Is Silver Wheaton Still a Buy?

Silver Wheaton (NYSE: SLW) has benefited from the recent recovery of silver as shares of the company rallied by more than 26%, year to date. Until the company will release its fourth quarter earnings report and 2014 guidance by the end of March, let’s examine what should Silver Wheaton’s investors expect from the company in 2014. Let’s also compared its current valuation to other precious metals streaming and royalty companies such as Franco-Nevada (NYSE:FNV) and Royal Gold (NASDAQ: RGLD).  

Silver and Silver Wheaton

The correlation between Silver Wheaton and the price of silver is very strong and positive; thus, investors, who wish to take a position on silver, could also consider Silver Wheaton.  The chart below shows the progress of the normalized price of silver and Silver Wheaton’s stock in the past couple of months. Prices are normalized to the end of December 2013.

slw and silver price Feb 2014Source: Bloomberg and Google finance

As you can see, the recent recovery of silver has coincided with the rally of Silver Wheaton’s stock. Looking forward, if the price of silver continues to rally, as it did in the past couple of months, investors of Silver Wheaton are also likely to benefit from this recovery. But the price of silver isn’t the only factor that affects the company’s valuation; Silver Wheaton’s production growth could also play a role in its valuation. 

Higher production in 2014

The company has yet to release its guidance for 2014, but due to its decisions in 2013, the company’s production is likely to rise again during this year. Specifically, Silver Wheaton acquired Salobo mine in Brazil and Sudbury mine in Canada at the beginning of February 2013. This year, unlike last year, they will produce for Silver Wheaton for a full year. Silver Wheaton’s management also believes these mines have the potential to increase their yield in the coming years.

The company also purchased from Hudbay Minerals 50% of the life of a gold producing mine from the Constancia Project at the beginning of November 2013. These purchases will increase the Silver Wheaton’s gold production and thus may improve its precious metals mixture. 

Silver Wheaton and other precious metals companies

Silver Wheaton, Royal Gold and Franco-Nevada have similar businesses — they purchase the rights to the output of precious metals mines and receive the metals at a relatively low and fixed rate, the level of risk they bear isn’t far off from one another. The main difference they have is their precious metals mixture. Silver Wheaton’s revenue heavily relies on silver, while Royal Gold and Franco-Nevada sell mostly gold. This difference also comes into effect in their profitability; e.g. in 2013, Silver Wheaton’s operating profit was 56%; Royal Gold’s profit margin, 50%; Franco-Nevada’s profitability, 48%. These differences are mostly because silver tends to be more profitable than gold for streaming companies. Therefore, Silver Wheaton’s operations are more profitable than other precious metals companies, which could translate to higher dividends for its investors.

Silver Wheaton might be a better investment opportunity not only compared to other precious metals streaming companies but also compared to silver ETFs. Let’s see why.

Comparing Silver Wheaton to Silver ETF

Investors who seek to invest in silver might consider a silver ETF such as Shares Silver Trust (NYSEMKT:SLV). But Silver Wheaton has more to offer in return than a silver ETF has, and the risk isn’t much higher:

  • Silver Wheaton pays a quarterly dividend based on the company’s performance in recent quarters, while the only return investors of Shares Silver Trust have is the appreciation of the trust;
  •  The company is capable to increase its production, which is another factor that could improve its valuation;
  •  Investors of Shares Silver Trust have to pay a fee of 0.5%, which only reduces the return on the investment;

Therefore, investors, who seek to add silver to their portfolio, might be better off to consider Silver Wheaton rather than silver ETFs such as Shares Silver Trust.

Final note

The rally of silver may have helped pull up the stock of Silver Wheaton. The company’s current valuation isn’t high compared to other precious metals royalty and streaming companies. Finally, Silver Wheaton’s potential rise in its production in 2014 is also likely to play a secondary role in improving its valuation.

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Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.