Silver Wheaton: Expanding Reasons to Buy
Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
The combination of strong metrics, recent acquisitions and strong earnings make Silver Wheaton Corporation (NYSE: SLW) an attractive addition to one’s core portfolio at current levels. The company already stands as arguably the most dominant silver streaming company in the world; the addition of several new sources of the precious metal should serve to bolster this position. Finally, the company’s recently released dividend policy places the shareholders in an even stronger position and adds to the positive case for this stock.
Acquisitions Provide New Flows
Under Silver Wheaton’s operating model, the company negotiates with other miners and producers to acquire sustainable streams of silver at set prices, often without the need to outlay any cash until product is delivered. The cost of silver to the company, therefore, is fixed at very attractive levels, averaging around $4 per ounce. The company recently announced a transaction with Hudbay Minerals Inc. to acquire flows from both the Constancia development mine and the flagship 777 mine. Randy Smallwood, Silver Wheaton’s CEO, commented:
"We are extremely pleased to add two new precious metals streams, on high-quality base metal mines, to our diversified portfolio which now includes 17 operating mines and four development stage assets." This transaction provides immediate cash flow, is accretive on all short- and long-term metrics, and maintains our policy of investing in low-cost, high quality assets. It also solidifies one of the strongest growth profiles in the precious metals industry. Hudbay has a history of mining success spanning decades, and as flagships in their asset portfolio, we are confident that 777 and Constancia will deliver significant long-term value to both groups of shareholders."
The addition of these two precious metal streams has the potential to act as a catalyst for the stock and carry it higher. This is but the first of several reasons to look closely at this stock.
Earnings
While Silver Wheaton’s recent earnings release was not the solid beat that many investors were hoping the company would deliver, the numbers came in near the top of the expected range. The company released earnings of $0.40 per share relative to analysts’ expectations that ranged from $0.35 to $0.42. Perhaps of even greater importance than the final figure are two other statistics released with the EPS results: the change in the cost of silver to the company and the per-ounce change in the company’s operating margin. Putting each of these into the proper perspective yields real insight into the company’s future.
Based on the earnings release, the company was able to lower its cost on a silver-equivalent ounce basis to $4.04. This means that the company is paying the equivalent of just over $4 per ounce for the silver it receives as a result of the contracts it has in place with producers like Hudbay. The company does not bare other mining or production costs, making it very straightforward to understand. The spread between the market price of silver and the cost paid by the company is what is earned. This looks very attractive and helps to put the second metric into the right light. Cash operating margin on a per ounce basis fell to $25.01 from $34.21 in the second quarter of 2011. It is likely that this decline will form the basis of any discussion opposed to purchasing the stock. Silver bears will cite this decrease as a reason why the stock’s price has fallen and the stock should be avoided. The reality that this statistic has little to do with the long-term health of the company will be starkly absent from those discussions.
The price of silver has been under significant pressure for some time and prices have fallen. The equation discussed above leaves little room for misunderstanding; costs are essentially fixed, so when prices fall, margins fall as well. Unless one believes that silver prices will remain depressed for an extended period, which is highly unlikely based on the overall health, or lack thereof, of the economy, Silver Wheaton is positioned to rebound strongly as silver prices strengthen. One of the appeals of this stock for investors at all levels is that understanding what one is buying is very accessible.
Silver Wheaton’s Peers
When the overall health of the industry is considered, Silver Wheaton stacks up well against some of its closest competitors. The company has an operating margin of 76.4%, relative to an operating margin of 21.6% for Coeur d’Alene Mines Corporation (NYSE: CDE) and 41.9% for Pan American Silver Corp. (NASDAQ: PAAS). Silver Wheaton boasts a return on assets (ROA) of 20% relative to 4.3% for Coeur d’Alene and 8.9% for Pan American. Additionally, Silver Wheaton has a 5-year projected earnings per share growth rate of 36.5%.
When the above statistics are combined with the company’s recently announced dividend policy, the stock becomes hard to ignore. Shareholders are to receive 20% of the operating profit generated in the most recent quarter. All of these factors combine to make Silver Wheaton extremely attractive as a core holding, particularly at the depressed levels recently reached by the stock.
Mr. Ehrman has no positions in the stocks mentioned above. The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.
