Silver Wheaton: The Breakfast of Champions

Every morning is the dawn of a new day, and under the circumstances, I maintain that forlorn Fools would be wise to pour some silver on their figurative breakfast.

Superstar silver-stream-specialist Silver Wheaton (NYSE: SLW  ) closed the door on a brutal 2008 last week with the release of fourth-quarter earnings. Alongside this Fool, Silver Wheaton recorded some hefty losses from long-term investments in junior silver exploration companies like Mines Management (AMEX: MGN  ) as silver prices plummeted and the markets devoured the juniors. Silver Wheaton's resulting $65 million writedown yielded a loss of $54.2 million for the quarter, but leaves behind little remaining risk to imminent streams of profit. The company certainly was not alone in its pain, as Pan American Silver (Nasdaq: PAAS  ) also recorded a loss and Kinross Gold (NYSE: KGC  ) took a massive billion-dollar hit.

Thankfully, operational snags at two of Goldcorp's (NYSE: GG  ) mines kept silver production below initial expectations during the brutal silver correction, leaving more silver in the ground for the coming stages of the precious-metals bull market. Bolstered by the addition of Goldcorp's world-class Penasquito mine, however, the company forecasts production growth of about 40% in 2009 to 15-17 million ounces. By 2013, that figure could reach 30 million ounces as additional streams like Alexco Resource's (AMEX: AXU  ) Keno Hill property move into production.

Like royalty-specialist Royal Gold (Nasdaq: RGLD  ) , Silver Wheaton employs a rather capital-intensive business model that sees up-front expenditures paid off in spades over the long haul. With fixed costs permitting careful cash flow calculations, the company is able to manage risk during these risk-ridden times. Despite the significant recovery under way in both silver prices and precious metal mining stocks, financing to develop future mines remains constrained by the global credit lockdown. With nothing drawn on a $400 million revolving credit facility, Silver Wheaton stands ready to assist with up-front capital in exchange for long-term silver streams. I consider the business model a stroke of genius, and expect the credit crisis to yield some tasty long-term growth opportunities.

Silver Wheaton was my best call in 2008, as shares have nearly tripled since striking a 52-week low precisely on November 25, 2008. While precious metals rarely move in a straight line for very long, particularly while they're in the spotlight, I believe Silver Wheaton's recent recovery marks merely the beginning of substantial long-term share appreciation.

Further Foolishness:

1,471 CAPS members, including 451 All-Stars, have selected five-star-pick Silver Wheaton to outperform the S&P 500. 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 in Silver Wheaton, Alexco Resource, Kinross Gold, Mines Management, Pan American Silver, and Royal Gold. The Motley Fool's disclosure policy is .999 pure.


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  • Report this Comment On February 23, 2009, at 3:09 PM, NYUgrad wrote:

    Let's also not forget the ridiculously low cost of the revolving debt. A lttile over 1% interest for $400M in available cash to invest in acretive silver streams at higher Silver spot prices, moving fwd.

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