Silver Wheaton: A Precious Alternative
Edison | Jun 11, 2014 02:07AM ET
Silver Wheaton Corp (NYSE:SLW) is the world’s pre-eminent silver streaming company with agreements covering 24 different mining projects, 19 of which are in production and two of which are anticipated to be in production in the foreseeable future (Constancia in FY15 and Rosemont in FY18). While at first glance analogous to both miners and royalty companies, Silver Wheaton’s streaming business plan is almost unique as a listed investment opportunity as it offers exposure to exploration success and production expansion without exposure to cost inflation. It also pays a dividend and has geared exposure to precious metals prices. In the meantime, it trades on a rating that is uniformly cheaper than its royalty company contemporaries and is often little different to those of major mining companies, despite having a materially lower risk profile.
Since its creation and listing in 2004, Silver Wheaton has recorded a 39.4% compound increase in silver sales per year, an 81.4% pa increase in earnings, a 55.4% pa increase in basic EPS and a 58.7% pa increase in operating cash flows. While growth rates will inevitably moderate, we are still forecasting a further 44.8% increase in basic EPS to FY19, driven by a (conservative) 23.7% increase in silver equivalent production as a result of US$3.6bn in investments made over the past two years, with additional upside potential provided by Barrick’s Pascua-Lama and Pan American’s Loma de La Plata projects.
h3 Valuation: Potential 80% capital upside/h3Assuming no new streaming arrangements (note: this is an unlikely contingency), an investment in Silver Wheaton offers investors a break-even internal rate of return over the remaining life of its streams. In addition to its conventional streaming arrangements, however, SLW is in a perfect position to offer effective funding to the mining industry at a c 16% cost of capital (see page 7) compared to a cost of debt (if it is available) frequently in excess of 10% and a cost of equity frequently around 30%. By contrast, we estimate SLW’s cost of debt to be 2.4% and its cost of equity to be 5.0%, creating a significant opportunity for SLW. Taking into account likely future streaming agreements, we conservatively forecast a Silver Wheaton share price of US$37.67 (C$41.12) in FY19, which represents an internal rate of return to existing investors of 14.7% in US dollar terms over a five-year period. In relative terms meanwhile, SLW trades on multiples that are consistently cheaper than its royalty ‘peers’ and more akin to (or in some cases cheaper than), its operating contemporaries, despite being associated with less risk (see page 11).
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