my blood pressure SLW is usually the silver stock I look to first.

I know we’ve got a lot of silver “bugs” out there in Gumshoedom — is Silver Wheaton still among your favorites, or do you prefer something else in the sector? Let us know with a comment below. And the Street Authority gang were kind enough to tease their other top ten investments for the year in a recent ad, too, so if you’re interested in finding out about the other nine just let me know and I’ll try to follow up (I just glanced quickly at the clues, can’t be sure yet but the list probably includes BHP Billiton, Hospira, National CineMedia, and a few ETFs).

Full disclosure: As I noted above, I do own call options on SLW (I also own some silver bullion and coins), but I don’t currently own any other silver miners or other stocks mentioned in this article, though I have invested in several of them in the past. I own shares of Altius Minerals, which is a significant owner of International Royalty and is in agreement to sell their ROY shares to Royal Gold. I will not trade in any name mentioned here for at least three days.


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30 Comments on "“This Silver Stock Set to Soar in 2010”"

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clarkbar2
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clarkbar2
January 12, 2010 4:31 pm

Good Sleuthing, Gumshoe! SLW continues to maintain a growing audience of ardent fans, many of whom have followed this stock from the days when it was Wheaton Minerals, (Prior to GoldCorp involvement). I think you are spot-on regarding the stock providing leverage to silver prices and yet I think SVM and even some smaller ones like MSV (Minco Silver, MISVF (OTC) and FRMSF (First Majestic offer extremely interesting chart formations and fundamentals. Thanks again.

lone ranger
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January 12, 2010 7:05 pm

I have been following silver for many years. I note that Elliot Wave analysis predicts the price of silver will be half of what it is today [over the next year or so]. It is very dangerous to bet against their assessment. I totally agree with them. Just some input for your consideration since SLW will decline substanially if silver drops 50%.

TD
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TD
January 12, 2010 7:44 pm

Lone Ranger, Have you been able to make money trading EWI? I have tried following them for the last six months and lost my butt. They called for pending drop in silver in August, I bought December puts and lost it. I tried UUP calls at the same time they were calling for a big rally in the dollar. By the time the dollar turned around my calls were worthless. I hope you are fairing better with them.

Max Mays
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Max Mays
January 12, 2010 8:09 pm

I’d be very cautious trying to trade by the charts at this time. That may have had strengths in the past. But I’m just guessing that the charts didn’t warn us about (C) Citibank’s fall from about $50. down below $5. I believe we are in uncharted territory due to the gov’t bail-outs and generous printing of new money. Silver down by half? I seriously dobt it.

lawrence tammand
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lawrence tammand
January 12, 2010 8:37 pm

Best value in silver stocks is MNEAF, Minera Andes. Cash flow positive, richest silver deposits in the world and cheap by all counts. CEO is an industry titan too.

elissa stein
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elissa stein
January 12, 2010 9:53 pm

check out great panther silver ltd. On Toronto and pink sheets. gprlf.pk

bruno
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bruno
January 13, 2010 2:33 am

I think FRMSF is a better play (constant growing, fantastic management, great potentials); Silver is going up through the roof. Almost no risk in bying fysical silver too.

Yen
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Yen
January 13, 2010 6:10 am

Thanks. Please do more on the Street Authority things.

Larry
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Larry
January 13, 2010 8:04 am

Any advice on investing on the new Iranian Petroleum Bourse?

I realise Americans are limited on financial dealings with Iran – but I DO know (through offshore news services) many of the 1st president George Bush’s administration (Haig, Baker, etc) were/are dealing directly in Iranian oil and/or through Iranian pipelines.

If THEY are allowed – why not the ‘everyman’ (ie: 14th Amendment ‘Equal Protection Clause’)

Dr. Henry M. Chakoian
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Dr. Henry M. Chakoian
January 13, 2010 8:35 am

I have commented on SLW previously. It has been really good to me and is among my largest holdings. Owning the stock, selling covered calls, selling puts and buying calls has been profitable.When Slw was at $4 lat year, I was begging family and friends to buy in. They are sufficiently diversified and aligned with top companies like Gold Corp,that a reduction in one mine will not be catastrophic. If you believe as I do, that the Fed money spigot will continue at wide open, precious metals will rise as USD declines. Hi-Oh, silver, up, up and away. Herach.

Tom
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Tom
January 13, 2010 10:43 am

I agree. SLW is a great place to be. Very safe and slow steady gains. For the fast gains I am looking to First Majestic FRMSF, Great Panther, and Esperanza ESPZF.
For gold bugs check out Sierra SGCP.
Always appreciate your work Travis!

advantedges
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0
January 13, 2010 10:54 am
If the stock symbol has more than four characters, then you should consider selling rather than buying. Penny stocks are pumped, as it appears that several are here. I agree in principal with Elliot Wave, simply because a big run up like we have had in gold (and the stock market), needs to correct before we resume an upward trend. If gold corrected last year (November) to last week, then we are off and running again. Gold will take Silver with it. The first day of the new Platinum ETF was good for the stocks in that space like PAL… Read more »
dino
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dino
January 13, 2010 10:51 pm

I like Endeavor Silver EXK. Check out todays news.

