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:
“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 val