Talking Value, Risks, and Opportunities with Silver Wheaton's CEO

Before interviewing a resource-company CEO, I enjoy inviting members of Motley Fool CAPS to propose their own questions. The poignant insights that commonly stem from reader-submitted questions offer a prime example of how powerful a force it can be to pool our ideas as investors and approach the discipline as a community the way we do here at The Motley Fool.

Before my recent conversation with Silver Wheaton (NYSE: SLW  ) CEO Randy Smallwood, I asked community members to submit their own questions, and the following exchange stems directly from two questions posed by CAPS member skypilot2005.

Christopher Barker: I had let my readers know that I would be speaking with you and invited them to propose any questions they might wish to ask. One Motley Fool CAPS blogger asked the following two-part question: What's the single greatest threat to the precious-metals streaming industry, and what is the biggest opportunity?

Randy Smallwood: The biggest threat, I would say, is that some of these smaller companies are chipping away at the model and giving up price participation features in the process. For me, one of the highlights of the model -- and something we've always maintained a big focus on -- is that there will never be a cost surprise in our company. It's the one risk that we take out of the equation, which the normal resource investor has to face. The capital cost estimates and operating cost estimates are all very, very fluid, and what we've seen lately is that there are some really poor track records in terms of delivering those. So I want cost-confidence. I want to be able to tell my shareholders that "guess what, you know that my cost per ounce will be 'X' in 2015, and that my cost per ounce will be 'Y' in 2020." And that will stay.

A lot of other companies have taken to giving out price sharing or adjustments based on performance, and to me that opens up a variable on the cost side that is one of the main attractions of the streaming side ... is that we've taken out that cost risk. And so that I think is something that's weakening the model from that perspective. And they've had to do it to remain competitive; it's a competitive space. We've obviously had great success in growing our company, and a lot of people see that success and want to get their foot in the door.

The greatest opportunity in the industry is the continued recognition that selling off a non-core asset to fund your core franchise is viable. What people have a hard time with on the streaming side is that instead of dividing an asset along property boundaries, we're dividing it among metal boundaries within the property. That's really what a stream agreement is. And as that gets more accepted among companies the size and scale of Vale (NYSE: VALE  ) -- and you know we've got partnerships with Barrick Gold (NYSE: ABX  ) and Goldcorp (NYSE: GG  ) -- the more acceptable streaming becomes as a means of financing. And we're seeing that more and more. Over the last six months, a lot of the big companies out there -- the big multinational, multicommodity companies -- they are all of a sudden opening the door when we knock on it, whereas in the past it had often been a tough sell.

Barker: The same reader asks: "Is the market accurately pricing your stock at the moment?"

Smallwood: We think we're undervalued. We think that our business model is one that is still not well understood. We're still helping people to fully grasp how much risk is taken out of the equation by investing in Silver Wheaton. The only real risk you have in our investment is, of course, commodity price risk, which you have everywhere you invest in the resource sector, and on production -- and actually achieving production -- because the costs are fixed. I just don't think that's fully understood.

I would say that's a broader thing across the royalties and streaming industry, is that although we are getting a premium over mining companies, I think that premium is worth even more. And there is no doubt that our stock trades at a bit of a discount to the other gold streaming companies [author's note: principally Royal Gold (NASDAQ: RGLD  ) and Franco Nevada], but I think we're making some of that up over time. So yes, I do think we're a little light in terms of where our share price is versus where it deserves to be ... especially when you consider our growth over the next three to four years. Climbing up over 50 million ounces per year from the current level of just over 30 million ounces -- and all for exactly $480 million with no surprises on the capex -- as people understand that more, I think they'll understand the value there.

To track my own ongoing coverage of this resoundingly successful growth story, please bookmark my article list or follow me on Twitter. My Foolish colleague Dan Caplinger has prepared a detailed report outlining the compelling investment thesis for this star of the silver screen, and I encourage Fools to access that special report by clicking here.



Read/Post Comments (6) | Recommend This Article (12)

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 11, 2013, at 10:53 PM, skypilot2005 wrote:

    Sinchi,

    Wow! Thanks for asking the questions. Where else can an individual investor have access to a very successful C. E. O. like that? Thanks and Fool On….

