The Single Most Important Thing Silver Wheaton Has to Prove in 2017

Silver Wheaton did a great job investing when miners were struggling. Now, it has to prove it made the right calls.

Reuben Gregg Brewer
Reuben Gregg Brewer
Feb 1, 2017 at 9:07AM
Energy, Materials, and Utilities

The precious metals downturn provided Silver Wheaton (NYSE: SLW) with a massive opportunity to invest when gold and silver miners were weak. Now that gold and silver prices are heading higher, though, its development projects will likely take center stage. And that's both a risk and an opportunity, which is why development progress will be so important to see in 2017.

Three small stacks of silver coins

Image source: Silver Wheaton.

No growth?

Silver Wheaton provided an interesting production forecast in January. It basically expects little growth in the silver and gold it receives from its partners' operating mines between now and 2020. That news comes after a period in which the company's production grew fairly rapidly due to new investments. With silver and gold prices solidifying, however, new investments like the roughly $2.6 billion it made in 2015 and 2016 with then-struggling partners Glencore and Vale SA (NYSE:VALE) will likely be harder to come by.  

A bar graph showing that the majority of Silver Wheaton's production growth will be coming from development projects over the next few years.

Silver Wheaton production growth forecast. Image source: Silver Wheaton.  

That sounds more dire than it is, however, because there's a lot of potential growth built into the company's streaming portfolio. The problem is that virtually all the growth will come from development projects. That's not inherently bad, but it does mean that investors need to pay particularly close attention to what's going on at these new mines and mine expansions. Proving it's made the right investments here is key to the company's near-term growth profile. 

Not an owner

That said, it's important to remember that Silver Wheaton is not a miner. It's a streaming company. That means that it makes up-front payments to miners in return for the right to buy gold and silver at reduced rates in the future. For example, in a late 2016 deal with Vale, Silver Wheaton provided a payment of $800 million for the right to buy future gold production from Vale's interest in the Salobo Mine at roughly $400 per ounce.  

Vale likes the deal because it is trying to build out its massive S11D iron ore mine and the commodity downturn left it short of funds. Silver Wheaton favors it because it gets access to cheap gold. But the key here is that Silver Wheaton doesn't own the mine. That reduces the inherent risks involved in running a mine, of course, but it also means that Silver Wheaton is dependent on Vale successfully operating that mine.  

An image describing the precious metals streaming business model that Silver Wheaton uses.

How Silver Wheaton's streaming model works. Image Silver Wheaton. 

That risk is even bigger when it comes to development projects because so many things could go wrong. For example, in a worst-case scenario, the expected resources could prove illusory. In that situation, Silver Wheaton's expected returns would go up in smoke. It often builds protective financial clauses into its contracts, but that merely provides a financial floor -- production growth, the real long-term drive of financial results, would have to be found elsewhere.

So the big question mark right now is whether Silver Wheaton's investments in development projects will pay off. Right now, that is probably the single most important thing for the company to prove in 2017. Breaking that down a little more, investors should ask two main questions: (1) Are the mine projects Silver Wheaton backed advancing on schedule, and (2) are Silver Wheaton's mining partners strong enough financially to see their projects through to completion?

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Only time will tell

Silver Wheaton used the precious metals downturn to great advantage in 2015 and 2016, adding valuable gold and silver streams to its portfolio. However, the company's projections for 2017 and beyond assume only modest growth from currently operating mines. That means that development projects will be the driving organic force behind production growth.

Since Silver Wheaton doesn't actually do the mining, the real question is whether the company picked the right assets and partners. So progress on its development investments is, at this point, one of the most important things to watch in 2017. If development is moving well, Silver Wheaton will have proven it made the right calls. Production growth, however, could be a problem if plans don't work out as expected.