Silver Wheaton Corp.: Should You Buy, Sell, or Hold?

Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) just closed a big gold deal. Here’s why I think the stock is headed lower.

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Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) just diluted its shareholders by selling US$800 million in new stock. Is this a signal to bail out?

New deal

In order to pay for the purchase of a 25% stake in the gold stream produced at the Salobo copper mine in Brazil (owned by Vale SA) Silver Wheaton is selling shares at US$20.55 in a bought deal offering. If the underwriters exercise their full options, the total gross proceeds will top US$900 million.

Silver Wheaton’s shares finished the March 2 trading session at US$21.20 and dropped 3% in after hours action.

The deal increases Silver Wheaton’s share of Salobo’s gold output to 50%, and is expected to add as much as 70,000 ounces per year to its production stream.

Production growth

The agreement sends a strong message to shareholders that Silver Wheaton is seeing opportunities to beef up its portfolio. Mining companies are operating in a challenging environment right now and capital for development or exploration is tough to come by. Most miners have to cough up a hefty premium to tap the debt market and share prices are so low that issuing equity is very dilutive.

Silver Wheaton is taking advantage of the weakness to add long-term production. The company finished 2014 with a $1 billion credit facility and $233 million in cash. The fact that it has decided to pay for the Vale assets by issuing stock suggests there might be other deals in the pipeline.

The company is already expecting a boost to silver output in the second half of 2015 when the Constancia copper mine owned by Hudbay Minerals goes into full production.

Cheap supply

Silver Wheaton generally gets a very good deal on the gold and silver by-product it purchases from the miners. The company’s average silver cost in Q3 2014 was $4.16 per ounce. Gold costs were $378 per ounce.

The company reported Q3 operating margins that were better than 70%. The Q4 numbers should be better when they come out on March 18.

What should investors do?

The shares have been falling for the past month and the equity sale is going to put added pressure on the stock. Current shareholders should probably hold the shares, but new investors might want to wait for a better entry point.

The stock has taken four runs at $30 per share in the past two years, but failed to break through each time. The latest rally ended in late January and the stock is likely to bottom out again in the $20 to $23 range.

The growing production stream means Silver Wheaton’s long-term prospects look good, even if gold and silver prices stay near their current levels. Any increase in precious metals prices should drive margins and the stock much higher.

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 Andrew Walker has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and Silver Wheaton. Silver Wheaton is a recommendation of Stock Advisor Canada.

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