Bruce Minnick
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Bruce Minnick
January 14, 2010 4:22 pm
Minco Silver is a sleeper ready to wake up in 2010-2012. Getting ready to build a world class low cost (even the tailings are sold) silver mine in China with huge proven reserves. Minco this month may also take possession of the former largest silver mine in US history still fully functional with lots of reserves and recently upgraded Sunshine Mine. Sunshine was mismanaged and the operator Sterling is in bankruptcy. The court decides on new ownership around the 22nd or 23rd of Jan., 2010. Sunshine has been all upgraded, has lots of silver reserves, and can produce up to… Read more »
Lore
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Lore
January 18, 2010 10:14 pm

Thank you,Bruce,for your valuable info.
I am already doing very well with my Minco Gold investment but am going to look at Minco Silver again,speedily!

Carl Alpine
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Carl Alpine
January 18, 2010 11:52 pm

Hi Bruce, would it not be more interesting to buy Minco Gold Corp. because the own about 40% of minco silver and have the Gold play also on the side? Carl, Austria

Tom Szabo
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0
January 21, 2010 8:37 am
For the record, Apex went bankrupt about a year ago so it is no longer operating in Bolivia (its partner Mitsubishi was kind enough to buy Apex’ stake in San Cristobal by forgiving debt). In regards to Silver Wheaton, one thing I would recommend is people realize SLW are generally negotiating with the majors (on the big important deals anyway) for something they might be more eager to buy than the majors are eager to sell (majors are not known for giving stuff away for free in any case). In other words, we can’t just assume those silver streams were… Read more »
robert
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robert
February 11, 2010 10:44 am

good article

K Connors
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K Connors
February 11, 2010 1:36 pm

While I own a small amount of SLW, I prefer AAU and SVM. Appreciate the research Travis

will
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will
March 6, 2010 4:28 pm

Are you guys on the irregular website? I have been on the free site for almost a year and can swear that I have not seen you guys before. The information is so different. It is precise and direct.

TradePlacer
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June 27, 2010 3:18 pm

Pretty much right on. SLW is up a lot this year. But what happens if the general market tanks? Will the silver miners hold their own this time?

Contrary Investor
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September 5, 2010 3:10 pm

Very good informative article.


Cameron at Contrary Investors Cafe

Peaceful Warrior
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Peaceful Warrior
October 1, 2010 8:09 pm

Contrary Investor, check out the latest interview done with Anderson yesterday, it sets things straight, especially with the new merger: http://seekingalpha.com/instablog/503905-marco-g/

Peaceful Warrior
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Peaceful Warrior
October 1, 2010 8:14 pm
Here's what in my opinion has the potential for greatness within the next couple of months. Genco Resources (TSX:GGC) Genco is a Mexican Silver miner turnaround story. This was previously a $4 stock, when a few years ago, it was mining Silver profitably. Because of politics and other issues, the stock has declined to where it is today. Recently with management changes, a new NI 43-101 compliant technical report and feasibility study completed the company’s fortunes are improving. On September 20, 2010, Silvermex Resources (SLVXF, TSX:SMR) offered a merger with the company. Here is the interview with the CEO done… Read more »
Mike N
Guest
0
February 27, 2012 8:07 pm

Lots of comments on silver that seems to be in a trading range. Should one start thinking about Uranium?
Will we have a crisis when the end of the agreement between Russia and the United States ends in 2013? Who will supply US with Uranium to support existing power plants? Why is China buying all that it can get there hands on? Is this an area that we should be looking into for future investments? Food for thought!

r
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r
January 12, 2010 9:27 pm

so what am i missing…..all this upside? at $.11 a share earnings. What’s the hoopla about?

fabien hug
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fabien hug
January 12, 2010 10:08 pm

Completely agree with you; this is a government lead market.

Dan Genzardi
Guest
0
January 13, 2010 7:15 pm

Max like you i accumulate Minera for the past 2 years and i did well.I also accumulating IPT.to for 3 reasons EGD.TO a drilling company own over 30%of IPT shares and take care of all drillings needs,the management is top under the director Fred Davidson wich is the Co. of the two entities,i did trade and accumulating IPT for the last 3 years,described by Investor Digest columnist (Kachanowsky)recent article the best junior of the world under the radar with the largest property in Mexico,the third reason i’m Can.$.

Gravity Switch
Admin
11
January 21, 2010 9:16 am

Thanks Tom, excellent points.

Bruce M,
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Bruce M,
May 12, 2010 11:58 pm

I never buy stock indirectly. Management has to much authority in using the proceeds
should they decide to sell the holding and investors may not pickup on the indirect investing which kills the opportunity.

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