Why Silver Wheaton (NYSE: SLW) Stock Is a Buy

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Silver Wheaton Corp. (NYSE: SLW) practically invented the streaming business model. Established in 2004 with a main focus on silver, Silver Wheaton is now the largest precious metals streaming company in the world.

What exactly is streaming?

A silver or gold "stream" is a contract that allows the owner to purchase, in exchange for an upfront payment, all or a portion of the byproduct silver or gold produced by a mine it neither owns nor operates.

NYSE: SLWThis model is beneficial to both parties. The streaming company gets large quantities of silver or gold production for many years at what is often a huge discount to the market price. Silver Wheaton, for example, pays about $4 per ounce of silver and $400 per ounce of gold.

In return, the producer gets a large, upfront cash infusion, typically used to finance construction or expansion. It also gets an ongoing payment for each ounce delivered.

From an investing standpoint, SLW stock is a great way to play the precious metals space. It comes with less risk than investing in miners, while still offering upside potential.

Take a look...

Silver Wheaton's (NYSE: SLW) Advantage over Silver Miners

Like other royalty-type companies, SLW's investments are upfront. They have no downside risk associated with production, expansion, exploration, and most other cost risks borne by mining companies.

One of the most attractive features of Silver Wheaton's business model is how the streaming deals are structured.

You see, SLW offers massive potential upside over time since most streams are what's called "life of mine." As partner mining companies continue to explore, discover, and often expand their resources at existing projects, it often leads to an extension of mine life and greater ultimate production volumes than originally expected. That expanded production will benefit SLW in the future, and at no further cost beyond the fixed purchase price for each produced ounce.

SLW also gains from its share of the expanded resources, without having to contribute to the costs associated with that expansion.

But here's the biggest advantage Silver Wheaton has over regular silver miners:

Ultra-low fixed cash costs. In 2014, those were $4.14 per silver ounce. That's forecast to rise slightly to $4.55 by 2019. This cost structure provides considerable leverage to the price of silver since such a large portion of the silver price ends up as profit for the company.

And with silver prices moving higher, this is good news for SLW - and for investors.

Diversification Through Multiple Assets

NYSE: SLW chartSilver Wheaton benefits from 21 producing and 6 developments assets, which provides great diversification compared to other silver producers. Additionally, many of the assets are in areas considered to carry relatively low geopolitical risk.

The company's income is sourced from streams with some of the largest mining companies, including Barrick Gold Corp. (NYSE: ABX), Goldcorp Inc. (NYSE: GG), Vale SA (NYSE ADR: VALE), Glencore Plc. (LON: GLEN), and Eldorado Gold Corp. (NYSE: EGO).

They also have agreements in place with Lundin Mining Corp. (OTCMKTS: LUNMF), Hudbay Minerals Inc. (NYSE: HBM), Pan American Silver Corp. (Nasdaq: PAAS), and many others.

Today, SLW boasts more silver reserves (the highest-quality ounces) than any other silver company anywhere, around 750 million proven and probable ounces. More than 88% of SLW's production is from assets that are in the lowest-cost quartile. Estimated growth from 2014 to 2019 is a whopping 40%, from 35.3 million ounces to 51 million ounces.

In 2015, SLW's forecast production is expected to be a mix of 62% silver and 38% gold. By 2019, that will progress to 54% silver and 46% gold.

Here's how Silver Wheaton stacks up against other streaming companies, and why now is a good time to add SLW stock to your portfolio...

Buy Silver Wheaton (NYSE: SLW) Stock Today - Here's Why

Of the three largest streaming/royalty companies, which also include Royal Gold (Nasdaq: RGLD) and Franco Nevada (NYSE: FNV), Silver Wheaton is the biggest, with earnings about twice the size of the other two.

It also boasts the largest valuation of the three companies, with a market cap of $8.3 billion. Yet its P/E ratio is the lowest at 37. Silver Wheaton's forward P/E is 24, and its current yield is 1%.

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And this is a profitable business, with a 44% operating margin and a 32% profit margin.

SLW does pay a dividend, which right now is a modest 1%. But that dividend is calculated in a way that makes it very sustainable. The company pays out 20% of the average of the previous four quarters' operating cash flows to shareholders.

That low payout ratio gives management more flexibility in maintaining a dividend while building up its cash hoard.

And with a currently depressed mining sector, that cash is likely to come in handy over the next 12 to 24 months as management scouts out possible new streaming deals. Based on a recent press release, that's what appears to be in the cards.

Silver Wheaton recently filed a preliminary short-form prospectus with the securities commissions in Canada and the United States. This move allows SLW to offer up to $2 billion in securities including shares, bonds, units, and warrants over a 25-month period.

While no specific offerings have been announced, this provides management with the flexibility to raise considerable sums, which they'd likely use to either acquire new streams, or perhaps even competitors, or both.

With silver and gold prices likely near their cycle lows and moving higher, now's a great time to add Silver Wheaton (NYSE: SLW) to your portfolio for precious metals exposure.

Thoughts on silver stocks? Talk to us on Twitter @moneymorning.

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