The precious metals industry has experienced a strong couple of years with record low U.S. interest rates and several bouts of quantitative easing. As an alternative currency, precious metals have benefited as an inflation shield, while the global flight to safety made it one of the only reliable safe haven investment destinations, aside from U.S. Treasuries [for more precious metals news and analysis subscribe to our free newsletter].
And while exposure to physical bullion and futures contracts remains the top vehicle of choice for many, investors can also turn towards stocks of companies responsible for discovering and mining the precious metal. And in the world of silver mining, there is perhaps no bigger name than Vancouver-based Silver Wheaton Corporation (SLW).
Silver Wheaton is the largest silver streaming company in the world, with estimated production of around 28 million silver equivalent ounces in 2012. Rather than developing its own mining operations, the company obtains the silver through 15 long-term silver purchase agreements and three long-term precious metal purchase agreements covering over 20 different mining assets with prices at or below the prevailing market price at the time [see Top 5 Silver Mining Stocks By Market Cap].
With a portfolio of low-cost and long-life assets under such agreements, the company has amassed some $555 million in cash on its balance sheet as of September 30, 2012, with an additional $400 million available through a revolver. These assets include top-tier mines such as Barrick Gold Corporation’s (ABX), Pascua-Lama project and Hudbay Minerals Inc.’s (HBM) flagship 777 mine and Constancia project among others.
The rest of the company’s mines include:
- San Dimas: A Mexican Goldcorp Inc. (GG) venture entered into in October of 2004 where the company has received 49 million ounces of silver, with probable reserves of 31.8 million ounces as of December 2011.
- Zinkgruvan: A Swedish Lundin Mining venture entered into in December of 2004 where the company has received 14 million ounces of silver, with probable reserves of 34.8 million ounces as of June 2011.
- Yauliyacu: A Peruvian Glencore International venture entered into in March of 2006 where the company has received 17 million ounces of silver, with probable reserves of 12.4 million ounces as of June 2011.
- Penasquito: A Mexican Goldcorp venture entered into in June of 2007 where the company has received 12 million ounces of silver, with probable reserves of 240.1 million ounces as of December 2011.
- Minto: A Canadian Silverstone Resources venture entered into in May of 2009 where the company has received 0.5 million ounces of silver and 74,000 ounces of gold, with probable reserves of 1.8 million ounces of silver and 220,000 ounces of gold.
- Cozamin: A Mexican Capstone venture entered into in April of 2007 where the company has received 5 million ounces of silver, with probable reserves of 9.8 million ounces as of December 2011.
Given these dynamics, the company’s financial results are primarily dependent on silver production volumes at various mines and the price of silver at the time of sale. The company’s cash costs for silver and gold remain well below its average realized selling price, even though the latter remains significantly more volatile. During the third quarter of 2012, the average cost of silver was just $4.04 per ounce, while the average realized price was $31.16 per ounce.
Silver Wheaton’s long-term plans consist largely of using its strong cash and credit reserves to execute on its growth strategy of purchasing additional accretive silver and precious metal stream interests. By 2016, the company anticipates growing its silver production from 28 million silver equivalent ounces in 2012 to approximately 48 million silver equivalent ounces, including 100,000 ounces of gold, according to its third quarter 2012 report [see Inside Citi’s 2013 Precious Metals Outlook].
Silver prices remain the second key variable for investors to look at aside from production volumes, but they remain much more difficult to forecast. A median estimate of 49 analysts, traders and investors compiled by Bloomberg found that they expect silver prices to rise as much as 29% to $40.25 per ounce in 2013. After almost tripling since the end of 2008, silver outperformed all other precious metals except for platinum in 2012.
Risks and Rewards
There are many risks that investors should consider before investing in Silver Wheaton or other silver-focused equities. Since the company’s silver supply has remained relatively stable, silver prices pose perhaps the largest risk to the company’s financial results. Some analysts believe that silver prices will fall as long-term interest rates stabilize and perhaps begin to rise in the United States, which could lead to investors moving out of safe havens and into equities.
Some of this risk could be offset by growth in its production volumes, particularly at the two aforementioned mines. During the third quarter of 2012, the company’s production increased by 26% over the comparable year ago quarter. Barrick’s Pascua-Lama project is expected to generate an average of 9 million ounces annually during its first five years of operation, while Hudbay’s 777 mine remains in the early stages of production, providing more room for growth.
Silver Wheaton’s stock is trading well off of its 52-week lows of $22.94 and modestly off of its 52-week highs of $41.30 at roughly $36 at the time of writing. On a technical level, the stock continues to trade within a relatively tight downward channel, with lower support at around $33 and upper resistance at around $41. Key pivot points moving into February 2013 are the $39.30 level on the upside and the $31.42 level on the downside [see Silver Opens 2013 With A Bang].
Technical indicators aren’t of much help when analyzing the stock given the tight trading range, but the MACD appears ready for a move to the upside trading below the zero line, while the RSI remains relatively neutral at $53.56. But again, much of the technical price action is driven by silver and precious metals prices, which have started to wane in recent months. Traders should look towards these fundamentals for additional cues as to future price action.
The Bottom Line
Silver Wheaton remains a very unique company within the precious metals industry, given its focus on buying long-term supplies rather than developing its own mines. These dynamics give the company very stable production volumes that generally increase over time, but investors should still be aware of the risk posed by spot silver price volatility. While there’s little doubt that the company will lose money, lower spot prices could negatively impact growth.
Looking forward, the company has many plans in place to increase production, but analysts remain a bit more mixed when it comes to silver prices. Given the potential for higher interest rates and reduced quantitative easing, precious metals may be at risk for some downside as capital flows move into equities. But overall, the majority of analysts see silver prices heading towards $40.00 this year, which would be bullish for companies like Silver Wheaton.
Disclosure: No positions at time of writing.