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Silver Wheaton (SLW)

December 16, 2009 Company Profiles, Silver Stocks No Comments

Silver Wheaton (SLW) is another royalty company that is high on my list.  BuyGoldCo focuses on gold, but in reality the site is devoted to precious metals of all types and Silver Wheaton is an ideal candidate when you are looking for a company that focuses on silver.  The Corporate Profile tells the whole royalty story in two easily understood paragraphs.

“Established in 2004, Silver Wheaton has quickly positioned itself as the largest silver streaming company in the world.  The company has entered into seventeen agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver production, at a low fixed cost, from high-quality mines located in politically stable regions. Forecast 2009 production is 16 million ounces of silver and 17,000 ounces of gold, for total production of 17 million silver equivalent ounces.  By 2013, annual production is anticipated to more than double to approximately 39 million ounces of silver and 20,000 ounces of gold, for total production of approximately 40 million silver equivalent ounces.  No ongoing capital expenditures are required to generate this growth and Silver Wheaton does not sell forward its silver sales.”

“Silver Wheaton’s industry-leading growth profile is driven by a portfolio of world-class assets, including silver streams on Goldcorp’s Peasquito mine in Mexico and Barrick’s Pascua-Lama project straddling the border of Chile and Argentina.  The company’s unique business model creates significant shareholder value by providing considerable leverage to increases in the silver price while reducing the downside risks faced by traditional mining companies.  Silver Wheaton has an experienced management team with a strong track record of success and is well positioned for further growth.”

Silver Wheaton offers all of the upside of silver without the costs of the day to day production that the companies that actually do the mining face.  Let’s examine what this means in depth.

How  Does This Royalty Process Work?

Silver Wheaton pays an average of $4 per ounce for each ounce of silver produced from the companies in which it has purchased royalties.  These royalties are subject to a maximum increase of 1% per year.  Silver, which is currently trading at $17.64 per ounce as I write this, would provide $13.64 of operating income per ounce.  That’s not a bad return for a $4 per ounce investment, but this is just the beginning.  Silver has lagged behind gold in gold’s run to $1,224, but that is about to change as we come out of this latest consolidation period.  When gold moves to $1,278 and beyond, silver will play catch up in a hurry.  Silver should move dramatically upwards for the next 3 to 4 years, for reasons that we will discuss shortly, but suffice it to say that Silver Wheaton will be the premier silver play during that period.  Because Silver Wheaton is a royalty company, where no actual mining takes place, they have, as of June 2009, only 5 permanent employees, so their corporate overhead is minimal.

Silver Wheaton Is Growing Silver Wheaton (SLW)

How About A Tax Free Bonus!

Silver Wheaten is a  Canadian based company, headquartered in the Caymans. That spells no income tax, which is a huge benefit for any company.  Unless the tax laws change, Silver Wheaton will only pay capital gains tax on investments.  mines, that Silver Wheaton has royalties with, develop, they often produce additional reserves, thereby either increasing the annual production for Silver Wheaton or  extending the life of the royalty (depending on the conditions of the contract).  In other words, upside potential can expand as the mines are worked.

Is Silver’s Time Near?

Gold and silver have historically been used as hedges against inflation  and the devaluation of currencies by governments.  They are now and have always been recognized world wide as currencies.  As an investor you must be able to see the reality which surrounds the market in which  you are investing.  Without trying to alienate my more liberal readers, it is clear that the Obama administration has no intentions of encouraging a strong dollar and in fact they are doing everything in their power to devalue the dollar so that they can reduce the debt payments by paying them back with dollars that are worth less, if not worthless!  Silver can only rise as the inevitable inflation takes hold of the U.S. dollar.  As the silver prices rise, the contracted purchase price of the royalty can only increase 1% per year of the previous year’s purchase price.  The reality of the current situation will put more profit into Silver Wheaton’s shares as the inflation increases the net margins per ounce.  There is a chance that the political situation could change and adults could regain power in the Congress, but if that were to become the case, things should be reevaluated at that time.

Demand for Silver is Increasing

The majority of silver is a byproduct of base metals mining which has slowed dramatically since the beginning of the recession/depression we are currently suffering through.  As the economy recovers, demand will increase and the miners will not be able to produce the silver fast enough to meet the demand.  As you read this next article about possible new demand for silver, keep in mind that silver is one of the key ingredients of the solar panels panels that are being pushed as the administration’s answer to our energy problems.

Silver-Zinc Batteries  Coming In 2009 With 40% Better Run Time Than Lithium-Ion

From Gizmag.com

Lithium-ion is, by far, the most common form of rechargeable battery found in today’s mobile devices. However, a shift towards silver zinc may be looming on the horizon thanks to a new product in development by ZPower, Inc. Ross E. Dueber, president and CEO of the company is scheduled to address attendees at the Batteries 2008 conference in Nice, France starting tomorrow, where he will tout the advantages of his silver-zinc technology scheduled to launch in “a major notebook computer in 2009.” Whether we will find out the identity of this “major notebook” in the coming days remains to be seen, but the impending release does offer some hope for consumers frustrated by the battery life of their precious portable gadgets.

First and foremost, silver-zinc can offer up to 40 percent more battery life than traditional lithium-ion batteries and 200 + cycles at 100% discharge. ZPower claims that their product contains no toxic chemicals and is up to 95% recyclable which I would assume means that they have addressed the problem of mercury leakage that plagues silver-zinc batteries at the end of their life-cycle. They also noted that the batteries feature a water-based chemistry that is completely non-flammable (unlike lithium-ion that has a reputation for the occasional explosion). The one major drawback of silver-zinc is the cost of the silver itself, but word is that ZPower is planning on a trade-in recycle policy that will help to offset costs. Sounds good, but we will have to wait and see if the notebook coming out next year will be important enough and affordable enough to drive sales.

What Does This All Add Up To?

With Silver Wheaton, we have a low overhead, virtually tax free company that profits from a rising silver price, in a time of rising inflation and increasing demand for its product, that is not hampered by the logistics and costs of actually mining the silver.   It doesn’t get any better than that!

SLW From Inception1 Silver Wheaton (SLW)

Silver Wheaton Price Chart From Its Founding to Dec 2009

Silver Wheaton has lagged in its recovery to its pre-financial meltdown price but that is about to change.  How high can it go?  I am looking at $35 to $40 per share on the conservative side.  If the dollar has an orderly move down to .62 over the next couple of years, my estimate will hold.  If there is a panic out of the dollar, than silver could go way higher for a while.  This is the environment in which we find ourselves and when I see potential profits of between 100% and 125% on the conservative side, I am all in.

Silver Wheaton is another royalty company that is high on my list.  I own this stock and I am acquiring more on dips in price.  Silver Wheaton is an ideal candidate when you are looking for a company that focuses on silver. As is always the case, do your own due diligence before investing in anything.  After all it is your future and your money!

Till next time, good luck and good trading!

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