Monday, April 22, 2019

Silver Wheaton Is A Permanent Scare For Investors

Antonio Carradinha



  • The company has a streaming model that works with adequate purchase agreements.
  • The company has solid cash flow but needs to improve its financial strategy.
  • More return to shareholders is crucial as dividend is low and shares outstanding have increased.
  • While fixed costs are high, profits are very low for a company of this type.

It has long been a commonplace to say that investing in Silver Wheaton (NYSE:SLW) is like investing in silver (NYSEARCA:SLV) itself. The company has an attractive business plan that allows to dispose of large quantities of this precious metal at low prices. All this is well known to investors as well as the gradual increase of its business also in gold (NYSEARCA:GLD). Because of this, I have always found that SLW could be a good investment because we can easily leverage the price rise of precious metals (PM).

However, there are reasons that should lead us to be more cautious. The volatility of PM implies an even greater volatility in SLW as we can see in the charts below. For this reason, the long-term investor sees his asset rising and falling dramatically in the face of PM price changes.

If we look at the chart below we will see that from the beginning of 2016 until today SLW had an increase in its share price that far surpassed the increase of silver. Of course, SLW shows great upside potential as soon as silver prices reach levels above $15-$16. In fact, as soon as fixed costs are covered any increase in PM prices translates into a more than proportional climb in SLW share prices.

Nevertheless, it has to be noticed that net income has been modest despite the good prices the company gets from purchase agreements of silver and gold. There seems to be no doubt that the fixed costs of the company are at a high level and everything must be done to lower them. It’s a fact that the company can’t show adequate results if silver falls slightly under $15-$16 as happened in 2015. In recent years, this has been the limit level for results to become negative. For the reasons explained, EPS has been declining – from $1.65 in 2012 to $0.45 in 2016 (being even negative in 2015).

As we can see on the chart above SLW needs higher valuations of silver and gold to climb. More than ever the company shows significant volatility forcing investors to pay close attention to its price movement. Taking a look at the last chart below it is possible that the increasing purchase agreements of gold may change somehow this situation. However, at current prices Silver Wheaton has a small margin of safety and is very dependent on the rise in prices of PM.

It will be necessary to do a break-even point study of the level of SLW share price in relation to the price mix of the two PM. It will be a task for another article and will be based on a short-term price analysis. The goal is to build a relationship between the price change of these 3 assets going forward. Currently if prices of SLV and GLD are under $15-$16 and $110-$115, respectively, SLW prices are in great danger of plunging. That’s not promising at all.

I believe that the company could improve and show a better image if it can solve soon its fiscal problems with the Canadian Revenue Agency. On the other hand SLW has a serious problem at San Dimas and it was very positive if an agreement of some sort could be obtained with Primero Mining. Since 2012 Silver Wheaton doubled its production, mainly through investments in new streams with funding coming from cash flows and new equity. The company has 30 high-quality assets with a streaming model that works. Despite the low profitability and significant volatility, the company continues to be an interesting investment in the precious metals mining area. What is required from a company of this type is that it makes good agreements and that the mines in question are of superior quality.

Silver Wheaton’s financial strategy should rely mainly on its own cash flow generation. The company has put in place a streaming model that leads to purchase agreements with very favorable conditions. In my opinion this should allow the company to be debt-free without needing to raise new equity that always involves dilution and loss of value for shareholders. Importantly, global sales already account for almost as much as silver as gold. It gives much more elasticity to the strategy of the company that is increasingly less dependent on a single precious metal with the risk and vicissitudes of mining production to be favored by the positive impact of diversification. With tight cash management the company could be increasingly independent in the financial area which would make it more demanding and effective in the agreements to be established with its partners.


One aspect will be paramount: fixed costs should be contained or reduced so that dependence on PM is not immediately felt at such low prices. On the other hand, the company has to give more return to its shareholders because the dividend is low and the company has significantly increased the number of shares outstanding (plus 22% from 2014 to 2016). The company has no choice but to create a growing margin of safety to take advantage of the price variation of PM. Currently, the company can not be a long-term investment because its volatility will imply medium-term trading. In phases of PM rising prices it will be a strong buy with adequate trailing stops.

Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

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