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.
If you are an investor who is interested in the long term investment thesis of Silver Wheaton, but also interested in playing this move on silver. I would suggest purchasing some long-term call options on Silver Wheaton, with an exposure in the area of January 2012 and with a strike of $30.00 for a leveraged trade on silver.
(**) Special Note of Disclosure: Jack Barnes holds no interest in Silver Wheaton Corp. (NYSE: SLW).
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I have a gold and silver mine that i am putting into production…how would I sell my silver products to silver wheaton corp……………thanks robert hunter…owner operator………….
Robert,
I don't believe you desire to sell to SLW…do you???
Are there not others to sell to that will give much more for your efforts?
To me, $3.90 an ounce is much less than the going price of $22.00…
I don't know but, my logical thinking tells me to sell somewhere else.
MO
thanks for infomation robert……………..
Yeah. Exactly. Good reporting. My only question would be, where were ya when Morgan engineered the big silver smackdown of 08 and SLW was selling for roughly 3 1/2 bucks?
I bought as much as I could then. Now that it's risen 700% or so in 2 years, it's still a great stock, but the really easy money has been made.
I find it best to buy things when the fundamentals are strong and the investment in question is simply out of favor. SLW has a long way to go, but people are excited about it now. Why? Mostly because it's going up. Hmmmm.
I still have a hard time not believing that holding physical gold and silver in ones hand is the safest way to preserve any wealth you may have after the worlds collapse of the fiat currency.
Those interested in SLW should check out the next Silver Wheaton: Sandstorm Resources Ltd. It was founded by alumni of Silver Wheaton. Among its assets is a 20% interest of the life of mine gold production of Silver Crest Mines. Its share price is currently unnder C$0.80 and also has warrants at under C$.040. Trades on the TSX.V under the symbol SSL (PinkSheets SNDXF).
My concern regarding Silver for the past ten years has always been that I have never been able to
obtain any reliable data such as 1) what is the volume of silver used in all the industries( global ) ?
2) What % of the actual price/oz reflect supply/demand effect ? 3) Does silver ( like Gold ) have any power as a reserve currency ?
Would appreciate your comment.
Thank you, Shayam
Whilst all the world,s well a large proportion of thier fiat currencies are failing give me gold and silver what else is there out there in the big bad world of the globalist/bankers that can make me feel more secure ….NOTHING.Stay safe!!!
Sign me up for the Money Morning Newsletter
Bricks & mortar, Gold will go down, hang on property, very long on Gold, short on rare earth elements, alternative energy will sky.
Allied Zurich- Britain, and Zurich Allied- Switzerland. Beware of splits with parts, was 57 and 43.
I understand that for the first time in many, many years, China citizens can start holding physical precious metals. This new oppurtunity will happen this year. While China is famous for being the country infamous for saving at a rate much higher than any other country in the world, just wait and see what happens to silver, gold and other precious metals. Do not miss this boat.
If I am wrong on this info, let me know.. I am a student at MSCD college, and I wrote a paper recently about this, Thanks for listening.
sir,
I SOLD SILVER IN FUTURE MARKET ,NEXT IN FUTURE IT IS UP OR DOWN.
PLEASE REPLY
Greetings, folks….
Jack Barnes saw your comments, greatly appreciated them, and asked me to post an update note.
Before I do so, I did want to take a moment to make two comments of my own related to our silver coverage — and particularly what Jack has had to say on this very popular topic.
First, our gurus may differ a bit in their near-term expectations for silver, gold and other commodities, but they're pretty much all on the same page in believing that long-term trends almost all point toward higher prices in the long run.
Second, I'd like to point out that Jack's prediction on silver — that is, what said he expected to happen — played out essentially just as he expected. And these comments were made on the record, so there's no disputing what he said.
Anyway, thanks for taking the time to write, everyone. Money Morning's readership base is a large one, needless to say. But it consists of smart, well-informed people with high standards and a demand for high-quality content and analysis.
William Patalon III
Executive Editor
Money Morning
Dear Readers:
Thanks for your comments and for your questions.
If you’ve been following my coverage of silver over the past few months, you’ll want to check out Monday’s “Buy, Sell or Hold” column (Monday, May 16th), when the promised update on Silver Wheaton Corp. (NYSE: SLW) is to run.
Thanks so much!
Jack H. Barnes Jr.