Silver Wheaton's (NYSE: SLW) shares have jumped in recent weeks
and are trading above $33 currently. We saw a sharp mover higher in
silver spot prices last week in part due to strong fundamental
demand from major markets like India and China in addition to
overall risk-off trade in global equity markets last week which
caused investors to pile back into precious metals like gold and
silver. Below we include our quick analysis on some of the
fundamental drivers of the recent moves and what it means for
Silver Wheaton. The company competes with silver manufacturers
like Silver Standard Resources (
SSRI
), Pan American Silver (NASDAQ:PAAS), Bear Creek Mining
Corporation (
BCM
) and Endeavor Silver (
EXK
).
Demand in India has largely been driving Silver
Prices…
Silver has been pushed to its current price of about $36.70 per
ounce by the rising global demand. The biggest contributor to this
push has been the strong demand for silver in India after the
precious metal hit the lows of $33 per ounce earlier this
month.
Silver and gold imports for the country surged by 500% in May on
a month-on month basis and 222% compared to May 2010. India's
bullish sentiments towards precious metals is evident from the fact
that over the last month, the Reserve Bank of India granted
permission to seven new banks to import gold and facilitate
investments. Moreover, with India's benchmark indices - Sensex and
Nifty - under-performing on weak global cues, investors have shied
away from stocks and are investing in precious metals.
… and China is expected to follow suit…
China also expects a lot of demand for silver this year. Philip
Kalpwijk, executive chairman of GFMS (a leading global
consultancy), detailed in a conference recently that the increased
focus towards silver investment products, combined with a
forecast 16% annual growth in industrial demand will lead to
China's total silver demand outstripping its supply. "There is a
widening demand for silver as investment in China because of its
lower entry point. It is also being increasingly recognised as an
physical investment asset, which will support demand." he
added.
… which brings us back to the effect on Silver
Wheaton
Silver Wheaton is the world's largest silver streaming company
with more than 14 silver streaming contracts with the producers and
miners. The company primarily enters into these contracts with
companies that produce silver as a by-product of their gold and
copper mining activities.
Their $4 per ounce purchase agreements give it an edge over
the conventional mining companies as it does not incur any kind of
production 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.
Therefore upside to silver prices leads to significant upside in
the company's margins.
Our price estimate for average silver prices for the year is at
$41 per ounce. The gold and silver demand peaks in India during the
festive season around November, and we can see some highs during
that period. Our
$43
price estimate
for Silver Wheaton is at a 30% premium to the current market
price.
See our full analysis for Silver Wheaton