Silver Wheaton Corp. (NYSE:SLW) shares may have lost a third of their value as a result of the drop in silver prices, but several trends in silver markets might lead to a rally.
Industrial use for silver is increasing substantially due to expanding electronic applications. But the physical supply of silver is declining as a result of mine maturity. Because we’re not dealing with virtual markets here, the price of silver will naturally rise on the back of increasing upward pressure. Silver Wheaton’s price is intrinsically linked to silver prices, which means that the inevitable upswing in the grey metal’s price will lead to a corresponding increase in its stock value.
If You Don’t Own Silver Wheaton Now, You’ll Kick Yourself Later
From a physical point of view, Silver Wheaton is well-positioned to take advantage of a potential price rally. It currently has the largest physical reserves of silver in the entire industry, which will come in handy once a rebound takes off and demand from the electronics sector kicks into higher gear.
Silver Wheaton might not look like a good investment if you’re analyzing it from a purely financial point of view. Falling silver prices have impacted the company quite harshly this year, and it has the battered financial statement to prove it.
Chart courtesy of www.StockCharts.com
Still, a savvy investor should not lose hope because there’s hope on the horizon. If you look at the numbers more closely, a very different picture emerges. The company’s revenue was up 10.7% year-on-year as it posted record production, but an unfortunate 17% decline in the average realized sale price per ounce of silver translated into a 28% decline in the bottom line. (Source: Silver Wheaton, last accessed August 31, 2015.)
Things, however, are likely to turn around for Silver Wheaton, and here’s why. Because of upcoming favorable market conditions, the company is comparatively undervalued at the moment. Buying more shares now while prices are low is the smart move.
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Keep in mind that even though precious metals prices have declined this year, Silver Wheaton has been able to sustain a very robust cash operating margin of 70%. (Source: Silver Wheaton, last accessed August 31, 2015.) Moreover, its operating cash flow was $110 million as of the second quarter of 2015.
This makes sense when you consider that Silver Wheaton is a streaming firm, which essentially means that it doesn’t own, operate, or explore for silver ore. The company instead makes agreements with mining companies to purchase the gold or silver they produce. Operating costs are then quite low, with silver prices acting as the main pressure on financial performance.
Think of Silver Wheaton’s latest drop in value as an opportunity to buy low before the market corrects itself and the share price rises.
Going forward from here, silver companies will be a good bet because demand is looking like it will go up, while the actual supply will fall. Need convincing? Silver is an essential material in the manufacturing of Gorilla Glass for tablets and smartphones, which is just one lucrative use out of literally thousands of others.
Silver is set to explode in industrial use, as it is finding application in touch screens, nanotechnology, biomedical engineering, water filtration, and other uses.
Given this growing industrial trend, Silver Wheaton is forecasting demand for silver to increase at a robust rate.
A report by HSBC concluded that there will be 1.112 billion ounces silver demand, but only 1.025 billion ounces of supply. (Source: Bullion Desk, last accessed August 31, 2015.) As things progress, this deficit may well start to increase, as production drops from a lack of new deposits.
Could Silver Wheaton Hit $20.00?
So what can we expect the silver price forecast to be in 2015? An exact number is of course difficult to pin down, but the above fundamentals certainly aren’t. In short, Silver Wheaton is poised for a precious metals rally from here on out as economic fundamentals continue improving. The company’s healthy reserve base will allow it to ride the rising demand wave of silver.
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