The Golden Standard in Silver

The simplest solution is quite often the best.

When it comes to addressing the mining industry's insatiable thirst for capital to fund mine construction projects, the silver stream flows with elegant simplicity.

Silver Wheaton's (NYSE: SLW  ) signature formula for locking in future cash flows has just been applied to one of the world's largest silver deposits, marking a pivotal amplification of the company's operational scale. Barrick Gold (NYSE: ABX  ) expects to spend at least $2.8 billion developing the world-class Pascua Lama gold mine on the border between Chile and Argentina, and Silver Wheaton is delighted to chip in $625 million to the cause. After issuing shares to satisfy the first payment of $212.5 million, Silver Wheaton expects to make three future payments of $137.5 million each from free cash flow.

In return, Silver Wheaton will receive 100% of silver production from three of Barrick's existing gold mines through 2013, and 25% of silver production for the entire (estimated) 25-year life of the Pascua Lama mine. With the addition of these streams, Silver Wheaton now anticipates five-year sales growth of 250% from 2008 levels, reaching annual production of 40 million ounces by 2013. Goldcorp's (NYSE: GG  ) Penasquito mine will drive near-term growth, while Pascua Lama fills in the mid-term pipeline.

Using average annual production data as a guide, the interim production from the Lagunas Norte, Pierina, and Veladero mines will furnish Silver Wheaton with about 10 million ounces of silver. Silver Wheaton's attributable share of Pascua Lama's mineable silver amounts to about 200 million ounces, for which the usual $3.90 will be paid per ounce (subject to minor inflation adjustments). All told, I calculate an all-in cost basis for the silver acquired through this deal of below $7 per ounce, which compares very favorably to the all-in cost of $10.10 per ounce reported last quarter by rival Pan American Silver (Nasdaq: PAAS  ) .

My pain is your gain
Since I first selected Silver Wheaton for my Motley Fool CAPS portfolio back in 2006, the shares have traversed a huge trading range to end up essentially flat. Meanwhile, the company's total attributable silver reserves have doubled in 2009 alone, and the long-term outlook for silver prices has only gathered strength, I continue to discern deep value in these shares despite the steady recovery from an eye-popping low of $2.51 per share.

My early CAPS picks for silver miners like Coeur d'Alene Mines (NYSE: CDE  ) and Helca Mining (NYSE: HL  ) have thus far been train wrecks, but I remain steadfast in anticipating substantially higher silver prices and a resurgence in this downtrodden sector. Join CAPS today and make my pain your gain.

Fool contributor Christopher Barker carries a silver coin that reads: "Honest value never fails." He can be found blogging actively and acting Foolishly in the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines, Hecla Mining, Pan American Silver, and Silver Wheaton. The Motley Fool's disclosure policy is 0.999 pure.


Read/Post Comments (10) | Recommend This Article (23)

Comments from our Foolish Readers

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 September 09, 2009, at 7:27 PM, speedybure wrote:

    Sinchy, I knew you would be all over this. I posted one for seeking alpha as well. Our boys are movin - Fool on my friend

  • Report this Comment On September 09, 2009, at 8:15 PM, silverminer wrote:

    speedy ... credit where credit is due. You commented on my article from last quarter's earnings that: "I think shareholders would agree to another 200m in equity financing, should it be a flagship stream."

    Seeing as the company just secured a flagship stream for $212.5m to be funded through an equity offering and the remainder of the $625m deal from cash flow, I'd say you called that one spot-on!

    http://www.fool.com/investing/general/2009/07/31/the-shining...

  • Report this Comment On September 10, 2009, at 11:12 AM, paperperson wrote:

    Coeur a train wreck? You must have gotten into it way too soon. I have friends online who got in under $10 and are smiling their fool heads off.

  • Report this Comment On September 10, 2009, at 1:10 PM, XMFSinchiruna wrote:

    Clearly, I don't consider Coeur a train wreck.

    http://www.fool.com/investing/general/2009/08/07/coeur-dalen...

    http://www.fool.com/investing/general/2008/08/12/an-underrat...

    http://www.fool.com/investing/general/2009/04/03/an-asset-mo...

