Silver Wheaton (NYSE:SLW) is set to release earnings on March 21 after the close, followed by a conference call the following morning with company officials. Despite having released new numbers on Tuesday that show the company now has reserves well in excess of 1 billion ounces of silver, the stock started Wednesday’s session lower as investors braced for operating results, and what is likely of greater importance, guidance. Silver Wheaton has long been one of the darlings of the mining industry, largely as a result of its business model, but the stock has suffered as silver has stagnated lately. While the specifics have changed, I still see Silver Wheaton as a great play in silver at current levels and an important part of a well-diversified portfolio.

Growing reserves
In Tuesday's press release, Silver Wheaton announced that attributable proven and probable reserves on a silver equivalent basis had risen to 1,116.1 million ounces; that number reflects 851.4 million ounces of silver and 4.96 million ounces of gold. This is a record level for the company and represents a 38% increase over the previous year. During the same period, attributable measured and indicated reserves rose to 603.2 million silver equivalent ounces, a 28% increase over the previous year. These figures leave Silver Wheaton solidly in the lead for largest silver reserves in the world.

Highlights from the previous year, also mentioned in the press release, include the addition of new streams from HudBay Minerals (NYSE:HBM) and Vale (NYSE:VALE). The HudBay acquisition consisted of a silver stream from the Constancia project and a precious metals stream from the 777 mine. The Vale acquisition was for 70% of the gold from various Sudbury operations for the next 20 years and 25% of the gold from Vale’s Salobo mine for the life of that mine. 

The latter is of particular note because it represents the first major gold acquisition by Silver Wheaton. When Motley Fool contributor Christopher Barker had an opportunity to speak with CEO Randy Smallwood earlier this quarter, he assured Barker that the company continues to favor silver. He did acknowledge, however, that a necessary part of the company’s prospects for growth must come from diversified precious metal plays. Look for commentary along these lines in both the company’s guidance and during the conference call as it has the potential to impact Silver Wheaton’s cash flows.

What to expect
The consensus analyst estimates for the quarter are for earnings per share of $0.49 on $259.4 million in revenue. These figures represent EPS growth of 19.5% on revenue growth of 35%. With the company thus far maintaining an operating margin just below 74%, these figures are solid and largely attributable to the company’s optimized operating model. As we learned from First Majestic (NYSE:AG) when it recently released earnings, despite having a record quarter for production, the company faced mounting cost pressures from both regular operations and environmental concerns. 

Silver Wheaton functions as a silver streaming company, meaning that it buys the production of specific mines (streams) from other miners. In most instances, these streams are purchased at a fixed price that is agreed upon at the time the production is sold, giving the company a static cost structure. As of last quarter, Silver Wheaton’s average cost of silver was roughly $4.04. As a part of the Vale deal, the company agreed to a fixed price on the gold it will buy from Vale at $400 per ounce. The spread that exists between the purchase price and the prevailing market price represents the profit that the company is able to achieve. This is a critical differentiator for the company and why it remains my favorite silver play.

The outlook for silver
As I recently discussed in detail, one of the primary reasons that silver looks more attractive under existing conditions than gold is that the industrial demand for silver is rising faster than supply. Silver demand is expected to rise to roughly 800 million ounces per year in the immediate term from the 550 million-700 million ounce range over the last few years. With applications from health care to high tech, silver has value as more than a safe haven play or inflation hedge.

Given the positives for silver and the superior business model used by Silver Wheaton, there are compelling reasons to have an allocation to the stock. Even if the economy continues on its apparent course of stabilization, silver should be a solid investment. The lukewarm reaction to the big reserve announcement suggests that investors are waiting for earnings figures to move the stock. While I like the company’s chances, the prudent investment choice is to wait; you might miss the initial pop if things look good, but a disappointment may be a blow worth avoiding.