(By Mani) Silver Wheaton Corp.
) (TSX:SLW) is one of the largest publicly traded silver companies in the world as well as the largest publicly traded precious metal royalty/streaming company. It provides direct leverage to silver without exposing investors to the operating and capital cost risks associated with its producing peers.
Silver Wheaton has a unique business model. Unlike many of its precious metal peers, Silver Wheaton does not own or operate any mines, but instead, has agreements in place to purchase physical silver/gold from producing mines and development stage projects at a relatively fixed price.
This kind of model shields the company from inflationary pressures such as energy, labour and local currencies, key factors which have weighed on the performance of its operating peers. Silver Wheaton is also protected from capital cost inflation as the company is not required to make any additional payments over and above its initial contracted investment. Capital cost inflation has been another factor which has negatively impacted the performance of the global mining sector.
"With little exposure to cost inflation (outside of contracted annual adjustments), we believe Silver Wheaton is uniquely positioned to deliver dollar for dollar margin leverage within a period of rising sales," RBC Capital Markets analyst Dan Rollins said in a client note.
The company is well positioned to return a greater portion of capital to investors while maintaining a strong balance sheet due to its relatively fixed and low cost operating structure, fixed and declining capital outlays.
Silver Wheaton is in the midst of a period of strong production and sales growth with the ongoing ramp-up of production from Goldcorp's Penasquito mine and startup of Barrick's Pascua-Lama project in the second half of 2013.
The company's silver equivalent sales are expected to increase to about 35 million ounces in 2016 from about 21 million ounces in 2011. Further growth beyond 2016 is possible given the likely start-up of Augusta Resources' Rosemont project, potential start-up of Pan American Silver's Navidad project.
"Given the company's relatively fixed and low cost structure, forecast metal prices and low effective tax rate, we expect Silver Wheaton to generate robust margins with gross profit margins expected to average 86% and net profit margins 74% through 2016," Rollins noted.
In 2011, the company reported gross margin of 88 percent and net margin of 75 percent. In addition, the company's return on equity and return on invested capital are expected to average 17 percent relative to realized returns of 23 percent and 22 percent last year.
Silver Wheaton is also expected to generate strong free cash flow even after paying out 20 percent of its operating cash flow as dividends. The analyst sees the company's cash position to climb from about $0.8 billion at the end of 2011 to approximately $3.4 billion by the end of 2016.
Meanwhile, with $1.4 billion in available liquidity as of the first quarter of 2012, the company has the financial resources to pursue further acquisitions should the right opportunities present themselves.
In addition , Silver Wheaton is attractively valued relative to royalty/streaming peers given the company's growth, margin and return potential. Relative to Franco-Nevada and Royal Gold, Silver Wheaton trades at a discount on a number of key metrics including price to net asset value (1.2x versus 2.1x) and 2012 price to cash flow (13.6x versus 19.8x).
"As few precious metal companies are able to provide investors with both meaningful yield and the ability to enhance future growth without exposing shareholders to undue inflationary risk or dilution, we believe Silver Wheaton warrants investor attention," Rollins added.