As New Year's Eve quickly approaches, and we prepare to make our 2013 investing resolutions, it is a good time to reflect on the materials sector in the year that was 2012. In this December series, our writers will be recapping some of the most popular, highest-performing stocks in this sector. We will examine whether the gains these companies provided their shareholders in 2012 are sustainable, or whether they merely can be attributed to one-time events or fizzling trends. Consider these pieces as gifts to benefit our Foolish, long-term investors seeking exposure to the materials sector. Enjoy, and Fool on!
Four years have elapsed since I brought this stock to the attention of my readers at $2.51 per share, and Silver Wheaton (SLW 0.44%) remains the gift that keeps on giving. With a solid 28% advance thus far during 2012, the popular silver streamer delivered the kind of leverage investors are looking for over a corresponding 19% advance for the silver bullion proxy iShares Silver Trust (SLV 1.84%).
The pace of deal-making activity may have slowed somewhat from the company's early days, but production growth continues at an astounding pace as Silver Wheaton's key suppliers bring their world-class assets into production and extend the working lives of those operations through successful exploration. The deals that are being forged, meanwhile, are quite large in scale, with the next stream transaction likely to carry annual production beyond 50 million ounces of silver!
5 million new reasons to invest
The company inked only one new stream transaction during 2012, but what a sweet deal it was! By pitching in $750 million toward the cost of bringing HudBay Minerals' (HBM 0.10%) Constancia mine in Peru into production, Silver Wheaton secured for itself a bonanza of ultra-low-cost silver production from both the existing 777 mine in Manitoba, as well as the pending Constancia operation. Sweetening the pot further was a gold stream component for 100% of gold output from the 777 mine until at least 2016, and 50% of gold production thereafter. All told, the deal lifted Silver Wheaton's anticipated annual production by 2016 from 43 million to 48 million silver-equivalent ounces, giving investors 5 million new reasons to adore Silver Wheaton.
Meanwhile, the company has turned one of the investing world's most profitable business models into a veritable cash machine that continuously refreshes the treasury to support the next landmark deal the company will select. With more than $1 billion on hand even after making an initial payment to HudBay, Silver Wheaton remains in prime condition to forge yet another accretive stream transaction the moment an opportunity is identified that meets the company's core criteria of selecting high-quality, long-life assets that present a strong likelihood of resource expansion through subsequent exploration.
A couple of minor hiccups worth noting
While this year has yielded another solid performance from Silver Wheaton -- along a long-term growth trajectory that I believe will ultimately carry the shares to the $100 mark -- 2012 presented a couple of minor disappointments that we need to point out. Although none of the enormous cost escalation relating to the construction of Barrick Gold's (ABX 0.56%) Pascua Lama mine will be passed along to Silver Wheaton -- which is part of the beauty of Silver Wheaton's business model -- Barrick's announcement that first production will be delayed until the second half of 2014 does force investors to wait just a little longer for the next major surge in the company's production profile.
While the effects of Barrick's woes were limited to future production, Goldcorp (GG +0.00%) suffered a fairly substantial disruption of its world-class Peñasquito mine in Mexico that affected Silver Wheaton's bottom line during 2012. Goldcorp was forced to reduce 2012 production guidance for Peñasquito by 11% after drought conditions forced a temporary reduction in throughput at the mill. Goldcorp is scrambling to tap new wells to alleviate that shortage by 2013; in any event, Peñasquito remains a cornerstone asset for Silver Wheaton that will yield bountiful returns for many years to come!
Looking ahead to 2013
Aside from the periodic resource expansion that Silver Wheaton enjoys as the company's high-quality stream partners invest in brownfield exploration, the greatest upside catalysts to Silver Wheaton's shares during 2013 are likely to come from additional gains in the price of silver and the forging of at least one major stream transaction. That $1 billion liquidity position is burning a hole in Silver Wheaton's growth-minded pocket, and I have every confidence that the right project will emerge to help launch Silver Wheaton into the top spot as the world's leading silver producer even faster than it is already poised to do so.
I also think silver is likely to appreciate handsomely during 2013 as extremely bullish monetary policy collides with the expanding suite of industrial applications for this coveted metal. As a result of the company's essentially fixed cost structure, margin expansion continues to light the way for investors anticipating further outperformance from Silver Wheaton in 2013.
