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Where Will Silver Wheaton Stock Be in 10 Years?

By Rich Duprey, Sean Williams, and Matthew DiLallo – Updated Dec 29, 2016 at 3:03PM

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We asked three Fools who focus on the precious metals industry for their views on the premier silver-streaming company as a long-term investment.

Image source: Getty Images.

There's little question Silver Wheaton (WPM 1.05%) remains a premier precious metals stock. As the largest pure precious metals streaming company in the world, it expects to produce an equivalent of 54 million silver ounces of silver and 265,000 ounces of gold this year. Yet the prices of silver and gold have only recently begun to recover, and remain well below the highs they hit back in 2011.

Any sudden shock to the markets can cause silver and gold to rise or fall dramatically, which would impact the value of Silver Wheaton's streaming deals -- and its share price. With this variable in mind, we asked three of our regular precious metals contributors why investors should buy -- or avoid -- this blue-chip metals stock right now. Here's what they had to say.

Solid precious-metal fundamentals and cheap access to financing should yield great results

Sean Williams: Pardon my bias as a Silver Wheaton shareholder, but I believe this streaming giant could have the potential to double or even triple over the next decade. Sound crazy? There are two particular reasons why I feel this way.

To begin with, the underlying fundamentals for precious metals still look strong, even if we've witnessed recent weakness in gold and silver prices. Opportunity costs for owning gold and silver should remain relatively low even if the Federal Reserve raises interest rates a couple of times. Low interest rates mean low yields for bonds and bank CDs, meaning trading out of these near-guaranteed returns for gold or silver may make sense. It's tough to see interest rates rising substantially after more than eight year of near record-low rates.

Supply and demand fundamentals also favor physical gold and silver. Supply has been growing at a snail's pace while investment demand has surged in recent quarters, which is usually a recipe for higher prices. Meanwhile, we're likely to see significant growth in silver demand from the solar industry, which could positively impact silver's per ounce price.

Image source: Getty Images.

As for Silver Wheaton itself, its real advantage is the diversity of its streaming deals and the relative predictability of its cash flow. Silver Wheaton typically works out very long-term or life-of-mine deals with its mining company partners in exchange for upfront cash they can use to develop or expand their operations. The result is no residual mining costs for Silver Wheaton and a gross margins that hit $946 an ounce for gold and more than $15 an ounce for silver during the third quarter. It would take a near plummeting of gold and silver prices for Silver Wheaton to lose money.

Furthermore, interest rates being kept near record lows has given Silver Wheaton access to capital at a pretty inexpensive rate. With the assumption that it'll be difficult for multiple rate hikes to be implemented without a substantially adverse effect on the economy, the company should keep its access to relatively cheap capital for some time to come.

With industry-leading margins and a dividend to boot, Silver Wheaton has what could aptly be described as the best business model within the mining industry. A doubling or tripling of its valuation could be in the cards by 2026.

An even more diversified streamer

Rich Duprey: As the world's largest "streaming" player, with an enterprise value in excess of $11 billion, Silver Wheaton is arguably the premier pure play on silver. While it cut its teeth doing deals valued at around $100 million, it now has agreements with mining giants like Barrick Gold, Glencore, Goldcorp, and Vale, that run upwards of $1 billion or more. They provide the streamer with an estimated equivalent silver production this year of around 54 million ounces and 265,000 ounces of gold, but its future may be in making more deals with small, junior miners for around $20 million or so. Having more of them will allow Silver Wheaton to leverage them into larger financial gains.

The silver market, of course, has fallen hard over the past few years after the price of silver peaked at $50 per ounce in 2011. Today, it trades at a little over $18 per ounce. According to Reuters, that's also reduced the overall size of the deal market available, as well as the size of individual transactions. Just last year, there were $5 billion worth of deals up for grabs, with some individual ones valued as much as $1 billion. Today, the market for deals is around $2 billion and they're going for around $300 million to $500 million each.

Image source: Getty Images.

But that's OK for Silver Wheaton, because if it's able to attract more players to the market that might otherwise be frozen out due to their size or speculative nature, it could pay off handsomely down the road. Junior miners don't have the same access to financing that their larger brethren do, so they would likely be willing to give up a portion of their future production to Silver Wheaton at lower prices than they might be able to get on the market in exchange for cash in advance they can use to ramp up their growth.

Pocketing greater numbers of the smaller deals should serve the silver streamer well in the decade ahead, as there looks to be a structural shift in favor of higher silver prices coming in the future.

Same great company, just much bigger

Matt DiLallo: I do not think that the Silver Wheaton of tomorrow will be all that different from today's version, except it will be even bigger and likely generate a lot more cash flow. Driving that view is the fact that the company has already locked in a steady supply of low-cost gold and silver thanks to its streaming contracts. In fact, the company's current portfolio has more than 25 years of mine life left. Because of that, it has a clear line of sight to deliver about 55 million ounces of silver equivalent production per year through 2020. Even better, it only has to pay $4.52 per ounce for silver and $403 per ounce for gold for this production, which should enable it to generate a substantial amount of cash flow in almost any market environment.

That said, while there's a tremendous amount of stability in the near-term, Silver Wheaton has material optionality built into its portfolio via projects currently under development by its partners. These new mines could push its silver equivalent production up to as much as 80 million ounces annually in the years ahead.

Image source: Flickr via Eric Golub.

On top of that built-in growth, Silver Wheaton will almost certainly continue reinvesting a substantial portion of its cash flow and capital resources to acquire additional gold and silver streams. In the past year alone, the company has invested more than $1.8 billion in three different precious metal streaming deals. Given the capital intensive nature of the mining industry, Silver Wheaton should continue to have a steady supply of acquisition opportunities.

Bottom line, a decade from now, Silver Wheaton will undoubtedly be a much larger company given the embedded growth of its portfolio and the abundant acquisition opportunities that lie ahead. If I had to venture a guess, I would not be surprised to see it producing more than 100 million silver equivalent ounces per year at that time, or nearly twice its current output.

The silver lining to it all

The consensus seems to be that wherever Silver Wheaton lands a decade from now, it's sure to be on a plane higher than its current level. While forecasting too far into the future may be a fool's errand, investors can still use broad trends to gauge where a stock is headed. It seems safe to say there is still much value to be mined from this precious metals play.

Matt DiLallo has no position in any stocks mentioned. Rich Duprey has no position in any stocks mentioned. Sean Williams owns shares of Silver Wheaton. The Motley Fool owns shares of Companhia Vale and Silver Wheaton. We Fools may not 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.

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