Eyeing Par for Silver's Brightest Star

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The word par often conveys mediocrity. If you score par in golf, congratulations: You've just matched the course's intended score for the average player. But in stockspeak, par means $100 per share -- and I now think my top pick in silver will reach that milestone before the decade's done.

I pegged a truly golden opportunity for Foolish investors when shares of Silver Wheaton (NYSE: SLW  ) smacked a lowly price of just $2.51. The stock has advanced more than 700% during the subsequent 18 months. After a phenomenal run like that, how can I feel so assured of such enormous strength to come? Let's walk through the rationale, beginning with a glimpse of the silver stream specialist's first-quarter earnings.

Silver Wheaton earned $44.6 million for the quarter, and once again excelled at producing unobstructed cash flow with a fresh $57.6 million injection from operations. After producing 5.5 million silver equivalent ounces (SEOs) to start the year, the company reiterated its 2010 production target of 23.5 million SEOs. That mark implies a 35% surge in production over 2009 volumes, even after 2009's 46% increase from the previous year.

This company is quickly growing toward its 2013 target of 40 million SEOs ... yet the stock has only just recently surpassed both the prevailing price of silver and its previous all-time high. Goldcorp's (NYSE: GG  ) enormous Penasquito operation continues to meet or exceed ramp-up expectations, and Barrick Gold's (NYSE: ABX  ) Pascua Lama looms as another electrifying growth catalyst by 2013.

Although low-cost leaders Hecla Mining (NYSE: HL  ) and Silvercorp Metals (NYSE: SVM  ) enjoy loyal investor followings of their own -- and deservedly so -- Silver Wheaton's essentially fixed-cost business model offers investors a more reliable means of calculating future cash flows, corresponding to their own anticipated price trajectories for silver. The company is already enjoying an operating margin of $13.16 per silver ounce in the first quarter. If this multiyear bull market trend continues, it will yield expanding cash flows for Silver Wheaton, just as the industry struggles to fast-track mine development in response to sustained demand.

With the world's credit markets still highly uncertain and tenuous, I believe that Silver Wheaton's capacity to provide miners with up-front development capital in return for silver streams will remain in high demand. Punctuating that broader expectation, Taseko Mines (AMEX: TGB  ) reported last week that it sold 22% of future gold production from the Prosperity mine to Franco-Nevada for $350 million. Unlike typical royalty arrangements, this deal notably mimics the Silver Wheaton business model.

In conclusion, I believe Silver Wheaton's expanding cash flow, combined with sustained demand for mine development capital, will yield further acquisitive growth and greater shareholder value. Based upon current assets and silver prices, and despite the incredible share advance noted above, I still consider the shares fundamentally undervalued. Coupled with my long-held silver target price of $50 per ounce, I expect that sustained acquisition activity and continued organic growth will propel Silver Wheaton shares into triple-digit territory (adjusting for any splits, of course) by the time this precious-metals bull market reaches its zenith.

Where do you think Silver Wheaton shares -- and precious metals in general -- are headed? Share your opinions in the comment box below.

More than 1,800 CAPS members, including 600-plus All Stars, have selected four-star pick Silver Wheaton to outperform the S&P 500. Create your own portfolio at Motley Fool CAPS and get on your way to becoming an All-Star investor. It's free and fun!

Fool contributor Christopher Barker carries a silver coin which reads: "Honest value never fails." He can be found blogging actively and acting Foolishly within the CAPS community under the username TMFSinchiruna. He tweets. He owns shares of Hecla Mining, Silver Wheaton, Silvercorp Metals, and Taseko Mines. The Motley Fool's disclosure policy is 0.999 pure.

Read/Post Comments (11) | Recommend This Article (32)

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 17, 2010, at 8:47 PM, redbeard33610 wrote:

    As for mf (small letters) the article ends in

    "The Motley Fool's disclosure policy is 0.999 pure." I know exactly what the Motley Fool means in that sentence, but doesn't .999 round up to just 1%?

    just one wondering Redbeard in Tampa FL

  • Report this Comment On May 17, 2010, at 8:47 PM, sonnypage wrote:

    I share Christopher's enthusiasm for Silver Wheaton. I bought my first shares back on October 28th, 2008, at $2.98; then got very seriously long a few weeks later in December in the mid $5s. This has been by far my largest position ever since.

    Every time I consider buying shares in a "true miner", I always come back to Silver Wheaton, which is of course, a silver "streaming" company. You are getting all of the bang of a miner but with much less risk.

    My own opinion is that we are still very early in this trade. I am not sure when we get to Christopher's triple digit target, but I am very certain that get there we will....and I will be there.

  • Report this Comment On May 17, 2010, at 9:02 PM, XMFSinchiruna wrote:


    An understandable question. :)

    Bullion products are typically marked .999, equating to a purity of 99.9%.

  • Report this Comment On May 17, 2010, at 9:12 PM, redbeard33610 wrote:

    Thanks for the purity answer. I did not know that was how silver was marked. Thank you for the info :) Now I know the "Rest of the Story."

    one better informed Redbeard in Tampa FL

  • Report this Comment On May 17, 2010, at 9:16 PM, topsecret09 wrote:

    Sinch.... 375 shares of Taseko, or 100 shares of Silver Wheaton ?

  • Report this Comment On May 18, 2010, at 7:02 AM, outoffocus wrote:

    Sweet I got linked. =D

  • Report this Comment On May 18, 2010, at 8:55 AM, XMFSinchiruna wrote:


    Sorry ... I am not able to offer such specific recommendations on individual trades like that.


    The trip to par may be long, and frought with stunning volatility. Along the way, the reminder that we began from a late 2008 low of $2.51 per share will provide lasting context.

  • Report this Comment On May 18, 2010, at 9:01 AM, Gonzhouse wrote:

    Like topsecret09, very interested in comparing TGB with SLW. I'm long both, more TGB than SLW.

  • Report this Comment On May 18, 2010, at 10:20 AM, XMFSinchiruna wrote:

    I'm long both, more SLW than TGB, though both are core holdings. They are, of course, very different companies with very distinct sets of assets and almost incomparable business models.

  • Report this Comment On May 18, 2010, at 11:03 AM, Br0oklyn wrote:

    TGB Long Hold

  • Report this Comment On June 11, 2010, at 11:23 PM, timezmoney wrote:

    The demand for precious metals exceds the supply as people trade paper for gold and silver, this demand can drive the precious metals sky high. I see $5,000 gold in five years.

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SLW $24.33 Down -0.08 -0.33%
Silver Wheaton CAPS Rating: ****
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