    Sky

  • Report this Comment On March 11, 2013, at 11:07 PM, amln wrote:

    Thanks both of you for your great generosity in sharing your ideas, knowledge, and enthusiasm. A big thank, also, goes to Mr. Smallwood for taking the time to be with us!

  • Report this Comment On March 17, 2013, at 11:03 AM, skypilot2005 wrote:

    http://sandstormgold.com/projects/bachelor_lake/

    http://www.metanor.ca/en/index.php/press-releases/article/me...

    03-06-2013

    METANOR PRODUCES 3017 OZ OF GOLD IN FEBRUARY AT ITS BACHELOR PROJECT

    March 6, 2013- Val-d'Or, Quebec, Canada: Metanor Resources Inc. ("Metanor") (TSX - V: MTO) is pleased to release an update regarding the current development of its Bachelor project.

    Metanor produced 3017 ounces of gold in February, compared to 2 236 oz in December, bringing the total production since July to 13,128 ounces of gold. The ounces produced in February come from 18,186 tonnes grading 5,34 grams per tonne recovered at 96,7%.

    The average tonnage in February was 650 tonnes per day (Tpd) compared to 447 Tpd in January, and 275 Tpd in December. The commissioning of new stopes allowed the company to deliver a steady flow of ore to the mill.

    Furthermore, the company announces that it has been granted an additional three month delay before commencement of capital repayment of the Ressource Quebec (subsidiary of Investissement Québec) loan. Details are available at http://www.sedar.com. The first payment will be made May 31, 2013.

    Sky

  • Report this Comment On March 18, 2013, at 10:33 PM, skypilot2005 wrote:

    http://www.brigusgold.com/Cache/1500047878.PDFY=&O=PDF&a...

    3/18/13

    High Grade Drilling Results to Expand the Resource at Grey Fox

    Halifax, Nova Scotia; March 18, 2013 Brigus Gold Corp. (“Brigus” or the “Company”) (NYSE MKT: BRD; TSX: BRD) is pleased to report additional drilling results from its ongoing drill program at the 147 Zone, including high grade gold intercepts of 8.7 grams per tonne over 21metres and 6.2 grams per tonne over 25metres.

    “It is clear that the Grey Fox resource is more significant than initially reported,” said Howard Bird, Brigus’ Senior Vice President of Exploration. “These high grade drill results are located outside of our current resource estimate and will expand the gold resource on the Grey Fox property.”

    Next quarter,the Company plans to release an updated NI 43-101 resource estimate on the Grey Fox property followed by a full feasibility study in Q3 2013.

    Sky

  • Report this Comment On March 18, 2013, at 10:37 PM, skypilot2005 wrote:
  • Report this Comment On March 20, 2013, at 9:23 PM, skypilot2005 wrote:

    http://investors.hecla-mining.com/phoenix.zhtml?c=63202&...

    3/20/13

    Hecla Announces Lucky Friday Mine Released from PPOV Status by Mine Safety and Health Administration

    COEUR D'ALENE, Idaho -- (BUSINESS WIRE) -- Mar. 20, 2013 -- Hecla Mining Company(NYSE:HL) (Hecla or the Company) announced today that the Mine Safety and Health Administration (MSHA) has officially notified the Company that the Lucky Friday Mine will not be issued a potential pattern of violations (PPOV) notification, a possibility the agency had indicated late last year.

    "We are pleased that following the rehabilitation of the shaft, training and other work, MSHA has decided that the PPOV is not required. We have worked with MSHA, and are continuing to enhance many aspects of the mine’s operations and safety, including implementation of the National Mining Association’s CORESafety Program,” said Phillips S. Baker, Jr., Hecla’s President and Chief Executive Officer.

    The Lucky Friday mine resumed operations in the first quarter of 2013. Production levels are expected to ramp up to normal production levels by mid-year as rehabilitation work continues, and the mine is expected to produce approximately two million ounces of silver for the full year 2013, and approximately three million ounces of silver in 2014.

    The Company has recalled the employees necessary to reach full production and arranged for all employees, both returning and new, to receive supplemental safety training, with enhanced procedures for risk assessment and accident prevention designed to improve existing safe work practices. Ground support has been upgraded for over 8.25 miles of underground workings.

    Sky

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