Silver Wheaton's partnership with Goldcorp. Source: Silver Wheaton.
Even as the Dow Jones Industrials Average (^DJI +1.24%) has soared to unprecedented heights throughout 2014, the precious-metals arena has remained solidly on the sidelines, stumbling as bullion prices remain at multiyear lows and prospects for mining companies grow dimmer. For silver and gold streaming specialist Silver Wheaton (SLW +7.35%), what seemed like a solid recovery just a couple months ago has turned into yet another disappointment, as concerns about the sustainability of the global economic recovery produced another downturn in prices of both previous metals.
Yet even with the company's poor performance lately, Wall Street analysts maintain a favorable view on Silver Wheaton, with most giving the stock positive ratings and expecting better things from the company in the future. Let's take a closer look at Silver Wheaton to see why Wall Street's finest see potential for the company.
A look at Silver Wheaton
|
2014 YTD Return |
0.3% |
|
Average Price Target |
$30.47 |
|
Implied Potential Return |
52% |
|
Ratings |
5 Strong Buy, 11 Buy, 2 Hold |
Source: Yahoo! Finance.
Why Wall Street loves Silver Wheaton
One of the best things that Silver Wheaton has going for it is that it doesn't have any of the overhead costs or operating hassles of actually running gold or silver mines. Instead, its streaming model involves providing financing to mine operators, taking future streams of metal production in exchange, and giving Silver Wheaton the right to buy silver and gold at a discount to the prevailing market price. The streaming business model involves less risk than traditional mining companies face, as Silver Wheaton has no direct exposure to the consequences of accidents or other downtime-producing incidents, nor does it have to deal with labor costs and other issues.
Source: Silver Wheaton.
As a result, Wall Street largely sees Silver Wheaton as a way to profit from rising precious metals prices. For years, Silver Wheaton's contracts essentially made it a leveraged play on silver, and the company's diversification strategy, including more gold streaming contracts, broadened Silver Wheaton's exposure to the precious metals complex. Even with many analysts questioning whether precious metals will ever regain their highs from two or three years ago, Silver Wheaton has opportunities to profit when prices are lower.
Silver Wheaton: Dealing with a tough industry environment
Yet as Silver Wheaton shareholders have seen, the company is far from immune to bad conditions in the precious metals market. Because Silver Wheaton's contracts give it a share of production, anything that results in one of its partners producing lower volume affects its prospects as well. One of the biggest examples of how that can hurt Silver Wheaton involves Barrick Gold (NYSE: ABX) and its Pascua-Lama project in South America. Due to delays in project development, Barrick and Silver Wheaton had to renegotiate their streaming agreement, resulting in the deferral of expected streams of revenue for Silver Wheaton going forward.
Source: Silver Wheaton.
Moreover, Silver Wheaton shareholders get hit in another way during tough times. Silver Wheaton's dividend policy pegs the payouts for any given quarter to the average operating cash flow generated over the preceding four quarters. With silver prices having slid so far, investors have already seen the huge impact of that policy, with dividends being cut in half between mid-2013 and the latest payout back in August. Further erosion in cash flow could result in even smaller dividends in the future, taking away what was once one of Silver Wheaton's strongest attributes.
Silver Wheaton's flat performance so far in 2014 shows that even when Wall Street loves a stock, it's no guarantee that it will see good returns in the short run. Still, if Silver Wheaton can stick to its guns and take advantage of low prices to negotiate favorable contracts with weaker players in the mining industry, the long-run profit potential could be truly enormous -- and benefit those shareholders who were willing to take the plunge during uncertain times.
