Why Silver Wheaton Is the Best Alternative to Physical Silver

Source: Thinkstock

Source: Thinkstock

Silver Wheaton (NYSE:SLW) operates as a worldwide silver streaming company. Silver streaming is basically a process by which the company purchases a mining firm’s silver production in order to distribute that silver in the market. SLW has contracts to purchase silver in bulk at prices well below market value, and then proceeds to sell the silver at a higher prices. The company has “multiple long-term silver purchase agreements and two long-term precious metal purchase agreements, whereby it acquires silver and gold production from companies located in Mexico, the United States, Greece, Sweden, Peru, Chile, Argentina, and Portugal.”

Based upon its current agreements, forecast 2014 annual attributable production is approximately 36 million silver equivalent ounces including 155,000 ounces of gold. By 2018, annual attributable production is anticipated to increase significantly to approximately 48 million silver equivalent ounces, including 250,000 ounces of gold. This growth is driven by the company’s portfolio of low-cost and long-life assets. The company is my most preferred way behind physical silver ownership to invest in silver. The company is incredibly profitable, and the stock should see strong capital gains and also pays a dividend for shareholders to wait for a rebound in gold prices. In a recent piece, I covered the financial strengths of the company. The purpose of this article is to review the operational performances of the company, focusing on some of the larger deals the company has in place.

During the first-quarter of 2014, attributable silver equivalent production was 9.0 million ounces (6.9 million ounces of silver and 33,800 ounces of gold), representing an increase of 8 percent compared to the first-quarter of 2013, which was quite strong. There are, however, important happenings at some of the properties where the company has contracts.

First, there were some issues at Penasquito. In Goldcorp Inc.’s (NYSE:GG) first-quarter 2014 Management’s Discussion and Analysis, permitting for the Northern Well Field project — which will add 25 new production wells — has been delayed due to unanticipated additional regulatory requirements related to the interconnection with the existing well fields, securing surface land access rights, and additional permitting requirements by the environmental authority. This is a bit of setback for Silver Wheaton. Goldcorp now expects construction to begin during mid-2014 with completion expected around mid-2015. Contingency plans have been developed for fresh water production at the mine to ensure plant production continues as planned. T

he long-term tailings study continued on schedule this quarter with results still expected in the second-quarter of 2014. Goldcorp has indicated that Penasquito’s exploration drilling program continued in the first-quarter of 2014, resulting in a total of 6,334 meters drilled. The exploration program continues to define the intersection of the copper-gold sulphide rich skarn ore body and porphyry deposit located below and adjacent to the diatreme ore body. In addition to exploration, Goldcorp is investigating the potential for producing a saleable copper concentrate at Penasquito as well as assessing the viability of leaching a pyrite concentrate from the zinc flotation tailings. Successful implementation of one or both of these new process improvements has the potential to significantly improve the overall economics and add to the mineral reserves of Penasquito.

Turning to the San Dimas Property, as per Primero Mining Corp.’s (NYSE:PPP) first-quarter 2014 Management’s Discussion and Analysis the expansion of the San Dimas mine from 2,150 tons per day (tpd) to 2,500 tpd was completed during the first-quarter of 2014. Throughout, the first-quarter averaged 2,422 tpd. In addition, Primero also indicated that recoveries are expected to improve in the second-quarter 2014 with the completion of an additional leaching tank and additional thickener. Primero continues to review the option to further expand the San Dimas mine to 3,000 tpd.

At Salobo, as per Vale’s (NYSE:VALE) first-quarter 2014 Management’s Discussion and Analysis, the expansion of the mill throughput capacity at the Salobo mine to 24 million tons per annum (Mtpa) from its current 12 Mtpa reached 97 percent physical completion in the first-quarter of 2014. The expansion is expected to come on stream in the second-quarter of this year. At the Sudbury property, as per Vale’s February 21, 2014 news release, Vale officially opened the Totten mine during the first-quarter of 2014. Vale stated that the mine is expected to ramp up to full production in 2016 and process 2,200 tons per day of ore containing copper, nickel, and precious metals for approximately 20 years.

Finally, at Constanica, initial production is on schedule. As per Hudbay’s (NYSE:HBM) first-quarter 2014 Management’s Discussion and Analysis, the Constancia project in Peru remains on track for initial production in the fourth-quarter of 2014 and commercial production in the second-quarter of 2015. Hudbay has incurred $1.2 billion in costs as of March 31, 2014, and the project is now over 71 percent complete. As per the agreement with Hudbay, in the first-quarter Silver Wheaton paid Hudbay the final payment of $125 million in connection with the silver stream on the Constancia Project as Hudbay’s total expenditures related to Constancia reached $1 billion. An additional $135 million relative to the gold stream on Constancia will be paid to Hudbay once $1.35 billion in capital expenditures has been incurred on Constancia.

This list is not nearly exhaustive of all of the company’s activities, but is among the highlights that you need to be aware of. The setback with Goldcorp’s Penasquita is unfortunate, but temporary. Other production highlights from Salobo, Sudbury, and Constancia suggest these projects are on schedule. While costs have risen and revenues are down for the company, it is solely due to a depressed precious metal price. However, it continues to make the right decisions looking ahead, setting up new streams and amending deals that are broken. The company is the best alternative to physical silver in my opinion and once the precious metals rebound, the stock could double from current levels of $24.83.

Disclosure: Christopher F. Davis is long Silver Wheaton. He has a buy rating on the stock and a $30 price target.

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