A Gold Mine in Silver Streaming?

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

Whenever investors see a problem in Europe, they rush to precious metals like Gold and Silver. The prices of both the commodities are sentiment driven and have risen significantly over the past two years, but in the current year, we haven’t seen any fireworks. The reason could be because 2012 has been a less dramatic year, which has kept the prices in range, and commodity investors would not be too happy with it. Though the commodity prices haven’t moved much this year, commodity companies were able to make fortunes.

A Safe Investment

Silver Wheaton (NYSE: SLW) is a pure play silver mining company, and is the largest silver streaming company in the market. The company does not own any silver mines, but purchases fixed quantities of silver from the miners at fixed prices. The business model is safer than the miners as there aren’t any unexpected expenses of mining accidents, but the returns are similar to miners. The company sells more than 20 million ounces of silver produced by miners like Barrick Gold and Gold Corp.

The company directly benefits by inflated silver prices as it is involved in buying and selling of silver. Accordingly the company would lose money when price of silver slides, but that is not likely to happen soon. This is because of the fact that investors around the globe are preparing for another round of Quantitative Easing. This would make sure that the prices of precious commodities are on the up move again. Since the positions are leveraged and the production of silver costs only $4 per ounce, and any upside in the prices of silver would be amplified profits for Silver Wheaton.

Outperforming Silver

<img height="354" src="/media/images/user_13723/slv-vs-slw_large.JPG" width="550" />

Shares of Silver Wheaton have been consistently outperforming the market. The company has appreciated over 55% over the last two years, compared to the 30% increase in the SPDR Gold ETF. The stock price has increased 30% in the last three months compared to the 10% increase in iShares Silver Trust (NYSEMKT: SLV). Analysts believe that Silver Wheaton will continue to beat the iShares Silver Trust as the company retains 80% of the cash generated by its operations. The stock also yields 1.2% whereas owning silver involves expenses, which makes investing in the company logical.

Outperforming Competition

Some competitors of Silver Wheaton in the silver streaming business are Coeur d’Alene Mines (NYSE: CDE) and First Majestic Silver (NYSE: AG). Anyone who is trying to diversify in the silver streaming stocks should note that the earnings of Coeur d’Alene Mines shrank by 41% this quarter. First Majestic Silver too announced dismal results, reporting a 50% decline in earnings. Silver Wheaton on the contrary reported positive earnings with a 3% increase in revenues, with a meager 4% decrease in gross earnings compared to its peers. The earnings shrank shrunk primarily because the price of silver wasn’t doing anything. It’s not hard to conclude that Silver Wheaton is performing better than both its competitors and diversifying wouldn't be a great idea.

Fundamentals

<table> <tbody> <tr> <td> <p><strong>Company</strong></p> </td> <td> <p><strong>Market Cap</strong></p> </td> <td> <p><strong>EPS this yr</strong></p> </td> <td> <p><strong>Debt/Equity</strong></p> </td> <td> <p><strong>Net Profit Margin</strong></p> </td> </tr> <tr> <td> <p>Silver Wheaton</p> </td> <td> <p>$12.64 billion</p> </td> <td> <p>249.13%</p> </td> <td> <p>7%</p> </td> <td> <p>73.05%</p> </td> </tr> <tr> <td> <p>Coeur d’Alene Mines</p> </td> <td> <p>$2.18 billion</p> </td> <td> <p>209.22%</p> </td> <td> <p>2%</p> </td> <td> <p>6.61%</p> </td> </tr> <tr> <td> <p>First Majestic Silver Corp</p> </td> <td> <p>$1.86 billion</p> </td> <td> <p>60.58%</p> </td> <td> <p>30%</p> </td> <td> <p>4.06%</p> </td> </tr> </tbody> </table>

 

Silver Wheaton clearly has the best combination of financial metrics. It not only has been the best performing company amongst its peers, but also has the best profit margins, along with a good debt/equity ratio. Additionally, the stock yields around 1.2% and the 5 year expects EPS growth stands at 36.5% making this a spectacular fundamental play.

Conclusion

There is limited downside and rather upside to the price of silver, primarily because of QE3 making headlines. The fundamentals are great and judging from the numbers, Silver Wheaton looks well poised to give skyrocketing returns in the future. The company has been able perform better than it’s the peers along with silver, and analysts believe that the leveraged silver streaming company could very well outperform silver again. From all the reasons mentioned, we are compelled to give a foolish buy rating to the stock.

 


PiyushArora 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.

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