Sunday, September 22, 2013

There's Still More Upside in Silver Wheaton

NEW YORK (TheStreet) --The rollercoaster ride that has characterized precious metals markets this year continues, with silver prices hitting recent highs above $25 before heading lower.

This volatility has extended to silver-streaming company Silver Wheaton (SLW) as well, which is trading nearly 30% lower on the year, even after its rally during the summer months. But as the broader metals market attempts to stabilize, the stock's weakness has run its course and long-term opportunities can be seen at current levels.

So, while we have seen some major declines in the company's year-over-year earnings, there is mounting evidence that the worst days are behind us and that Silver Wheaton is positioned once again to start producing the stronger earnings numbers seen in the past.

During the second quarter, Silver Wheaton's production rose to a record at 8.6 million silver-equivalent ounces -- a yearly increase of nearly 30%. Rising productivity, however, failed to generate similar increases in sales. Annualized sales were only higher by 4% for the period, coming in at 7.2 million ounces. But where Silver Wheaton really establishes itself as a industry leader with its streaming model is in its ability to keep silver costs low, at an average of $4.14 per ounce. [Read: More Than Porn: Shame and Masculinity in the 21st Century] For long-term investors, most of the attraction in Silver Wheaton comes from the company's contracts to buy metal from miners at pre-determined prices, thus reducing operating risks and exposure to fluctuations in metals prices. Nevertheless, weak points can be seen in recent earnings and revenues numbers, as a 20% decline in sales prices weighed on both. Operating margins declined by more than 20%, earnings fell to $91 million, and revenues were 17 percent lower than last year's, coming in at $167 million. But even with these negatives, Silver Wheaton's margins are holding above 55%, which indicates highly efficient operational activities and strong positioning in the sector. The company's low cost structure and superior business model have been aided by increased metals demand in emerging markets (particularly India and China), which helped propel stock values higher over the summer.

Going forward, an improving global economy is expected to lead to rising demand for silver, as its broad industrial applications far outweigh those of gold. This will help Silver Wheaton command higher prices and limit any downside that might be created by reduced incentive to buy metals as a safe haven.

Silver Wheaton now trades at 17 times earnings, and with silver markets showing continued signs of strength, there is significant potential for upside in the stock.

Key developments to watch include the production timetable at the Pascua-Lama mining project, which is Silver Wheaton's most important gold investment. Delays here could create an added drag on the company's performance, but Silver Wheaton has made sufficient arrangements to be compensated for missed deadlines. [Read: Apple's iPhones Are Built for Collect Calls]

In any case, the project should continue to act as a important strategic asset, and support earnings projections in coming quarters. With Silver Wheaton, we have low valuations and a metals market supported by growing demand in emerging Asia, as well as an efficiently run business model with low production costs. The stock met massive selling pressure in the early parts of the year, and erratic price moves in gold and silver could still generate more volatility. But the fundamental backdrop and the latest rebound suggest that a long-term bottom is in place. Silver Wheaton is a buy at current levels. At the time of publication the author had no position in any stock mentioned. This article was written by an independent contributor, separate from TheStreet's regular news coverage.

Richard Cox is based in China, and has lectured at several universities there on international trade and finance, focusing primarily on macroeconomics and price behavior in equity markets. His articles appear on a variety of Web sites, including MarketBulls.net, Seeking Alpha, FX Street and others. Investing strategies are based on technical and fundamental analysis of all the major asset classes (stock indices, currencies, and commodities). Trade ideas are generally based on time horizons of one to six months.

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