3 Things to Watch With Silver Wheaton
Sep 4th 2012 11:33AM
Updated Sep 4th 2012 11:34AM
Silver Wheaton (NYS: SLW) is a silver streaming company that primarily purchases silver production from mining companies at low fixed costs in exchange for upfront capital expenditures to fund mining project developments.
Today, let's look at three things investors should be watching regarding Silver Wheaton, as they will provide us better insight into the company.
1. Silver prices and production contracts
There aren't too many things a Silver Wheaton investor has to worry about, but the price of silver and the production of a contracted mine are definitely two things near and dear to their hearts.
Without question, Silver Wheaton tends to trade in tandem with the price of silver more so than just about any other miner due to the nature of its contracts. In its most recent quarter, Silver Wheaton's contracts entitled it an average purchase price on silver of just $4.06 per ounce and a sick operating margin of $25.01 per ounce. With such high margins, Silver Wheaton is much more susceptible to fluctuations in the underlying price of silver.
Shareholders also should keep a close eye on Silver Wheaton's production contracts, which could signify an uptick or slowdown in profits. Lately, things haven't exactly been looking on the up-and-up for Silver Wheaton. In 2013, its contracts with Barrick Gold (NYS: ABX) regarding the Lagunas Norte, Pierina, and Veladero mines are set to end. In addition, two of its larger production mines have issued poor near-term forecasts. Delays in Barrick's Pascua-Lama project and a forecast for lower production from Goldcorp's (NYS: GG) Penasquito mine could further crimp Silver Wheaton's earning potential.
With just over $1 billion in net cash as of its most recent quarter, it was inevitable that Silver Wheaton would eventually seek out new deals to buoy its soon-to-be-ending contracts with Barrick Gold and weaker production forecasts from two of its other mines.
Silver Wheaton found that deal with Canada's HudBay Minerals (NYS: HBM) . HudBay already has a robust balance sheet complete with $711 million in cash and no debt, but it needed even more backing to build out its 777 mine and Constancia mine. Silver Wheaton will be investing $750 million -- $500 million upfront and $125 million in two more installments assuming certain conditions are met -- in order to gain access to 100% of both 777 and Constancia's silver production at a low fixed cost of $5.90 per ounce. It also will receive 100% of all gold production from 777, possibly until at least 2016, for a low fixed cost of $400 per ounce. These prices are subject to just a 1% inflationary hike that doesn't even take effect until the beginning of the fourth year, which ensures that the 4.9 million additional ounces that this deal will yield Silver Wheaton will help maximize its already robust margins.
The final factor all investors should keep their eyes on is Silver Wheaton's dividend. Dividends are something new for Silver Wheaton, but it's attempting to reward shareholders by following a practice similar to one implemented by Newmont Mining (NYS: NEM) of tying its dividend to its previous quarters' cash flow.
Silver Wheaton very easily could become a dividend juggernaut in the mining space given its ridiculous margins, but let's remember that it needs to retain its cash to be able to seek out deals like the one it struck with HudBay. Still, its current annual payout of just $0.40 (projecting out its recent $0.10 quarterly announcement) would place its payout ratio at just under 20% of next year's earnings. It seems pretty clear that as long as its silver operating margins remain north of $20 per ounce that these dividends are much more likely to move higher than lower. Silver Wheaton's quarterly payout has already grown from just $0.03 to $0.10 in a matter of five quarters.
Now that you know what to watch for, it should be easier to analyze Silver Wheaton's successes and pitfalls in the future and hopefully give you a competitive investing edge.
If you're still craving even more info on Silver Wheaton, I would recommend adding the stock to your free and personalized watchlist so you can keep up on all of the latest news with the company.
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The article 3 Things to Watch With Silver Wheaton originally appeared on Fool.com.Fool contributor Sean Williams has no material interest in any companies mentioned in this article. You can follow him on Motley Fool CAPS under the screen name TMFUltraLong, track every pick he makes under the screen name TrackUltraLong, and check him out on Twitter, where he goes by the handle @TMFUltraLong. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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