One of the best-performing stocks this year to date has been Silver Wheaton (NYSE:SLW), one of the world’s largest silver companies. While the price of silver is up 8 percent for the year, Silver Wheaton shares are up 28 percent. Furthermore, over the past several years, Silver Wheaton has significantly outperformed not just silver — which trades at multiples of its $6 per ounce price tag from 10 years ago — but the S&P 500 and American stocks more broadly.
I still think that there is significantly more upside potential for this phenomenal company, and here’s why.
First, the price of silver is poised to run significantly higher. The industrial demand for silver is rising as companies are finding more uses for it given its physical properties (e.g., conductivity of heat and electricity, reflectivity, malleability, etc.) and their importance to new technologies from computers to cell phones to photovoltaic cells in solar panels. Investment demand is rising as well, as investors are frustrated with low-bond yields and high stock valuations that cannot keep up with inflation. While many investors turn to gold, silver offers an inexpensive alternative in the precious metal space with an industrial application “kicker.”
As the price of silver rises, so will Silver Wheaton’s revenue. Silver Wheaton makes what are called streaming deals, whereby the company makes an upfront payment to a mining company in exchange for the right to buy a certain amount of its silver production at a rate that is significantly below the market price — usually around $4 per ounce. Thus, Silver Wheaton can buy silver at $4 per ounce, sell it at $21 per ounce, and pocket the difference. If the price of silver rises, as I believe it will, this difference grows, thereby benefiting Silver Wheaton shareholders.