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The Smart Silver Play: Silver Wheaton

Digging deeper into this company reveals why it shines

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As it turns out though, lightning can strike twice. There are unconfirmed reports that the La Oroya smelter may be resuming operations ahead of schedule, meaning Silver Wheaton is positioned for another windfall. And, ‘positioned’ has a dual-meaning in this instance. The smelter is only about 100 miles away from the Yauliyacu mine, which should reduce inventory levels even further.

In total, Silver Wheaton has seventeen operating mines under its umbrella and four development stage projects. That count doesn’t include any deals inked following the Hudbay deal. Included in this suite of assets is Barrick Gold’s cornerstone project, Pascua Lama, which is forecast to begin production in mid-2014. Once in production, it is forecast to deliver approximately 9 million ounces of silver annually to Silver Wheaton in the first five years of operations.

So how much silver will these operations produce once they’re up and running? Following the Hudbay deal, Silver Wheaton has set a target of 48 million silver-equivalent ounces (or SEO) per year by 2016. Smallwood however has suggested that “70 million and then even 100 million is a comfortable [future] level. The silver streaming industry produces 750 million SEO per year, so 100 million for us is a tangible [forward-looking] level for us.”

For perspective, over the past six months Silver Wheaton has produced and sold more than 13 million SEO, and collected $400 million in revenue for it during a period where silver prices were lackluster. At first glance an annualized revenue rate of $800 million may not seem like much for an $11.2 billion organization. The company managed to turn $288 million of that $400 million into net income though — net margins of more than 70%.

And that’s when the attractive aspect of a silver streaming company really starts to shine. It also underscores why investors may want to mentally disconnect the presumed relationship between SLW and silver itself, including iShares Silver Trust (NYSE:SLV). It is also worth noting that Silver Wheaton does all this with a very lean cost profile — administration costs are almost half that of SLV.

When asked whether or not another round of quantitative easing is needed by Silver Wheaton, Smallwood replied “It would help, but we don’t need it … our average cost for silver in Q2 was $4.06.”

The amount leaves plenty of wiggle room for other expenses, which is why margins can remain so strong even when silver prices are at relative low points. Indeed, silver prices could drop precipitously, and Silver Wheaton would remain profitable.

While Wheaton has been viewed by the media and the market as a high-growth instrument fueled by incredible net margins and rising silver prices, growth isn’t the ultimate goal here. As the company brings all of its foreseeable projects to an operational, revenue-bearing status, it will also grow its income distribution policy. Ultimately, as the company gets closer to its 100 million ounce per year production target, it will give the majority of the streaming business’ net income back to shareholders as dividends.

The company’s got the assets to keep the payouts strong for quite a while too. Smallwood adds “Currently, 25% of our projects have 20 years or more worth of mining life left. After the development of our open pit projects, almost 50% of our assets will have a mine life of 20 years or more.”

Article printed from InvestorPlace Media,

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