Tags: Silver | Wheaton | metal | SLW

Silver Wheaton Pops on Metal Price

By    |   Tuesday, 11 Oct 2011 12:57 PM

Silver Wheaton (SLW) is classified as a silver mining company, but the company does no mining. The company's business model lets other companies do the mining and Silver Wheaton locks itself in as a buyer of produced silver. It then resells the metal in an attempt to profit. As silver metal pops higher, Silver Wheaton wins.

Silver Wheaton contracts with mining companies for which silver production is a byproduct of a mine's primary output. The contract typically involves Silver Wheaton paying an upfront amount to lock in all or a portion of a mine's futures silver production. It then pays a fixed amount for each ounce produced under the contract.

The combination of an increasing silver price and increasing production from Silver Wheaton's silver contracts has resulted in rapid earnings growth over the last couple of years. In 2009, SLW reported earnings of 39 cents per share. In 2010 the earnings increased to 83 cents per share and the number of silver ounces produced increased by 37 percent. For the first half of 2011, net income was 76 cents per share and silver production was at a pace similar to 2010.

Leveraging silver

Historically, the share price of Silver Wheaton has closely tracked the spot silver price. However, in April 2011, when silver rocketed up towards $50 per ounce, the price of SLW started to lag silver as it climbed to new records. As silver turned back down, the price of SLW again started to parallel the changes in spot silver.

Silver Wheaton pays approximately $4 per ounce on contracted silver purchases. As the spot price of silver increases, the profit margin for Silver Wheaton rises, leveraging the price gain. However, if spot silver does not increase, Silver Wheaton will continue to earn the margin between the spot price on the contract price paid for silver.

The latest analyst report from RBC Capital Markets upgraded SLW to outperform, up from sector perform. The company next reports on Nov. 8.

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Silver Wheaton (SLW) is classified as a silver mining company, but the company does no mining. The company's business model lets other companies do the mining and Silver Wheaton locks itself in as a buyer of produced silver. It then resells the metal in an attempt to...
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2011-57-11
Tuesday, 11 Oct 2011 12:57 PM
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