Is Silver Wheaton Corp Still a Buy?

Silver Wheaton (NYSE: SLW  ) has benefited from the recent recovery of silver prices as shares of the company have rallied by more than 26% year to date. Until the company releases its fourth quarter earnings report and 2014 guidance at the end of March, let's examine what Silver Wheaton's investors should expect from the company in 2014. Let's also compare its current valuation to other precious metals streaming and royalty companies such as Franco-Nevada (NYSE: FNV  ) and Royal Gold (NASDAQ: RGLD  ) . 

Silver and Silver Wheaton
The correlation between Silver Wheaton and the price of silver is very strong and positive; thus, investors who wish to take a position in silver could also consider Silver Wheaton. The chart below shows the progress of the normalized price of silver and Silver Wheaton's stock in the past couple of months. Prices are normalized to the end of December 2013. 

Source: Bloomberg and Google finance

Higher production in 2014
The company has yet to release its guidance for 2014, but due to its decisions in 2013, the company's production is likely to rise again this year. Specifically, Silver Wheaton acquired the Salobo mine in Brazil and the Sudbury mine in Canada at the beginning of February 2013. This year, unlike last year, they will produce for Silver Wheaton for a full year. Silver Wheaton's management also believes these mines have the potential to increase their yield in the coming years. 

The company also purchased from Hudbay Minerals 50% of the life of a gold producing mine from the Constancia Project at the beginning of November 2013. These purchases will increase Silver Wheaton's gold production and thus may improve its precious metals mix. 

Silver Wheaton and other precious metals companies
Silver Wheaton, Royal Gold, and Franco-Nevada have similar businesses -- they purchase the rights to the output of precious metals mines and receive the metals at a relatively low and fixed rate -- and the level of risk they bear doesn't vary too much. The main difference they have is their precious metals mix. Silver Wheaton's revenue heavily relies on silver, while Royal Gold and Franco-Nevada sell mostly gold.

This difference also has an effect on profitability. For example, in 2013 Silver Wheaton's operating profit margin was 56%, Royal Gold's was 50%, and Franco-Nevada's was 48%. These differences in margins are mostly because silver tends to be more profitable than gold for streaming companies, which could translate to higher dividends for investors in silver producers. 

Comparing Silver Wheaton to Silver ETF
Silver Wheaton might be a better investment opportunity not only compared to other precious metals streaming companies but also compared to silver ETFs. Investors who seek to invest in silver might consider a silver ETF such as iShares Silver Trust (NYSEMKT: SLV  ) . But Silver Wheaton has more to offer in return than a silver ETF has, and the risk isn't much higher: 

  • Silver Wheaton pays a quarterly dividend based on the company's performance in recent quarters, while the only return investors of iShares Silver Trust have is the appreciation of the trust;
  • The company is capable of increasing its production, which is another factor that could improve its valuation; 
  • Investors of iShares Silver Trust have to pay a fee of 0.5%, which only reduces the return on the investment. 

Therefore, investors who seek to add silver to their portfolio might be better off considering Silver Wheaton rather than silver ETFs such as iShares Silver Trust. 

Final note
The silver rally has helped pull up shares of Silver Wheaton, and the company has higher operating profit compared to other precious metals royalty and streaming companies. On top of this, Silver Wheaton's potential rise in production in 2014 is likely to further contribute to improving its valuation. 

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