Potential Downside Scenario for Silver Wheaton

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Silver Wheaton (NYSE:SLW) is the world's largest silver streaming company and competes with silver manufacturers like Silver Standard Resources ( SSRI ), Pan American Silver (NASDAQ:PAAS), Bear Creek Mining Corporation ( BCM ) and Endeavor Silver ( EXK ). It purchases silver from mining companies that produce silver as a by-product, typically gold and copper mining companies.

While we are structurally bullish on Silver Wheaton - as evidenced by our near $43 price estimate that is over 30% ahead of the market - we look at a downside scenario which could deflate our optimism.

Silver Wheaton at a Glance

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.

Below we take a look at a potential downside scenario for the firm.

10% Downside Scenario - $41 Trefis price estimate for Silver Wheaton

Silver Shipments and contracts - Goldcorp

Goldcorp's Peñasquito mine will complete its first full capacity production in 2011. Silver Wheaton will receive silver from this mine for the complete life of the mine. We estimate that the mine will on an average supply Silver Wheaton 7 million ounces annually for the next 22 years.

We calculated these numbers using the production capacity and the reserves and resources at the Peñasquito mine. In a scenario where Goldcorp is unable to increase the current production levels during the Trefis forecast period, it could lead to a significant downside to the Trefis price estimate.

If production remains flat to 2011 levels, this would knock about 5% off of our price estimate. If production levels matched 2010 low's this would imply a price estimate of nearly 15% lower.

See our full analysis for Silver Wheaton


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

This article appears in: Investing , Investing Ideas , Stocks , US Markets
Referenced Symbols: BCM , EXK , SSRI

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