Shares of Silver Wheaton (NYSE: SLW), a precious-metal royalty and asset streaming company, tumbled 12% in February, according to data from S&P Global Market Intelligence. The root cause of Silver Wheaton's weakness can likely be traced to two sources.
Unlike most mining companies that have to handle the high expenses of day-to-day mining and maintenance, Silver Wheaton doesn't have those costs. It merely pays large amounts of capital upfront to fund the expansion of existing mines or the development of new mines. In return, it gains long-term or life-of-mine access to a percentage of that mine's production at a well below market rate. While this model can be quite profitable, production is ultimately out of Silver Wheaton's hands, which can sometimes be problematic.
During February, one of Silver Wheaton's key long-term contracts experienced problems. Silver Wheaton has a long-term deal in place supplying it with all of the silver produced at Primero Mining's San Dimas mine, up to the first 6 million ounces per annum, then 50% of the excess. Primero recently announced that production at the San Dimas mine has come to a grinding halt because of a worker strike. Primero has been trying to cut costs at its flagship San Dimas mine in Mexico, and to do so it wants to lay off workers. In response to these layoffs, unionized workers have organized a strike. With no production coming out of San Dimas, Silver Wheaton's silver production would be expected to be adversely affected.
The second, and likely lesser, factor that pushed Silver Wheaton lower in February was probably profit-taking by short-term investors. In less than two months between mid-December and the first week of February, Silver Wheaton's share price had gained 34% in value with hardly a hint of a down day. February served as a reminder that the stock market is a two-way street.
As a shareholder of both Silver Wheaton and Primero Mining, I can say that the shutdown at San Dimas is unfortunate, but not a killer for either company, especially Silver Wheaton.
Silver Wheaton has more than a half-dozen major streaming contracts set up for silver and gold with multiple mining companies, meaning it isn't tied to the fate of a single miner. While San Dimas could adversely affect its silver production, it's also possible that its gold-producing assets and other silver-producing mines could make up the difference.
Additionally, Silver Wheaton's leading margins simply can't be ignored. During the third quarter, Silver Wheaton reported paying an average cash cost of just $4.51 per silver ounce and $390 per gold ounce. Based on today's physical prices, that works out to almost a $14 margin per silver ounce and more than $850 per gold ounce. No mining company feels the impact of rising gold and silver prices more than Silver Wheaton – and lately physical metal prices have been pushing steadily higher.
As long as its portfolio remains diversified, precious metals continue to thrive from the uncertainty created by a Donald Trump presidency, and interest rates stay low, Silver Wheaton will be a stock for mining investors to strongly consider buying and owning over the long run.