Streaming Deal with Glencore Could Boost Shares of SLW Stock
Silver prices have been falling for eight straight days now. Precious metals have been retreating since the Federal Reserve hinted at a potential rate hike before the end of the year. But this doesn’t mean the global economy is doing any better than it was last month and Silver Wheaton Corp. (NYSE:SLW, TSX:SLW) knows this. SLW just made a $900-million play for future silver production at today’s rock-bottom prices. This could translate into massive gains for owners of Silver Wheaton stock.
This Could Send SLW Stock Soaring
There are silver companies and then there is Silver Wheaton. Silver Wheaton is the world’s largest precious metals streaming company. Instead of getting its own hands dirty, the company funds other silver producers to obtain the rights to purchase all or a portion of its silver/gold production at a very low price from high quality mines in Mexico, Chile, Argentina, Brazil, Peru, Sweden, Greece, Portugal, Guyana, Canada, and the U.S. The company currently has agreements with 21 operating mines and seven development projects.
Other than its initial upfront payment, Silver Wheaton typically has no ongoing capital or exploration costs and is not a victim to exchange rate risk. Speaking of costs, its operating costs are really, really low—fixed at about $4.00 an ounce for silver and $400.00 per ounce of gold. (Source: “Silver Wheaton Company Profile,” Silver Wheaton Corp., last accessed November 10, 2015.)
Based on its current agreements, the forecasted 2015 estimated annual attributable production is approximately 43.5 million silver equivalent ounces, including 230,000 ounces of gold. By 2019, estimated annual attributable production is anticipated to increase significantly (17.2%) to approximately 51 million silver equivalent ounces, including 325,000 ounces of gold. (Source: “Silver Wheaton Corporate Fact Sheet,” Silver Wheaton Corp., last accessed November 10, 2015.)
Silver Wheaton Makes a $900-Million Play on the Future of Silver
Silver prices are undervalued and Silver Wheaton knows the low commodity price environment has created some great long-term growth opportunities. On November 3, the company announced that it is paying $900 million to beleaguered Glencore PLC in exchange for rights to future silver production from a Peruvian mine. (Source: “Silver Wheaton Acquires Silver Stream From Glencore’s Antamina Mine,” Silver Wheaton Corp., November 3, 2015.)
This should be welcome news to both Glencore and Silver Wheaton investors. First, Glencore needs to pay down its $30.0-billion debt; this sale will help. For Silver Wheaton investors, the company’s agreement with Glencore will help boost Silver Wheaton’s bottom line and continue to provide increased dividends.
I enter as evidence the acquisition that will immediately increase Silver Wheaton’s production and cash flow profile by adding expected average silver production of 5.1 million ounces per year in 2016 and 2017 and 4.7 million ounces per year over the first 20 years.
The deal is for the life of the mine with a term of 50 years. Declared reserves will support mining activities at the Antamina mine until 2028. However, the term could be extended significantly if measured and indicated resources come to fruition and inferred resources follow the historical upward trend.
Overall, this $900-million deal highlights the willingness of down-on-their-luck miners to swap future production in exchange for much-needed cash today. Silver Wheaton is more than happy to provide desperate companies like Glencore with a quick infusion of funds for a resource it sees as being sorely undervalued.
Unlike gold, silver is not just seen as a hedge against economic uncertainty; it is also a necessary and versatile product used in green technologies like solar energy, water purification, and the production of windows and glass, medicine, nanotechnology, batteries, electronics, catalysts, and automotives.
Analyst Upgrades Point to Strong Gains for Silver Wheaton Investors
Whether the economy is going up or down, silver will be in demand. All it takes are rational investors to see this, or maybe just a few analysts. Of the four analysts covering Silver Wheaton Corp., three currently rate it a Buy and one rates it a Hold. (Source: Marketbeat.com, last accessed November 10, 2015.)
Since the $900-million announcement, analysts at Credit Suisse have raised the price target for SLW stock from $22.00 to $23.00. This represents an 84% increase over the current $12.50 share price. Silver Wheaton also had its Buy rating reaffirmed by analysts at Canaccord Genuity on November 4, raising its price target from $27.00 to $29.00 per share, a 132% increase from current levels.