Why Silver Wheaton is Still Going to $100

While leveraged speculators continue to lick their wounds following silver's infamous week of carnage -- which saw $1 billion exiting the iShares Silver Trust (NYSE: SLV  ) amid an estimated $99 billion commodities rout -- undaunted long-term investors like this Fool are cheering a welcome buying opportunity.

Especially considering the degree to which silver equities failed to track silver prices higher during the final weeks of the metal's explosive rise, I see a broad array of compelling opportunities staring whipsawed investors squarely in the face. Under the circumstances, I am compelled to revisit a silvery prediction that I made nearly one year ago: That shares of Silver Wheaton (NYSE: SLW  ) will strike the $100 mark before this precious-metals bull market has run its full course.

Silver Wheaton revealed a boisterous 142% increase in net profit for the first quarter of 2011, which reflects both an 85% increase in the average realized silver price and a 10% increase in production volume. Revenues grew 84% to $158 million, despite a sharp increase in the number of produced ounces that were not delivered in time to be recorded as sales during the period. With the resulting sales lag of 3 million ounces as of March 31, Fools are encouraged to consider the positive nature of that delay given silver's persistent strength above the first quarter's average realized price of $32 per ounce.

Key ingredients for Silver Wheaton's $100 share price
Now that I have reiterated my long-standing expectation for silver itself to strike $100 per ounce, a corresponding $100 target for Silver Wheaton sounds conservative by comparison -- and I believe that it is. The stock has already clearly demonstrated its capacity to overtake silver on a nominal basis (prior to silver's recent explosion toward $50). Because of the company's unique business model, which keeps cash costs essentially fixed in the neighborhood of $4 per ounce ($4.07 in the first quarter), I maintain that fair value estimates can be reduced to a simple multiple of the long-term prevailing price for silver. When I consider the company's forecast 60% production growth to 43 million SEOs by 2015, alongside a massive trove of silver reserves with a market value nearly three times greater than the stock's enterprise value, I consider a fair value of 1.5 times the prevailing price of silver a comfortably conservative estimate. Of course, any further silver stream acquisitions, increases to the share count, or other material developments would require a prompt reassessment of that multiple.

However, before investors can invest with confidence on the basis of a targeted 60% production growth spurt, they must first determine their own degree of confidence in those targets. In the case of Silver Wheaton, those projections could scarcely be better supported. Primero Mining produced 33% more silver from the San Dimas mine in the first quarter than prior operator Goldcorp (NYSE: GG  ) produced in the prior-year period. After delivering the first 3.5 million ounces to Silver Wheaton, Primero retains the rights to 50% of the silver produced each year in excess of that amount. Under the very capable leadership of former IAMGOLD CEO Joseph Conway, I believe that Primero will make the most of that key silver lining.

Now that Goldcorp's Penasquito mine has achieved design capacity, Silver Wheaton can rely upon 7 million ounces per year from that one mine alone. But the biggest slice of Silver Wheaton's growing silver stream pie will come from Barrick Gold's (NYSE: ABX  ) truly massive Pascua Lama project straddling the border between Chile and Argentina. With 45% of the project's $3.3 billion to $3.6 billion price tag already committed, and some 65% of earthworks complete, the project looks solid for a targeted start-up during the first half of 2013. Silver Wheaton will collect 25% of the mine's silver production throughout an estimated mine life of 25 years; for the first five years the company expects attributable production of nine million ounces annually!

Along with the continued long-term strength in silver prices that I obviously anticipate -- and the organic reserve growth that I expect from several of the company's key streams -- the final key ingredient to achieve a $100 price tag for Silver Wheaton involves the acquisition of new and robustly accretive silver stream agreements. Incoming CEO Randy Smallwood predicted a "flurry of transactions" once silver backed down a bit from its epic surge, and aims to ultimately amass a stream portfolio that is capable of producing 100 million ounces per year. Even as recent dislocations in the silver market have left behind a stable of enticing equity options -- epitomized by small-cap sensation Great Panther Silver (AMEX: GPL  ) and old-timer Hecla Mining (NYSE: HL  ) -- I encourage Fools to keep their gaze firmly fixed upon the superstar of silver streams: Silver Wheaton.

