Silver Wheaton (
SLW
) is the worlds largest silver streaming company and competes
with silver manufacturers like Silver Standard Resources (
SSRI
), Pan American Silver (
PAAS
), Bear Creek Mining Corporation (CVE:BCM) and Endeavor
Silver (
EXK
). It purchases silver from mining companies that produce silver
as a by-product, typically gold and copper mining companies. The
company currently has fourteen silver purchase agreements and two
purchase agreements for precious metals like gold. Moreover, the
company also has the right to purchase all or a portion of the
silver production attributable. This gives it an edge over the
conventional mining companies as it does not incur any kind of
operational losses in volatile market conditions. Moreover, since
the company does not own any of the mines, it does not incur any
operational and capital costs associated with the production.
We recently launched coverage of Silver Wheaton with a
$50
Trefis price estimate
for the company's stock. Based upon the company's silver purchase
agreements, we have broken down our analysis of Silver Wheaton
into seven business segments:
-
Primero
- Barrick Gold
-
Goldcorp
- Capstone
- Glencore
- Lundin
- Other
Silver Wheaton Enjoys High Profit Margins on Silver
Sales
The business model is to provide some of the necessary capital
to other mining companies via an upfront payment to assist in the
building the mine. In return, it gets a portion of the silver for
the life of the mine at a fixed cost. Most of the that Silver
Wheaton works with produce silver as a by-product of their mining
operations and so is a win-win arrangement for both the
participating companies.
On average, Silver Wheaton pays $3.90/oz of silver procured
from the mining companies. This fixed price is subject to change
based on inflationary pressures. The company does not have to pay
for any additional cost for development of the project after the
initial payment. Silver Wheaton sells silver at spot market
prices and does not hedge it. These fixed price contracts help
Silver Wheaton attain high margins (close to 70%) across all its
divisions.
The expected upside to silver prices provides the company with
significant upside with regards to profit. By 2015, it is
expected that the company's EBITDA margins may touch the 80%
levels.
Silver Prices Supported by Emerging Markets
Growth
In 2005, China was a net exporter of silver, with more than
3,000 tons of silver exported. As internal restrictions on silver
exports from China took hold, gross silver exports declined to
1,575 tons in 2009, down 58% from the previous year. In
2010, it imported nearly 5,159 tons of silver, a surge of
approximately four-fold from the prior year imports. The growing
middle class and domestic demand in emerging economies of India
and China has fueled the growth in demand for silver.
With gold prices hitting record highs, it has become
increasingly difficult for the common man in these countries to
continue to buy gold for jewelery or invest in gold, and so many
see silver as a rising asset class driven by many of the same
drivers as the demand for gold.
See our full analysis and $50 price estimate for Silver
Wheaton