Why Silver Wheaton Corp. Is a Solid Long-Term Investment

There are a range of tailwinds that enhance Silver Wheaton Corp.’s (TSX:SLW)(NYSE:SLW) long-term outlook.

| More on:
The Motley Fool

The last year has been particularly difficult for precious metals streamer Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) as its share price has fallen by 6% over that period.

However, there are a range of tailwinds that are set to propel silver prices higher, making Silver Wheaton one of the best long-term plays on silver.

Let me explain.

Now what?

The secular trend to renewable energy sources is gaining considerable momentum. Countries are implementing renewable energy targets that will see solar-generated electricity become a core part of the global energy mix. At the end of 2015. China quadrupled its solar energy targets; it is aiming to generate 200 gigawatts of electricity from solar power by 2020, almost five times higher than its installed solar capacity at the end of 2015.

This trend is particularly important for Silver Wheaton because silver is a key element in the manufacture of photo voltaic cells that make up solar panels.

You see, silver is the most conductive of all the metals. It takes about three million ounces of silver to manufacture sufficient photo voltaic cells to generate one gigawatt of electricity. China’s targeted solar capacity alone would require an additional 468 million ounces of silver. Then there are the ambitious solar targets established by Japan, Germany, and Brazil that will add to that demand.

This increase in demand can only push silver prices higher, particularly when emerging supply constraints are considered.

With silver prices caught in a protracted slump and close to the cost of production for many primary silver miners, many have been eliminating non-economic production in order to preserve their balance sheets and cash flows. One example of this is Endeavour Silver Corp. (TSX:EDV)(NYSE:EXK), which has announced that it intends to slash silver production by 25% in 2016.

A number of other miners will certainly follow suit because of the sustained weakness in silver prices.

However, what makes Silver Wheaton an attractive investment is that as a precious metal streamer, it is not engaged in costly and high-risk mining activities.

Instead, it essentially provides financing to miners in exchange for the right to purchase a proportion of a mine’s gold and silver production at prices far lower than the market price. This allows it to purchase gold for US$400 per ounce and silver for US$4 an ounce, or roughly a third and a quarter of the current market prices, respectively.

As a result, Silver Wheaton’s operations are less risky than those of the miners. This means it can remain profitable at prices that are unprofitable for miners.

Nonetheless, it won’t all be clear sailing for Silver Wheaton over the short term.

Not only are weak silver prices weighing heavily on its earnings, but it is locked in a battle with the Canada Revenue Agency, which claims that Silver Wheaton has not fully met its tax liabilities. Silver Wheaton could potentially have to pay additional taxes of $715 million and penalties of $353 million in the case of an adverse finding.

So what?

While the short-term fundamentals for silver may appear poor, over the long term, the precious metal can only surge in value as growing industrial demand coupled with production cuts lead to a constrained supply situation that will push its price higher.

Meanwhile, the current tax review is really only a short-term hiccup that shouldn’t impact Silver Wheaton’s long-term growth, even if an adverse finding is made against it. For these reasons, now is the time for investors to consider dipping their toe in the water and adding Silver Wheaton to their portfolios.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Matt Smith has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton. (USA). Silver Wheaton is a recommendation of Stock Advisor Canada.

More on Metals and Mining Stocks

Gold bars
Metals and Mining Stocks

Why Alamos Gold Jumped 7% on Wednesday

Alamos (TSX:AGI) stock and Argonaut Gold (TSX:AR) surged after the companies announced a friendly acquisition for $325 million.

Read more »

Nuclear power station cooling tower
Metals and Mining Stocks

If You’d Invested $1,000 in Cameco Stock 5 Years Ago, This Is How Much You’d Have Now

Cameco (TSX:CCO) stock still looks undervalued, despite a 258% rally. Can the uranium miner deliver more capital gains to shareholders?

Read more »

Super sized rock trucks take a load of platinum rich rock into the crusher.
Stocks for Beginners

Cameco Stock and More: 3 TSX Commodity Titans to Watch in 2024

Cameco stock and these others will provide you with growth that goes beyond just a year or two, with all…

Read more »

Handwriting text writing Are You Ready For Tomorrow question. Concept meaning Preparation to the future Motivation Stand blackboard with white words behind blurry blue paper lobs woody floor.
Stocks for Beginners

3 Reasons to Buy Lundin Stock Like There’s No Tomorrow

Lundin stock (TSX:LUN) has been killing its production of copper and plans on blowing its records out of the water…

Read more »

Gold bars
Stocks for Beginners

TSX Materials in March 2024: The Best Stock to Buy Right Now

Materials have been quite volatile, though the price of gold has surged to all-time highs. That makes this stock a…

Read more »

Gold bars
Metals and Mining Stocks

Will Gold Stocks Rally in 2024?

Down almost 30% from all-time highs, Franco-Nevada is a gold mining stock trading at a discount to consensus price target…

Read more »

A miner down a mine shaft
Stocks for Beginners

Canadian Mining Stocks: Buy, Sell or Hold?

Canadian mining stocks have seemed like such a strong investment, but with shares down significantly this year, what should we…

Read more »

Gold king in chess game face with the another silver team on black background (Concept for company strategy, business victory or decision)
Stocks for Beginners

Great News for Gold Stock Investors!

Gold has hit an all-time high! Which is good news for some gold stocks, and really good news for others.

Read more »