Tickers in this Article: SLW, PAAS, AG, HL, SVM, ABX, GG
With the volatility of silver prices this year, is the largest silver streaming company in the world worth investing in? Let's take a look. Investopedia Markets: Explore the best one-stop source for financial news, quotes and insights.

Background
Based out of Vancouver, Canada, Silver Wheaton (NYSE:SLW) is the largest streaming company in the world, with 20.5 million silver equivalent ounces sold in 2010 and $423 million in revenue. They are in a unique position where they do not mine their own silver, rather they make upfront payments to other mining companies, including Barrick Gold (NYSE:ABX) and Goldcorp (NYSE:GG), where they have the right to purchase all or a portion of their silver production, at a low fixed cost. With 14 long-term silver purchase agreements and two different long-term precious metals contracts, relating to 19 different mining assets, Silver Wheaton has limited exposure to any one mine. This is a key advantage that allows them to have an 83% profit margin and a 72.8% operating margin.

All this is possible by having a business model that requires no ongoing capital expenditures after the upfront fee, or exploration costs and no exchange rate risk; that gives them an astounding low cost of about $4 per ounce. Moreover they have only 24 employees, bringing in $17.6 million per employee. (If you are a hedger or a speculator, gold and silver futures contracts offer a world of profit-making opportunities. For more, see Trading Gold And Silver Contracts.)

Silver is not for the faint of heart however. Any commodity is volatile and silver is no exception. Silver prices have ranged from $30.67 at the beginning of the year, spiking 59% to $48.70 in April, eventually dropping 42% to $28.16 in September, then hovering in the $30 to $40 range for the rest of the year. Silver Wheaton has gone along for the ride as well, starting off at $38.48, jumping about 24% to hit a high of $47.60, then going down 40% to $28.75, before rebounding to around $36, today.

Peer Comparison
To see where Silver Wheaton stands, let's take a look at a few comparisons. In the mining sector, the multiples approach should not be used in isolation to compare companies, but should be used in conjunction with other approaches, such as the discounted cash flow method and the real options approach, due to varying lives of the mine and other factors. However we'll use the multiples method to look at a quick snapshot on how Silver Wheaton compares:
Company Market Capitalization Trailing P/E PEG EV/EBITDA P/CF EV/2P
Silver Wheaton (NYSE:SLW) $13B 26 0.93 24.9 25.98 12.89
Pan American Silver Corp. (Nasdaq:PAAS) $3.27B 10.9 0.94 6.8 10 1.21
First Majestic Silver (NYSE:AG) $1.9B 23.4 0.04 14.9 16.06 37.8
Hecla Mining Company (NYSE:HL) $1.89B 24 0.93 5.6 7.34 10.27
Silvercorp Metals Inc. (NYSE:SVM) $1.68B 20 3.1 10.1 14.19 22.08


Its price to earnings is the highest among the competition. Investors are expecting Silver Wheaton to grow, and to grow fast. Historically, the company has grown its revenue at a phenomenal 41.49% growth rate per year, for the past three years so we can see why. Its PEG ratio is in line with most of the competition, coming in at 0.93; anything below one can be a sign that a stock is undervalued.

However let's take a look at a few more multiples. Its EV/EBITDA, or EBITDA multiple, is the highest amongst its peers, and its price to operating cash flow multiple is substantially higher than the rest. Even with its high profit margins, it is still trading at a higher price, compared to its operating cash flow out of its peers. It looks like investors have high expectations.

Another good way to compare is to look at its enterprise value to 2P (proven + probable reserves). This looks at the company's total value to its reserves that are more likely than not to be recovered. It is usually a good multiple to use for oil and gas and mining. In Silver Wheaton's case, it can be difficult to assess, as since its inception in 2004 it has an annualized growth rate of 34% in proven and probable reserves, due to new contracts. As it stands right now it has the third highest EV/2P multiple out of the five companies we've looked at, and the lower the better.

Earnings Preview and Outlook
For Q3 2011, analysts are expecting a 50 cent EPS, up 213% from the year ago quarter. Revenue is expected to come in at $226 million, up 143.2% from the prior quarter, as well. (For related reading, see The 5 Types Of Earnings Per Share.)

In 2011, Silver Wheaton forecasts 25 to 26 million equivalent ounces of silver production, increasing by 80% to 43 million equivalent ounces in 2015. At current silver prices this would translate into about $1.5 billion of revenue in 2015, up 255% from $423 million in 2010.

The Bottom Line
It is evident that Silver Wheaton is growing at an industry leading pace. Leveraged to silver, it is producing huge amounts of revenue, with little downside risk to its operations. With its Q3 earnings due on Wednesday, Nov. 9, it will be interesting to see if it can meet expectations, missing three out of the four past earnings. Additionally its multiples, just one way to value a company such as this, do not appear cheap. Moreover, since Silver Wheaton is a leveraged play on silver, when silver prices become volatile, so does the stock, as seen throughout 2011. However, if you're looking for a silver play for your portfolio and believe silver prices will hold or head higher due to increased industrial demand and investment purposes, Silver Wheaton might be worth a closer look. Just be prepared for volatility.

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