Buy, Sell or Hold: Silver Wheaton Corp. (NYSE: SLW) Is Poised to Profit from the White Metal's Rally

Have you ever wanted to invest in a company that owned the supply of a product at a nice fixed rate of cost, but was able to leverage the upside, but not have to take any risk in actually making the product? How about if it's something inherently dangerous and expensive with bad margins like mining?

In the case of Silver Wheaton Corp. (NYSE: SLW) we have a very interesting investment vehicle, because the company does not have to take additional risks to grow its production numbers. Silver Wheaton owns the rights to silver production from mines that produce it as a bi-product. This allows the company to enjoy a growing supply curve, while protecting its balance sheet.

It has already purchased these rights upfront for cash, helping some miners with their capital costs to open a new mine. As these mines ramp up production in whatever primary product they are producing, Silver Wheaton gets access to the silver produced as a bi-product.

Silver Wheaton has 15 agreements with 11 operating mining companies, from which it purchases silver at fixed rates – typically around $3.90 per ounce with a small inflationary increase built in. Silver currently is now near a 30-year high of around $22 an ounce, so the leverage to silver's price is significant.

Silver Wheaton has developed these relationships to the extent that it can choose how much exposure it gives each agreement. In some cases, the agreement gives Silver Wheaton the whole production of silver from the mine in question. In other cases the contract only includes a percentage of the mine's production. This allows Silver Wheaton to focus on managing the supply of silver, rather than the actual mining of the metal, and reduces the amount of risk the company has to any specific mine, or even region.

Besides enjoying fixed production costs, this arrangement has the company taking no risk to increase its production. It has no capital cost increases in its business model.

Forecast 2010 production, based upon the company's current agreements, is 22.2 million ounces of silver and 20,000 ounces of gold, for total production of 23.5 million silver equivalent ounces. By 2013, annual production is anticipated to increase to approximately 40 million silver equivalent ounces. No ongoing capital expenditures are required to generate this growth and Silver Wheaton does not hedge its silver production.

In the middle of the biggest bull market for silver since the Hunt Brothers tried to corner the market, here is a company that has been growing its un-hedged production. What is even better is that it expects to almost double its production in the next three years with no upfront capital costs to the company.

So, let's review the big picture for Silver Wheaton:

• It has 15 Royalty Purchase agreements with 11 operating companies.
• It has 100% un-hedged silver production.
• Its 2010 silver production is expected to be 23.5 million equivalent ounces.
• It expects a doubling of silver equivalent ounces per year by 2014.
• It has no capital costs to grow production.
• And it has low fixed production costs.

Finally, the current bull market in silver makes Silver Wheaton a conviction buy.

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