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SLW AT A GLANCE

P/E ► 231 LOW EV/EBITDA ► 90.3 HIGH ROA ► 1% AVG ROE ► 1.4% AVG Debt to Equity ► 0.396 HIGH Current Ratio ► 1.02 LOW Interest Coverage Ratio ► 637 HIGH

 

 

 

 

 

 

Silver Wheaton Corp (NYSE:SLW) is the world's only pure play silver middle man.^[1] SLW does not own or operate its own mines, but instead the company buys silver at below market prices via long-term contracts with five major silver producers: Goldcorp, Lundin Mining, Hellas Gold, and Glencore. SLW then sells the silver to major industrial customers at a markup.

Silver prices are the single largest determinant of the company's profitability. SLW's contracts, while indexed for inflation, allow the company to pay a fixed rate for the silver it purchases, regardless of silver price fluctuations. When silver prices rise significantly, the company is able to pocket the difference. When silver prices fall, the company still has to pay the same fixed price. Moreover, the company has no control over how much silver its mining partners produce. SLW is not compensated in any way if the mines miss production expectations.

Silver Wheaton expects production to be between 13-15M in 2008 and upwards of 25M by 2010. ^[2] The average price of silver has increased 175% from 2003 to 2007, and, as of June 30th 2008, silver rose to over $17/ounce. ^[3] SLW does not have to pay income taxes on its purchases or sales because SLW operates through its wholly owned subsidiary Silver Wheaton Caymans, which is located in the Cayman Islands.

Company Overview

Silver Contracts

In 2007, Silver Wheaton had contracts to buy silver from five mines (owner - location):

• Luismin (Goldcorp - Mexico)
• Zinkgruvian (Lundin - Sweden)
• Yauliyacu (Glencore - Peru)
• Stratoni (Hellas - Greece)

Silver Wheaton also added the Penasquito mine in mid 2007 which is owned by Goldcorp and located in Mexico.

The La Negra mine (Aurcana - Mexico) was added to the portfolio in mid 2008.

^[6]

^[7]

Equity Investments

SLW holds significant ownership positions in publicly traded companies owning substantial undeveloped silver resources. At Dec. 31, 2007, these positions had a market value of $119.4 million

On Feb 19, 2009 SLW announced $65.1 million ($0.28 per share) non-cash write-down (loss on mark-to-market) of long term investments to $21.8 million for fiscal 2008.^[9]

Trends and Forces

Silver Prices Have Risen 175% between 2003 and 2007

The historical price of silver has most often hovered around $5 per ounce of silver, however as of June 30th 2008 that price has risen to over $17/ounce. ^[10] In comparison, Silver Wheaton’s average cash cost in 2007 was $3.91/ounce of silver. ^[11] The growing price of silver has been complemented by Silver Wheaton's low purchase price, but this price is likely to be higher in new contracts if silver prices remain high. The high market price of silver has shielded SLW from a decrease in production in 2007. Production decreased 3.4% between 2006 and 2007, ^[12] but over the same time period the price of silver increased almost 16%. Silver Wheaton says that a $1/oz change in silver prices would change their 2008 earnings by $15M.^[13]

Silver demand has been rising due to increased usage from industrial applications like computers, TVs, cell phones, and many others. This demand has been augmented by the increasing inflation in the US because both silver and gold are used as inflation hedges. Demand for silver has been outpacing the annual production of silver since 1990. ^[14]

Silver Wheaton has No Control Over the Silver Mines

Silver Wheaton does not own, operate, or control the mines with which it is partnered. If the mines miss production expectations, temporarily halt production, or shut down then SLW is not compensated in any way. Silver Wheaton buys its silver from 6 different mines which combined to record 344.6M oz of proven and probable reserves in 2007. ^[15] Glencore’s Yauliyacu mine is located in Peru and is vulnerable to the political instability in that region. The Yauliyacu mine made up 4% of proven and probable reserves in 2007. SLW’s largest reserve source is the Penasquito mine owned by Goldcorp, it made up 62.7% of proven and probable reserves in 2007.

Silver Wheaton Pays No Income Taxes

Silver Wheaton operates through its wholly owned subsidiary Silver Wheaton Caymans. Silver Wheaton Caymans is based in the Cayman Islands where the company is exempt from income tax laws. A change in this law could significantly decrease earnings if Silver Wheaton has to pay income taxes.

Competition

Silver Wheaton is the largest public mining company with all of its revenue from silver. Silver Wheaton competes most closely with non-producing mining companies like Silver Standard Resources (SSRI). Other close competitors include Pan American Silver (PAAS), Bear Creek Mining Corporation (BCM) and Endeavour Silver (EXK).

References

1. ↑ Silver Wheaton Homepage
2. ↑ SLW 2007 Annual Report, pg.1
3. ↑ SLW 2007 Annual Report, pg.9
4. ↑ SLW 2007 Annual Report, pg.11
5. ↑
6. ↑ Google Finance, SLW Income Statement
7. ↑ Silver Supply Index
8. ↑ SLW 2007 Annual Report
9. ↑ Company Press Release [1]
10. ↑ Kitco Silver Prices
11. ↑ SLW 2007 Annual Report, pg.9
12. ↑ SLW 2007 Annual Report, pg.9
13. ↑ SLW 2007 Annual Report, pg.19
14. ↑ Silver Prices
15. ↑ SLW 2007 Annual Report, pg.23