Silver Wheaton Delivers Pure Gold

When you're priced for perfection, only the best will do.

The investment world has taken notice of Silver Wheaton (NYSE: SLW  ) in a very big way. Considering the stock's year-to-date surge of well over 120%, in the context of silver's rise over 55%, it is clear Silver Wheaton has been the quintessential darling of the precious metals patch.

With a performance like that under its belt, despite a blockbuster earnings report, Silver Wheaton could not stave off the presumed temptation of would-be profit-takers.

Silver Wheaton easily doubled its prior-year earnings -- which themselves were rather flawless -- with earnings of $69.2 million for the third quarter of 2010. Operating cash flow surged 55%, while the company's realized operating margin for each ounce of silver sold improved 42% to $15.72. Record production of 5.9 million silver-equivalent ounces (SEOs) leaves the company on track to meet 2010 guidance of 23.5 million SEOs.

If silver can close out the year with the sort of strength it has exhibited of late, investors are in for a truly astonishing fourth quarter from Silver Wheaton. The spot price for silver hit the $29 mark before retreating, while average realized prices for the third quarter came in below $20 per ounce. Within that gap lies another remarkable margin expansion in the making.

In addition, the company reports that 2.2 million SEOs attributable to Silver Wheaton had been produced at the various mines for delivery subsequent to the quarter end. That lag effect is a completely normal phenomenon for Silver Wheaton, and in a bullish environment for silver, the lag is a boon for investors.

Looking forward, the company anticipates full-scale production at Goldcorp's (NYSE: GG  ) Penasquito mine for early 2011. Barrick Gold's (NYSE: ABX  ) Pascua-Lama mine is slated to commence production in early 2013. In full production, these two new mines alone will add approximately 16 million ounces of annual silver production to Silver Wheaton's formidable footprint.

I suspect there may be no shortage of Fools with unrealized gains in Silver Wheaton. The stock has appreciated more than 1,000% in the nearly two-year span since I issued my timely buy recommendation. I have gone on the record with my long-term price target of $100 for these shares, but that doesn't mean I won't advocate locking in some profits along the way. Sure, the company's anticipated 70% production surge over the next few years suggests a mighty powerful growth trajectory, and it's entirely plausible that the shares may still continue to press aggressively higher with silver's ascent. But disciplined Fools need to ring the register from time to time, and these gains have been bordering on the obscene.

Without question, I consider Silver Wheaton a long-term hold, and it remains my single largest equity holding. The precious metals patch is rife, however, with attractive growth prospects that also offer more of a value moat than Silver Wheaton can at these red-hot prices. I believe that investors continue to overlook Pan American Silver (Nasdaq: PAAS  ) from a valuation perspective. Hecla Mining (NYSE: HL  ) makes a solid play for post-manipulation silver. Forgiving Fools who prefer to catch a timely turnaround story may wish to give Coeur d'Alene Mines (NYSE: CDE  ) a fresh inspection. Since silver has outperformed gold by a dramatic margin of late, Fools might also consider dipping into an undervalued gold producer like Northgate Minerals (AMEX: NXG  ) .

When the dust ultimately settles on this multiyear secular bull market for precious metals, I have zero doubt that Silver Wheaton will have etched an epic journey of investment gains into historical accounts of the period. I strongly encourage Fools to maintain or seek exposure to this high-octane silver play, and I remind those with meaningful gains behind them that realized gains are the best kind by far.

Fools interested in tracking developments relating to Silver Wheaton may wish to add this red-hot ticker to their Motley Fool watchlist by clicking here.

Fool contributor Christopher Barker 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, Northgate Minerals, Pan American Silver, and Silver Wheaton. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.


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  • Report this Comment On November 09, 2010, at 8:14 PM, xp308 wrote:

    Thanks for the insight. With QE2 and the dollar heading lower metals are certainly a nice place to be. Where do you see the price of silver in the next 6 months?

    I had a position in SLW until today when I was stopped out by a trailing stop. Plan on buying back in soon.

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