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 Goldcorp, Great Panther Silver, Hecla Mining, IAMGOLD, Primero Mining, 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 sterling disclosure policy.


Read/Post Comments (8) | Recommend This Article (52)

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 May 09, 2011, at 3:31 PM, dbtuner wrote:

    Listen son, SLW always has some delay with silver every quarter. Quarter after quarter and year after year there is always some excuse at some mine or some payment or some shipment or some refiner. The delayed payment never shows up the next quarter as it should.

    If you think sliver is going to $100, then buy SLV. It tracks silver perfectly. Who cares if they have or don't have silver. All I want is a perfect price tracking mechanism without risks and that is what SLV is.

    Now go pump tulips.com or something similar

  • Report this Comment On May 09, 2011, at 3:43 PM, catoismymotor wrote:

    " Who cares if they have or don't have silver."

    DB, you'll care once the music stops and you're left holding the bag.

  • Report this Comment On May 09, 2011, at 4:10 PM, XMFSinchiruna wrote:

    dbtuner,

    Delays between attributable production and receipt of the product are an inevitable aspect of Silver Wheaton's enormously successful business model, and over the course of a long-term bull market for silver those delays do indeed provide a net benefit to shareholders.

    Your claim that delayed shipments do not later materialize in full is devoid of any basis in fact.

  • Report this Comment On May 09, 2011, at 4:18 PM, Gonzhouse wrote:

    Another SLW stock price catalyst not mentioned: SLW will produce massive cash flow. Mgmt just started a dividend program and their stated intention is to return all that cash flow (up to 50%) to shareholders in the form of dividends. That will form a base for SLW that will reduce the stock price volatility.

  • Report this Comment On May 09, 2011, at 4:21 PM, XMFSinchiruna wrote:

    Spot-on, Gonzhouse!

  • Report this Comment On May 09, 2011, at 7:15 PM, xetn wrote:

    dbturner, if you want to really track the price of silver, buy the metal (coins, bars). Then you have no counter-party risk.

  • Report this Comment On May 10, 2011, at 9:17 AM, EGTalbot wrote:

    I'm long SLW. I intend to remain long. That said, in the past five quarters, Silver Wheaton has produced 4.5 million SEO less than it has sold. While delays between receipt of the product and sales are of course inevitable, one would think that at some point very soon, they'll have a quarter where they sell more than they produce due to the backlog coming in. If/when that finally happens, you'll see the share price jump.

    In terms of earnings for 2011, at $35 per ounce average, if they sell something close to 25 million of the 27-28 they expect to produce, they'll hit estimates. Could easily be higher or lower sales or silver price, so there is a lot of room to beat or miss.

    If in 2015 they produce 45 million SEO, let's be optimistic and say they sell 40 million of it. At $50 an ounce, that's 2 billion in revenue, and since their input costs are largely fixed, earnings will be proportionally even better. SLW would be at $100 with the same P/E of 16.

    A lot of things could happen. Share dilution, nationalization, the bottom falling out of silver prices, not producing what they say they'll produce. That's why it's not trading for more already. But it does strike me that the long term risk/reward looks decent for SLW at current levels.

  • Report this Comment On May 10, 2011, at 11:47 AM, trenton1ryan wrote:

    < Under the circumstances, I am compelled to revisit a silvery prediction that I made nearly one year ago: That shares of Silver Wheaton (NYSE: SLW ) will strike the $100 mark before this precious-metals bull market has run its full course>

    I remember that article. That's what got me following SLW on a regular basis. I got in recently at $39, and feel kind of foolish (small 'f'). However, if I can swallow my pride and find some patience (not always easy in my case), I think I still have a double here. I could add if it nears $30, but I don't want to tie up all available funds in one stock. I've done that so many times, and more often than not, paid the price.

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