    I was merely pointing out that shares remain well below where they traded in 2006 when the silver price was lower than today and Coeur's two operating flagship mines were still vague sightings on the horizon. Toss in what we know now can see in the fundamental outlook for precious metals versus 2006, and you have a compelling disconnect in relative valuation suggesting plenty of room for Coeur to run.

    Again, the point was ... my pain is your gain.

  • Report this Comment On September 10, 2009, at 4:17 PM, BullionBilly wrote:

    You could have picked any number of stocks that did not preform, but Ceour d'Alene? I rode that horse at about $3.00 in 2005 & 2006 when spot silver was $3.50. Then it went to over $7.00, so I sold it. Then Last year it couldn't get out of the hole at $3.30 or so and I felt like a genius. As a result I switched horses to Goldcorp and am enjoying a nice ride, but now I see Ceour at over $20.00 and realize I should have kept d'Alene horsr too! But I would never call Ceour a nag.................

  • Report this Comment On September 10, 2009, at 7:00 PM, XMFSinchiruna wrote:

    Billy,

    I bought CDE in 2006 with a cost basis above $23 adjusted, which of course preceded the Kensington permitting issue and the development delays at San Bartolome.

    The fact that I never sold a single share -- but rather pressed my position as shares dove to unimagineable depths -- should stand as a testament to my unflappable faith in the long-term growth potential of Coeur..

    I consistently recommended Coeur as a long-term investment throughout its most difficult challenges, and took a lot of guff for doing so when the company's very survivability came into play. I always maintained in my articles that Coeur would find its way through.

    I said only that my 2006 CAPS pick of CDE has so far been a train wreck (still in the red). I'm not saying that the company is a train wreck by any stretch of the imagination, and I'm sorry if my article gives that impression. I was trying to draw attention to how cheap the shares are ... given that they remain below where they stood in 2006 before San Bartolome and Palmarejo were producing mines.

    Again, so there's no confusion, below are all my articles on Coeur d'Alene.

    http://www.fool.com/investing/general/2009/08/07/coeur-dalen...

    http://www.fool.com/investing/general/2009/05/27/the-preciou...

    http://www.fool.com/investing/general/2009/04/03/an-asset-mo...

    http://www.fool.com/investing/general/2008/10/16/coeur-dalen...

    http://www.fool.com/investing/general/2008/08/12/an-underrat...

    http://www.fool.com/investing/high-growth/2008/06/30/5-mid-c...

    http://www.fool.com/investing/general/2008/03/03/the-miner-w...

  • Report this Comment On September 10, 2009, at 10:36 PM, mariposahd wrote:

    hey Billy:

    guess u didn't see CDE did a reverse 10-1 stock split. so that price of 20 bucks now is really only 2 bucks. you made phenomenal sales @ 7!!

    On September 10, 2009, at 4:17 PM, BillyBullion wrote:

    You could have picked any number of stocks that did not preform, but Ceour d'Alene? I rode that horse at about $3.00 in 2005 & 2006 when spot silver was $3.50. Then it went to over $7.00, so I sold it. Then Last year it couldn't get out of the hole at $3.30 or so and I felt like a genius. As a result I switched horses to Goldcorp and am enjoying a nice ride, but now I see Ceour at over $20.00 and realize I should have kept d'Alene horsr too! But I would never call Ceour a nag.................

  • Report this Comment On September 10, 2009, at 11:02 PM, bigdrax wrote:

    HL estimate full year cash cost for 2009 should be below 3.00 a ounce. I'am up 91% since march of this year. Why call HL a train wreck. I do know there was a 14.55% short interest in HL. They (the shorts) should be covering soon.

  • Report this Comment On September 11, 2009, at 12:38 PM, XMFSinchiruna wrote:

    bigdrax,

    Once again ... I did not say Hecla was a train wreck. I said that my 2006 investment in Hecla has THUS FAR been a train wreck.

    I'm not sure how many more ways I can come up with to explain the difference. :)

  • Report this Comment On September 15, 2009, at 3:14 PM, Joelshann wrote:

    Thanks for the article. It's good to see some brief analysis on SLW.

    As to the comments, I continue to be amazed at how many people never lost money, always bought in at a low, sold at a double and jumped back in at the bottom. I don't own any of these stocks so I've lost all the recent gains and some of the older losses.

    To the love of touting proficencies.

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