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Silver Wheaton’s Time to Shine
Silver is primarily found as a by-product of the mining process for copper, lead, zinc, and gold. Companies that mine these deposits typically choose to focus on their core products. So, what do they do with the spare material? Through a concept known as silver streaming, a mining company makes an agreement with another entity to sell all or part of its silver supplies. Such transactions are beneficial to all: Mining companies get a capital infusion, and buyers procure the precious metal without having to commit to exploration and development, a rather arduous and costly endeavor.
A company benefiting from such transactions is Silver Wheaton (SLW). Under 15 long-term silver-streaming agreements, the company acquires silver at the lesser of prevailing market price or $3.90 an ounce (indexed for inflation). While this Canadian enterprise also sells gold, silver remains its bread and butter. Regardless, the fixed-cost structure reduces downside risk, while providing the upside of increases in silver prices and output.
A slew of recent transactions has lifted the company’s growth profile and laid the groundwork for solid annual production gains in the years ahead. In one notable deal, Silver Wheaton agreed to acquire 25% of the silver produced by Barrick Gold Corporation’s (ABX) Pascua-Lama project, forecast to be one of the largest and lowest-cost gold mines in the world. In another highly-touted transaction, Silver Wheaton acquired 12.5% of the silver mined at the Aquiline mine in Argentina, considered one of the most promising undeveloped silver deposits. Management also has made strategic acquisitions, most recently taking over Silverstone Resources Corp., its only serious competitor in the silver-streaming realm. Based on a plethora of recent transactions, Silver Wheaton’s production is scheduled to advance from 23.5 million ounces of silver equivalent in 2010 to 40.0 million ounces by 2013. All told, attributable silver reserves more than doubled during 2010, to 862 million ounces.
In spite of a record-setting year on the acquisition front in 2009, Silver Wheaton retains a healthy balance sheet. In fact, the company has $300 million in cash and an unused $400 million credit facility. What’s more, forecasted production advances indicate cash flow from operations will surge in the years ahead, which should empower management to continue making silver-streaming agreements.
A continued resurgence in the commodity’s value augurs well for Silver Wheaton. The recent recession, together with the ensuing sovereign debt crisis in Europe and ongoing inflation fears, encouraged investors to pour billions into physical bullion and commodity-based exchange traded funds. Given the prevailing uncertainty permeating the real estate market, the investment environment for commodities, including silver, is likely to remain positive. In addition to strong investment demand, the eventual recovery in industrial production should support consumption. Besides the typical end markets for silver (electrical, automotive, and medical instrument industries) new and innovative uses continue to be found.
One relatively new use of silver is in radio frequency identification devices (RFID), which is a tracking system (comprised of a computer chip and a transponder) capable of collecting, storing, and transmitting data. The technology, which has been around for decades, has gained attention recently for its ability to boost efficiency in supply chains. Wal-Mart Stores (WMT – Free Wal-Mart Stock Report) has led the way, convincing certain suppliers to equip their products with these radio tags. By upgrading its supply chain, the world’s biggest retailer is positioned to save billions each year. What’s more, the use of RFID tags is likely to accelerate for various reasons. First, the U.S. State Department has issued a binding ruling that all new American passports must have a RFID tag. Too, the technology is being used for admission into high-security labs. Car manufacturers are using the technology to keep track of car components. Also, certain schools in Japan are using RFID-equipped devices to keep attendance. It’s just a matter of time before supermarkets, libraries, and a plethora of other segments of society start utilizing the technology.
Investors interested in this technology may want to take a look at Intermec (IN), whose products include mobile computing products, bar code scanners, wired and wireless bar code printers, label media products, and RFID offerings. In fact, the global RFID market is expected to grow 13%-16% on an annual basis through 2011-2013, to nearly $10 billion. What’s more, investments in the RFID-enabled products have allowed Intermec to generate revenue by licensing its intellectual property. How does this affect the demand for silver? The commodity cannot be reused or recycled once used in a radio chip. Thus, as along as the technology continues to gain traction, demand for silver should forge ahead.
Silver prices continue to ramp up, surging from roughly $17 an ounce at the start of 2010, to roughly $27 at present. What more, momentum may well continue. First, prices of commodities, including silver, increased sharply after the Federal Reserve signaled its readiness to continue buying back debt, also known as “Quantitative Easing.” More recently, World Bank President Robert Zoellick stated that gold should have a position in the world’s monetary system, lifting Gold prices. That declaration, however, has boosted the price of gold above a typical relationship with silver. Silver prices have followed gold higher. This suits Silver Wheaton just fine, since a considerable portion of these higher prices should flow straight to the bottom line.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.