A Mighty Attractive Metals Stock

Some investors refuse to seriously consider gold and silver producers as legitimate choices for investment capital.

Where such decisions are based upon thorough and objective research, I take no issue.

Unfortunately, I observe that many refusals to invest in the sector are born of suppositions, misconceptions, and even prejudices. The result, often, is that decisions are made to avoid the sector without a trace of real consideration.

All the while, one company in particular continues to shine so brightly that it commands the attention of every Fool ... whether you view silver as a de facto currency or merely an industrial commodity. If you haven't taken a long, hard look at Silver Wheaton (NYSE: SLW  ) , I ask you: What are you Wheaton for?

As the world's only silver stream specialist, Silver Wheaton resides in a class all its own. With silver prices showing persistent strength under the shadow of gold, the company's fixed-cost business model permitted a 44% expansion of cash operating margin for the second quarter to a healthy $14.45 (for each of the 5.1 million silver equivalent ounces (SEOs) sold during the period). Fool favorite Hecla Mining (NYSE: HL  ) produced a more astonishing margin of $20.78 per ounce in the quarter thanks to negative production costs (after by-product credits), but Silver Wheaton produced more than twice the volume.

More impressive still, record earnings of $0.16 per share ($53.3 million) represent a 129% year-over-year increase, even after absorbing the impact of shares issued in connection with the strategic acquisition of a silver stream from Barrick Gold's (NYSE: ABX  ) Pascua Lama mine. Silver production rose 33% thanks to the Barrick acquisition and a very successful ramp-up process at Goldcorp's (NYSE: GG  ) Penasquito mine. For now, however, the recently transferred San Dimas mine (now operated by Primero Mining) remains in first place among Silver Wheaton's producing streams.

At the intersection between rising sales volume (up 74%) and an expanding operating margin, the brightest indicator of Silver Wheaton's strength stands for all to see: a net profit margin of 56%! That's a 1,200-basis-point surge over the prior-year margin, and any additional price gains in silver stand to improve that margin further still.

For serious silver investors stymied by disappointing bottom-line results from Coeur d'Alene Mines (NYSE: CDE  ) , Silver Wheaton provides a rock of unflappable profitability to stand upon. For those who consider the iShares Silver Trust (NYSE: SLV  ) a sensible exposure to the metal -- and I am not one of them -- Silver Wheaton's dramatic outperformance of bullion proxies stands as a testament to the enduring leverage of well-selected producers over price gains in the underlying metal.

Silver Wheaton shares have appreciated nearly 700% since I highlighted an unmistakable opportunity back in 2008, and more recently I expressed my expectation for the stock to reach $100 before this precious-metals bull market has finished running its course. So whether you view silver through the lens of a hard currency in a world of papier-mache, or a commodity play on rising industrial demand, what exactly are you Wheaton for?

More than 1,900 CAPS members, including 600-plus All Stars, have selected four-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 carries a silver coin which reads: "Honest value never fails." He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Coeur d'Alene Mines, Hecla Mining, and Silver Wheaton. The Motley Fool's disclosure policy is .999 pure.


Read/Post Comments (3) | Recommend This Article (34)

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  • Report this Comment On August 14, 2010, at 2:05 AM, Yourdeadmeat69 wrote:

    The stock of this company has been moving 2X the POS on good days, and at current prices 1X the POS on days when the market provides a sea that sinks or floats all ships, at these market levels. It's about to explode, as this article touts. The tendency is so profound, everyone including the Fed has noticed that the price of silver and gold has gone up 10X since 1971, If you made $10,000 in 1971, you bought a $3500 car and got a loan for a $40000 house. 2011, just add a zero to all of the above. Silver, $1,70 the ounce, is now pushing $19.

    Get it? And in more like 14 years than 40, your next zero is on its way, because all paper money backed by BS instead of silver and gold goes to zero.

    ALWAYS.

    4000 years Silver is money, and a disappearing commodity used in a variety of industrial processes last 200. Unlike it's big brother gold, which has the distinction of having just about every gram still available on earth ever mined, silver is a wasting asset and we're running out..

    Silver used to be used widely in photography, but its uses in electronics has eclipsed its former role, with nary a whisper, photography now supplanted by digital photography.

    To guage its value as money, check that beat up Morgan silver dollar minted in 1922--it's worth upwards of $25--or that dime minted before 1964--that junk dime, with no coin collection value, the basic coin itself, is worth over $1.15.

    That's right, in paper money values, that little silver dime is really a silver "dollar" (and change).

    And yet, there is still time for a decent sized $5 coin, $10 coin, $25 coin to be minted of sterling silver, beautiful, valuable, just as the Founding Father's intended in the Constitution.

