Silver Wheaton: Significant Upside Possible By 2014

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

Silver Wheaton (NYSE: SLW) is a silver royalty streaming company that generates its revenues by purchasing future metal production from miners for a fixed price in return for financing cash payments. The miners are typically gold and copper companies that produce silver as a by-product, and are therefore willing to sell future production of the metal so that they may obtain financing. Gold and copper miners usually get the press, but silver has done quite well over the years.

The company released its third quarter earnings report last week, and it showed a very large increase in silver production. The company realized silver production of 7.7 million ounces - a 26% increase over third quarter 2011. While these numbers are likely not going to continue into the future, they do show the upside in Silver Wheaton stock. Plus, the company has still not realized the production from Barrick Gold's (NYSE: ABX) Pascua-Lama project. This project has been postponed to sometime in the second half of 2014. Silver Wheaton will realize an increase of production for some time in the future once that project gets off the ground.

One dark spot for the company is the recent slide of silver prices. This decline in price in turn led to a 13% decline in revenue for the company. On top of this, Silver Wheaton saw an 11% drop in earnings.

The company also announced a dividend of $0.07 per share, representing a 20% yield. This should make investors happy and makes the stock very attractive going forward.

The stock has done fairly well since reaching a low of just over $23 a share in the middle of May. The stock now trades around $36 per share. But the price of Silver Wheaton is tied very closely to the price of silver, so if silver shows an up-tick you can expect the company to see increased value as well.

Silver Wheaton has beaten analyst revenue and earnings expectations in their results for the second and third quarters, though earnings were slightly down compared to a year ago. The company also raised its expectations for future production and now believes that its 2016 output will be nearly double the amount of silver it produced last year.

Sell-side analysts continue to think of Silver Wheaton as a good investment. It trades at 20 times trailing earnings, which is not particularly low, but earnings projections give it a forward P/E of 15 and a five-year PEG ratio of 0.8. Obviously, as pointed out above these valuation statistics are sensitive to silver prices, but presumably an investor in the company would expect silver to perform even better than the assumptions in analyst projections.

Silver Wheaton recently announced that it has closed the previously-announced purchase from HudBay Minerals of 100% of the life of mine silver production from its currently producing 777 Mine, 100% of the life of mine silver production from its Constancia Project, as well as 100% of gold production from the 777 Mine until Constancia satisfies a completion test, or the end of 2016, whichever is later. At that point, Silver Wheaton's share of gold production from 777 will be reduced to 50% for the remainder of the mine's life.

When compared to peers we see that smaller companies on the silver-focused side, like First Majestic Silver and Coeur d'Alene Mines (NYSE: CDE), trade at forward multiples of 10 and 8, respectively. Coeur d'Alene has seen a significant decline in earnings this year and looks to be significantly overvalued at the moment. First Majestic might offer some value, but it seems a riskier pick, primarily because of its small size and lack of capital.

Gold miners such as Barrick and Goldcorp show some value when compared to earnings estimates, but both have hit rough patches due to declining gold prices and increased production costs. Investors seem to equate precious metals as gold and gold alone, but silver offers nice diversification and has proven to be a nice hedge against the sluggishness in gold prices.

Silver Wheaton recognizes that production is the key to its growth. As a royalty streaming company it is affected less by mining setbacks that the core producers face, but the company is not immune to delays and shortages, as evidenced in its deal with Barrick. But the company is ramping up production, as evidenced by recent deals and by its record production for the quarter.

While I do not expect production to continue to increase at the rate the company has performed this year, it is safe to say that the company will continue to make gains. 2013 looks to be a solid year for the company. Silver prices should stabilize and show modest growth, which will be a great benefit to the company's bottom line. I see the stock increasing between 15% and 30% throughout the course of 2013, with a projected price of $45 per share.

StockCroc1 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

blog comments powered by Disqus