While depressed silver and gold prices put pressure on commodities companies' profits, they present business opportunities for some. Streaming companies like Silver Wheaton (SLW 2.12%) could take advantage of low asset prices to secure new contracts. This is exactly the company's plan, as was outlined during the recent earnings call.
Good time to secure new streaming deals
Silver Wheaton stated that its team was busy pursuing value-enhancing acquisitions. After a rise early in the year, silver and gold prices returned to previous levels. This makes equity and debt financing more difficult for miners. For most miners, equity financing at current share prices will lead to very significant dilution for shareholders. On the other hand, debt became more expensive with the decline of silver and gold prices.
In this environment, streaming becomes an attractive option, as a miners receive a solid upfront payment in exchange for a share of future production. This makes the current year a good time for Silver Wheaton to secure new streams.
The only thing that can restrain Silver Wheaton from making new deals is the amount of available financial resources. The company finished the first quarter with $82 million of cash on the balance sheet. What's more, Silver Wheaton has to make a final $135 million gold stream payment to HudBay Minerals this summer. The company stated that it had the option to deliver this payment in Silver Wheaton shares. Given the amount of cash on the balance sheet, Silver Wheaton is likely to take this option. At Silver Wheaton's current share prices, this will lead to a less than 2% dilution for the company's shareholders.
Trading at a discount to other companies in the field
Silver Wheaton is trading at less than 20 times its future earnings, a significant discount to companies like Royal Gold (NASDAQ: RGLD) and Franco Nevada (FNV 0.97%). The market gives more value to Royal Gold and Franco Nevada; both companies trade at 42 times their future earnings. The reason for this discount is Silver Wheaton's high exposure to silver prices, which have recently underperformed gold prices.
What's more, Franco Nevada and Royal Gold have significant amounts of cash on their balance sheets, which is readily available for new royalty and streaming deals. Silver Wheaton also has higher debt, which it took to acquire gold streams from Vale's Salobo and Sudbury mines back in 2013.
During the first quarter earnings call, Silver Wheaton stated that it was happy with the current debt level and did not intend to use its operational cash flow to repay a portion of this debt. Importantly, this $1 billion debt is bearing an interest rate of less than 2%, so interest expenses do not weigh on the company's performance.
Bottom line
Silver Wheaton continues to be a solid performer. With first quarter average cash costs of $4.57 per silver equivalent ounce, the company is positioned to deliver stable cash flow even in the low-price environment. Silver Wheaton is trading at a significant discount to Royal Gold and Franco Nevada, one that could be reduced if silver prices manage to hold at current levels. The company targets production growth of nearly 35% in five years, but this number could be revised upward if Silver Wheaton is successful securing new deals this year.
