A Great Time for a Slowdown

Only a Fool could get excited about declining sales volumes amid this most tumultuous of global financial environments. In this environment, companies need to be firing on all cylinders to survive. I've located a rare exception, though, where near-term production shortfalls could be a boon to the long-term investor.

Silver Wheaton (NYSE: SLW  ) reported flat earnings in the third quarter of $0.09 per share. Although silver sales volumes declined only slightly from a year ago, they were well below results from the previous quarters of 2008 and fell short of internal projections. The realized silver price of $14.50 was well above present levels, suggesting a difficult fourth quarter as well unless silver rebounds substantially.

Bring it on
After watching shares of Silver Wheaton dip to their lowest levels ever -- they've shed 78% of their value since March -- I'd need much more than a temporary production shortfall and a fundamentally dislocated silver price to scare me away from this bargain. The great commodity sell-off of 2008 was equally brutal for gold miners such as Yamana Gold (NYSE: AUY  ) , coal miners such as Peabody Energy (NYSE: BTU  ) , and fellow silver miners such as Hecla Mining (NYSE: HL  ) .

First, let's take a look at the production issue. Goldcorp's (NYSE: GG  ) San Dimas mine in Mexico encountered lower grade ores in two veins for a 39% decline in silver production over 2007 results. Meanwhile, Goldcorp reports that recently completed enhancements to the mining facility have improved metal recovery rates. Volatility in ore grades encountered throughout a given deposit is par for the course, and Silver Wheaton still expects an average grade of 381 grams per ton over the 25-year life of the mine. Two new projects began delivering silver during the third quarter, including Goldcorp's massive Penasquito project. Without any further capital expenditures required, Silver Wheaton expects more than 150% in organic production growth through 2013.

I fully expect silver prices to reverse course as well. The counterintuitive rally in the U.S. dollar appears to be losing steam. Silver has completed a 50% price correction and helped miners such as Pan American Silver (NYSE: PAAS  ) and Coeur d'Alene Mines (NYSE: CDE  ) to find some support. As a long-term investor, I welcome the temporary shortfall in production for Silver Wheaton, since it leaves more silver in the ground to be mined once rationality returns to the market. With better days ahead for silver investors, Silver Wheaton remains my top pick within the sector.

Further Foolishness:

In CAPS, 187 All-Stars have rated Silver Wheaton an outperform. Create your own portfolio at Motley Fool CAPS, and get on your way to becoming an All-Star investor. It's free and fun!

Fool contributor Christopher Barker captains yachts and writes about stocks. He can also be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He owns shares of Coeur d'Alene Mines, Hecla Mining, Peabody Energy, Pan American Silver, and Silver Wheaton. The Motley Fool has a silver-lined disclosure policy.


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Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On November 06, 2008, at 2:58 PM, Brettze wrote:

    So many buildings are leaking air either cooled or heated around the year.. Dual pane windows are not enough by a long shot.. There is so many details in energy conservation that an average person would be floored when told what he can or need to do to make it comfortable and energy efficient.. it is not always efficieny but also comfort like free of drafts... Take your chimney,, look up the chimney and see if your damper is shut without any air escaping up the chimney.. If you see gaps around the soot filmed dampers, , well , you got to do somehting about it like forgetting about firewood and seal the damper shut permanently!!

    Sealing the damper in your chimney without any use of firewood sure beats using firewood and polluting the air! with soot and paritculates.. You will be suprised at how warm it feel with the damper sealed shut with duct tape or foam spraycans that can be bought at hardware stores. Remember not to use firewood ever again.. You can put a sign in the fireplace warning not to use firewood again until you remove the duct tape or foam from the damper .

  • Report this Comment On November 07, 2008, at 6:13 PM, XMFSinchiruna wrote:

    Jim Rogers said today that silver will outperform even gold. :)

    http://caps.fool.com/Blogs/ViewPost.aspx?bpid=106805&t=0...

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