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Why Silver Wheaton Corp Will Continue to Outperform Its Peers

By Vladimir Zernov – Mar 25, 2014 at 3:03AM

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Silver Wheaton's low costs and solid financial position provide it with opportunities in 2014.

Silver prices have recently returned to the levels seen at the beginning of 2014. However, several silver companies have continued to demonstrate great stock performance this year, with Silver Wheaton (WPM 1.05%) among them. Silver Wheaton is not a traditional silver miner, as it acquires silver and gold streams in exchange for an upfront payment and doesn't operate any mines. This is a big advantage in the current low-price environment, and it will help Silver Wheaton outperform most of its peers.

Less vulnerable to silver price downside because of low costs
Current silver prices are close to the cost of production for most silver miners. For example, Pan American Silver (PAAS 0.33%) forecasted that its all-in sustaining costs would be $17-$18 per ounce of silver in 2014. Thus, declining silver prices leads to significant margin erosion for Pan American Silver. If silver prices dip below $18, the company's profitability will be brought under question.

Silver Wheaton's business model allows it to stay operational cash flow -- positive at almost any possible silver price. For example, Silver Wheaton receives 25% of Goldcorp's (GG) Penasquito mine production for just $3.99 per ounce of silver. Silver Wheaton also gets 100% of production of another Goldcorp mine, Los Filos, for $4.13 per ounce of silver. With such low costs, Silver Wheaton is well protected from the silver price downside. Yes, price downside cuts into Silver Wheaton's profits, but it doesn't endanger the company's future.

Low-price environment offers opportunities
Low silver and gold prices decrease capitalization of precious metals producers. This is why miners find it increasingly difficult to finance new projects by issuing equity, as their share prices are typically depressed. The issue of additional stock could still be viable for market leaders like Barrick Gold (GOLD 1.20%), which raised as much as $3 billion in equity offering back in November. However, this path is almost impossible to follow for smaller miners.

The other opportunity for smaller players to raise financing is to issue debt. Unfortunately, interest rates tend to be relatively high for smaller miners. For example, Hecla Mining (HL 0.85%) received a 6.875% interest rate for its eight-year senior notes, which were issued in the first half of 2013. As equity and debt issues could be disadvantageous for miners, they turn to streaming companies like Silver Wheaton.

Importantly, Silver Wheaton has the necessary liquidity to finance new deals. The company has $1 billion of available credit facility plus almost $100 million of cash on the balance sheet. Last year, Silver Wheaton took the opportunity of lower gold prices to acquire interests in gold production from Vale's Salobo and Sudbury mines. There is a possibility that Silver Wheaton will make a similar move this year, as the prices of gold and silver are lower than they were at the beginning of 2013, leading to lower streaming prices.

Bottom line
Silver Wheaton is well positioned to outperform most silver miners this year. The company's low costs provide stability for its operational cash flow. While low silver and gold prices are negative for mine operators, Silver Wheaton could take them as an opportunity and acquire more silver and gold streams at attractive valuations. The company's solid financial position allows it to do just that.

Vladimir Zernov has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. 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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