    Those Founding Fathers were pretty smart guys. They looked at four hundred years of history, and said, "never give the banks control of the currency, they'll collect all the money and rule over you." So they established, gold, silver, full faith, and credit, as the basis of our money in the Constitution.

    To make quick work of history, we lost gold as currency in 1933 ("thanks" to FDR), silver and gold were floated like lumber oats and pork bellies against fiat or paper currencies in 1971 ("thanks" to Nixon) in 1971, "faith" in our currency was destroyed by derivatives of no doc real estate sold an unsuspecting world, and all we've left in inertia--or credit--until China and Japan stop buying our bonds and worthless scrip.

    Why? To "control" money and YOU better. Asked about that process supplanting the Constitution, Greenspan, prior to Bernanke, just smiled cryptically. And yet, they're worried. The Fed feeds about four banks including JPM, which hold about 90% of the short positions in silver.

    And they use them. Google players who have watch commodity bid and ask prices, see phantom trades, thumbs on the roulette wheel of free markets appearing in microseconds on the commodity exchanges offering futures contracts on the price of silver. You can watch the Fed use those banks to manipulate the price of silver before your eyes, because that submerged balloon is about to explode in a world made bankrupt by policies defying history, and the ethics of financial capability researched and documented, before you allow a mortgage to be written against a house.

    And housing, our bankrupt housing, was the cornerstone of American properity and wealth.

    When all these forces coalesce, you'll see the price of gold $10,000 and silver $250, almost in a heartbeat. Our Zimbabwe dollars will be near worthless, in order to reduce the debt America incurred by real estate fraud, monetization, inflating the dollar until the debt "doesn't matter" because the amount owed becomes miniscule by comparison.

    Remember than 1971 $40K house now $400K? It's going to be $4000000 in about 15 years, so why worry if you owe $550K on it now?

    See how that works?

    And that's why I invest in SLW. It's a $250 stock, just, nobody hasn't noticed yet.

    And as to manipulation? There's legislation stating you MUST take possession of contracts offered on exchanges--not just post phantom trades, coming to a commodity exchange near you.

    It's overdue, as is our return to silver and gold as cornerstones of real currency.

    Just hope that happens before China and Japan stop buying our paper, and hope you're positioned to take advantage of it, in SLW.

    There's still a little time.

  • Report this Comment On August 15, 2010, at 4:20 PM, miklor1 wrote:

    Sorry yourdeadmeat69 no way SLW goes to $250.00 and you cited the reason in your own comment. SLW signs agreements with miners to buy their silver. When the silver manipulation ends and silver goes to $100.00-$300.00 or even $500.00 an ounce what mining company in their right mind would sign over their silver rights to SLW. Don't get me wrong SLW is a great short term play and may reach $50.00 or $60.00 but as I said above when silver explodes so does SLW's "stream". If you are lucky when that happens SLW may go to $10.00. My guess is however, much lower. Buy the actual miners, that is where the smart money will be going. To put it another way would you rather own actual bullion or the "paper" SLV? The choice to me is quite easy. Good luck and happy trading.

  • Report this Comment On August 16, 2010, at 6:08 AM, XMFSinchiruna wrote:

    miklor,

    Show me one silver miner that can match Silver Wheaton's existing reserve base, let alone the capacity they have to convert cash flow into additional streams <before> silver climbs to much higher prices.

    Fresnillo is the world's largest primary silver producer, and holds reserves of only 374m oz silver.

    http://www.fresnilloplc.com/downloads/RESERVES%20AND%20RESOU...

    Pan American Silver has 234m oz P&P (+ an impressive 711m oz M&I).

    http://www.panamericansilver.com/operation/documents/Reserve...

    CDE sits atop 269m oz. P&P.

    http://www.coeur.com/resources-table.html

    SLW, meanwhile (drumroll please):

    962m oz. P&P Reserves plus 383m M&I Resource (exclusive of reserves), for 1.35 BILLION ounces combined. All locked in at essentially fixed cost. Because of this conveniently simple cost structure, one can express fair value for SLW shares (based upon existing streams) as a multiple of the long-term average price of silver. I place that fair value between 1.5 and 1.6-times the long-term average price of silver ... <conservatively>. You are welcome to plug that sort of a valuation into any long-term silver price scenario you wish to, but you will wish to consider that if the price of silver ever reaches the heights you mention, shares of SLW will trade (barring splits) ahead of that nominal silver price.

    I encourage you, respectfully, to revisit the drawing board with regard to SLW, and check some of the assumptions that appear to be underlying your outlook on the company.

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