In the four years since I alerted my readers to the extraordinary investment opportunity in Silver Wheaton (WPM 0.50%) at $2.51 per share, the stock has delivered a breathtaking return of greater than 1,300%! By the time the stock strikes my long-term target of $100 per share, however, Silver Wheaton will have earned truly legendary status among the greatest growth stories of all time. Let's take this opportunity to examine just how the company is positioned to achieve such a remarkable feat.
Silver Wheaton's four pillars of growth
At any given time, Silver Wheaton possesses an incredible capacity to deliver growth on four simultaneous fronts: through gains in the price of silver, through increasing production as stream-carrying projects enter production, through the organic resource expansion of its existing stream partners, and through the forging of new stream agreements. This growth capacity reflects the genius of the company's underlying business model, which offers an essentially fixed cost structure on production from long-life assets with promising exploration upside... and all for a metal with a superbly bullish long-term price outlook.
After scoring a gorgeous stream transaction with HudBay Minerals (HBM 6.28%) over the summer, Silver Wheaton has set its sights on building annual production from 28 million silver equivalent ounces (SEOs) in 2012 to an incredible 48 million SEOs by 2016! More remarkable still is the company's retained capacity to ink yet another major strategic stream, even while the ink on that recent $750 million acquisition has barely dried. CEO Randy Smallwood explains: "With currently more than $1 billion in capacity, even after completing our first payment to Hudbay, we have one of the strongest balance sheets in the industry and are very well-positioned to achieve our goals." With cash flow gushing into the treasury each quarter in this elevated silver price environment, Silver Wheaton has grown into an unstoppable machine that is efficiently generating growth capital to fund each successive acquisition.
While Silver Wheaton stands alone in its wildly profitable silver niche, it's worth pointing out that similar business models are proving every bit as effective on the gold side as well. Royal Gold (RGLD 0.31%) and Franco-Nevada (FNV 1.11%) each stand with greater than $1 billion in available liquidity as well, and the persistent backdrop of a mining industry struggling to secure adequate project financing bodes extremely well for the continued success of these well-proven vehicles for investment exposure to silver and gold. Smaller operator Sandstorm Gold (SAND 2.55%) -- founded by former Silver Wheaton CFO Nolan Watson -- retains some meaningful acquisitive capacity of its own even after reeling in an important stream transaction with Colossus Minerals (NASDAQOTH: COLUF).
The fuel for further acquisitive growth
If Silver Wheaton's enviable and auto-replenishing liquidity position provides the engine for forthcoming deals to drive this growth story along, the fuel upon which that engine runs is the industry's acute need for non-dilutive project financing alternatives. Before the world's largest gold miner suffered outlandish rates of cost escalation for construction of its Pascua-Lama mine, the $625 million supplied by Silver Wheaton to Barrick Gold (GOLD 0.06%) for 25% of the mine's silver output represented nearly one-quarter of the project's budget at the time. Unfortunately for Barrick, that budget has since expanded by 160% to reach a staggering $8.5 billion! When a cash-strapped Thompson Creek Metals (TCPTF) faced few financing alternatives to bridge the gap created by its own bout of project cost escalation at Mt. Milligan, the company turned to Royal Gold on three separate occasions for financing that will account for more than half the project's total!
Even as the industry's cost-escalation crisis looks poised to diminish going forward, a simultaneous crisis of impaired access to capital via bank debt and equity offerings sets the stage for sustained demand for the unique source of financing provided by Silver Wheaton and its ilk. Smallwood recently declared: "While we believe there is a place for streaming in any market given its unique benefits and flexible nature, we think the value of this form of funding is particularly strong in this current market where access to traditional forms of financing such as debt and equity remains very challenging."
The power to choose
The bullish backdrop of demand for project financing is no ordinary fuel for Silver Wheaton's growth engine. Think of it like a fuel with a powerful additive to help keep the engine running clean and problem-free. You see, Silver Wheaton is in the driver's seat, enjoying the luxury of being able to wait for the right project to come along while still offering meaningful upside potential through the other growth vectors outlined above. So what constitutes the "right" sort of project for Silver Wheaton? According to the CEO: "Essentially, we look for long-life low-cost operations with strong management teams that can survive all phases of the commodity price cycle. We also look for assets that have exploration or expansion upside as this is key to increasing a stream's value."
And that's how Silver Wheaton will grow beyond the 48 million SEOs anticipated by 2016, and ultimately deliver well more than 50 million ounces of annual silver production as a sustainable baseline of long-term output. By leveraging strategic long-term partnerships with top-notch miners like Goldcorp -- a phenomenal investment vehicle in its own right -- Silver Wheaton reliably pairs the right business model with the right assets. When you add to that bullish business outlook the extraordinary gains that I see in store for the price of silver over the next several years, I continue to perceive meaningful profit potential in the shares of Silver Wheaton.
