Buy Silver Wheaton Despite Unemployment

Douglas is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

A recent article at Forbes suggested that Silver Wheaton (NYSE: SLW) was worth $37 per share, but allowed for additional upside on the closing of its deal with Hudbay Minerals. The transaction, which comes with a $750 million price tag, adds two new streams to the company’s already robust collection of silver production. Against the backdrop of an apparently improving unemployment picture and the continuation of QE3 – fondly known as QE4EVER – the future prospects for the stock have become more dynamic. Despite these developments, the stock continues to look strong and should be considered a buy for your core portfolio.

The Hudbay Transaction

The deal between Silver Wheaton and Hudbay, which had been previously announced, recently closed, triggering the first payment of $500 million. Silver Wheaton had amassed roughly $1 billion in cash that it vowed to deploy, making this the first of potentially more transactions. For its investment – as well as various future payments, including two for $125 million each when certain development goals are reached – the company has been granted rights to 100% of the silver production of two mines and a portion of the gold production from one of the mines. The fixed price that the company will pay for silver is $5.90 per ounce; this brings the average price that Silver Wheaton pays for silver production to $4.04.

The strength of this deal, as is the case with all of Silver Wheaton’s relationships, derives from its superior business model. As a silver streaming company, it has no exposure to the rapidly increasing costs of production. These costs have risen significantly in recent years and this trend is expected to continue. By avoiding this risk, the low prices the company pays for the silver, which it can then sell at market rates, should become increasingly attractive. In addition to mitigating risks, the company’s business model allows it to function with a 75% operating margin.

Macroeconomic Factors

Last week’s jobs report that placed the unemployment rate below 8% for the first time in 44 months was generally seen as bearish for precious metals. Even so, investors should not lose sight of the U-6 unemployment rate. This figure includes underemployed workers and those who have given up looking for work. It remains unchanged at 14.6%.

Whether you believe that a former mid-level executive who now pumps gas ten hours a week should qualify as unemployed or not, the picture is not improving as fast as the White House would like us to believe. The economy only added 114k jobs and, even at around eight percent, unemployment remains high and the economy weak – both bullish factors for silver and gold. The real question here for precious metal investors is how this will impact quantitative easing.

Given the fact that the Federal Reserve will use the generally accepted figure when deciding when to finally turn off the QE spigot, this is the figure to watch when considering the impact of QE on Silver Wheaton. The other factor, however, which is widely overlooked, is the fact that after buying all of this paper, the Fed will need to unwind its position at some point. This has the potential to throw another proverbial wrench in the works.


The last macro factor, and certainly the most important, is inflation. While initial indications seem to indicate that inflation has remained in check, most of us are aware that we keep spending more on the things we buy. The message is that inflation is out there and it will arrive sooner or later. This will drive prices higher and create serious inflation that should serve as yet another positive catalyst for precious metals. Economic indicators do not react nearly as quickly as most people believe, meaning that there is a lag before the real impact of various policies is measured.

The inflation tap has been opened and getting invested in precious metals as insulation is advisable at current levels. While a $37 target may seem reasonable as a function of supply, the combined upside of additional streams and an expected significant uptrend in prices make Silver Wheaton a must own for your core portfolio.

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.

blog comments powered by Disqus