Silver as a By-Product No Joke for SLW
J. Keith is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Since the earliest record, silver mining has always been somewhat of a challenge. Though much more plentiful than gold, it’s rarely found in nuggets or thick veins the way that gold is. In fact, 70% of silver production is as a by-product of other types of mining. You ever hear of anyone panning for silver?
That’s not to say that there are no silver mines. Nevada, known as The Silver State, boasts a rich heritage of silver mining, as does Colorado. The world’s two richest silver mines are found in Australia and Mexico, though the Cannington Mine in Australia also mines lead. And Barrick Gold’s (NYSE: ABX) Pascua Lama Mine on the Andean border of Argentina and Chile is expected to assume the number three spot when it comes on line within the next few years.
Most often silver is found with copper, gold and lead, being separated using zinc for lead ore (Parkes process) or electrolysis in copper ore. There is evidence of separating silver from lead as far back as 4th century. Asia Minor and ancient Athens was known for its silver currency, revealing some sophistication in early smelting techniques.
On a recent trip to Arizona I learned that a copper mine there owned by Freeport-McMoRan (NYSE: FCX) has found some very rich silver deposits, but is holding off mining specific ore until it can perfect it’s leaching process to include silver as well as copper. Currently a combination of leaching and electrowinning technology is used to gather the copper. How to include silver in this extraction process is still under development.
This highlights that much of the challenge with mining and marketing silver lies in this tendency to be a by-product. Quite often the mining company is geared up to handle a specific substance, most often gold or copper. Because of this, they look for a market to take the silver off their hands, freeing them to be able to concentrate on what they know and do best. Capitalizing on this idea, a company recently started offering contracts to buy this silver from mines. These companies are known as streamers.
The largest of these silver streamers is, by far, Silver Wheaton (NYSE: SLW), headquartered in Vancouver, Canada. Recognizing an opportunity to enter into contracts with mining companies, this innovative company began operation in 2004. Basically, they purchase the right to buy either all or a percentage of the production of a given mine at a fixed rate. This results in low overhead for Silver Wheaton since they have no mining or processing expenditures. By contract SLW protects themselves from drastic downward movements in silver, while maintaining upward advantages. Approximately 5% of its revenue comes from sales of other metals, including gold.
SLW is not a pure silver play. Because of low overhead and contractual advantages, they’re able to maintain a strong profit margin through market fluctuations. As you can see from the chart, there is a close correlation in SLW’s movement with silver.
Silver Wheaton is no longer an experiment, having already proven itself in the marketplace. A 1.2% dividend puts SLW at the highest of all Precious Metals and Minerals companies. The current P/E ratio is 18.9, not making it appear to be the best buy on the block, but still respectable. This may be indicative of silver’s recent drop. Having approached annual lows of 25.84 (10/4/2011) at about 29 a share today, it’s a long cry from its 43.38 high around this time last year. Current contracts and forward expectations of higher silver would indicate that SLW has a long way to go. If you've already taken a physical position in silver, with it’s small drop today, this might be the best setup for going long that we’ll have for quite a while.
Silver can also be traded via iShares Silver Trust (NYSEMKT: SLV), ProShares Ultra Silver (NYSEMKT: AGQ) and Sprott Physical Trust, among others.
For your prosperity,
J. Keith Johnson
The Gold Informant
The Gold Informant is a Goldco Direct affiliate writer.
The Gold Informant is long precious metals and may own or initiate a position in shares mentioned at any time. The Motley Fool owns shares of Freeport-McMoRan Copper & Gold. 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.
