43 Million Reasons to Love Silver Wheaton

When silver fetched just $16.90 per ounce a little more than two years ago, I offered my readers 13.6 billion reasons to adore Silver Wheaton (NYSE: SLW  ) . Even as the prevailing price has doubled since that time, the long-term outlook for silver going forward remains a dazzling reflection of the metal's coveted industrial applications and monetary pedigree. If you share my expectation for silver to continue trending higher for quite some years to come, then the reasons to adore Silver Wheaton may be expanding faster than the U.S. national debt.

Forty-three million of those reasons correspond to the silver streamer's monster haul of 43 million silver-equivalent ounces (SEOs) annually by 2015. From anticipated 2012 production of 27 million SEOs, that's nearly a 60% growing spree in the span of three years.

Now that Goldcorp's (NYSE: GG  ) gorgeous Penasquito mine is completing its final ramp-up to bring Silver Wheaton's attributable share of silver production from 5.3 million ounces in 2011 to more than 7 million ounces annually, investor attention now turns to the next big surge in Silver Wheaton's monumental growth trajectory. Barrick Gold (NYSE: ABX  ) remains on track to enter production at its world-class Pascua-Lama mine in mid-2013, with Silver Wheaton's annual share of silver production expected to average 9 million ounces annually over the first five years. While Barrick has to do all the work and incur all the rampant cost-escalation risk that continues to affect the industry, Silver Wheaton gets to kick back and watch new production volume file in that's roughly equivalent to superstar miner First Majestic Silver's (NYSE: AG  ) targeted 2012 output.

Pondering Silver Wheaton's future profitability at the looming scale of 43 million ounces offers more sheer fun per number-crunching step than any other stock out there. With an essentially fixed cash cost structure of just over $4 per ounce, a Fool has only to plug in his or her own silver-price forecasts for a glimpse of the profits to come.

As a baseline, consider that Silver Wheaton yielded $550 million in net profit for 2011 based upon sales of 21 million SEOs at an average realized price of $34.65 per SEO. With a net profit margin of 76% -- a product of the company's ingenious business model -- it's no wonder I've called Silver Wheaton the most profitable company in the world.

So, in a back-of-the-envelope sort of way, if we apply the 2011 realized silver price to 2015 sales volume of about 40 million ounces (allowing for some lag between production and sales volumes), we could expect to see 2015 net earnings of about $1.05 billion. By those metrics, Silver Wheaton currently trades for just over 11 times 2015 earnings. If, however, you believe that silver is more likely to average $50 per ounce in 2015, then the multiple drops down to less than 8 times 2015 earnings.

Of course, with a cash balance of $840 million that's hungering to fund additional accretive stream transactions -- not to mention the potential addition of currently stalled streams from projects such as Pan American Silver's (Nasdaq: PAAS  ) Navidad project in Argentina -- readers are advised to remain watchful for sustained volume growth over the very long haul. It is on that basis, after all, that I ultimately see shares of Silver Wheaton topping $100. I have maintained my bullish CAPScall on Silver Wheaton since 2006, and I invite you to join the more than 2,500 members of the community who likewise believe Silver Wheaton will continue to outperform.

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 First Majestic Silver, Goldcorp, Pan American Silver, and Silver Wheaton. We Fools don't 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.


Read/Post Comments (4) | Recommend This Article (25)

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 March 24, 2012, at 4:35 AM, INVESTWISE2010 wrote:

    Ostensibly the margin seems high $ 34.65 per ounce (current price of silver) minus contracted cash cost $ 4 per ounce, which is $ 30.

    Please let me know whether the upfront costs, which have been paid when signing these contracts, have been taken into account, when stating that Silver Wheaton is the most profitable company in the world.

    Can you also please share details of these upfront costs and the impact on the margins and the return on investment.

  • Report this Comment On March 24, 2012, at 4:38 AM, INVESTWISE2010 wrote:

    Ostensibly the margin seems high $ 34.65 per ounce (current price of silver) minus contracted cash cost $ 4 per ounce, which is $ 30.45.

    Please let me know whether the upfront costs, which have been paid when signing these contracts, been taken into account, when stating that Silver Wheaton is the most profitable company in the world.

    Can you please share the facts on these upfront costs and the impact on the margins and the return on investment.

  • Report this Comment On March 24, 2012, at 9:39 AM, XMFSinchiruna wrote:

    Investwise,

    I'd be happy to, but before we begin, the cash operating margin for 2011 was actually $30.56.

    Of course, the net profit margin discussed herein does not take stream acquisition costs into account. But one would not expect them to.

    First, let's get a more comprehensive view of the cost structure by taking that cash operating cost, and adding items like depletion, G&A, Taxes, and other expenses. That cost figure, which corresponds to net profit divided by ounces sold, comes to $26.10, or a net profit margin of 75.3% (76% stated above was a rounding error).

    Now, estimating acquisition costs on a per-ounce basis requires some projections, including estimates of total attributable ounces recoverable, mine life, etc. I place total acquisition costs per recoverable ounce, conservatively, at less than $3. That ignores all M&I and inferred resources! Many of SLW's core stream acquisitions were made during an entirely different price environment for silver, and even those struck further along in the metal's advance were on extremely favorable terms.

    So, roughly speaking, everything after the first $11 to $11.50 per SEO sold is not merely pure net profit, but actually reflects comprehensive shareholder return by factoring cumulative acquisition costs into the equation. The actual return will be better still as organic reserve growth comes into play.

    With trailing average silver prices above $30, the power of this cost structure is clear to behold. Plugging-in some of the more bullish forward price scenarios for silver, the profits will become truly legendary.

  • Report this Comment On March 24, 2012, at 3:03 PM, INVESTWISE2010 wrote:

    That explanation does clarify a lot. Many thanks, Sinch.

Add your comment.

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 1839019, ~/Articles/ArticleHandler.aspx, 8/23/2014 1:50:39 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Apple's next smart device (warning, it may shock you

Apple recently recruited a secret-development "dream team" to guarantee its newest smart device was kept hidden from the public for as long as possible. But the secret is out. In fact, ABI Research predicts 485 million of this type of device will be sold per year. But one small company makes Apple's gadget possible. And its stock price has nearly unlimited room to run for early-in-the-know investors. To be one of them, and see Apple's newest smart gizmo, just click here!


Advertisement