It is easy to see why precious metals stocks continue to fall as both gold and silver are under significant pressure because of a strong U.S. dollar and weak oil prices. Since the start of the year gold has fallen by 17% and silver has plunged a massive 28%. Both metals are trading at their lowest prices since the global financial crisis. Even more worrying is that the outlook for precious metals remains pessimistic.
Despite this, precious metals streamer Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) still appears to be an attractive investment, and even more so with its share price down by a massive 50% in the last year.
Now what?
It hasn’t been clear sailing for Silver Wheaton in recent months. Not only has it been adversely affected by low precious metals prices, but its tax filings for the years 2005-10 are being reviewed by the Canadian Revenue Agency (CRA). Silver Wheaton faces additional taxes and penalties in excess of US$200 million should the CRA make an adverse finding.
However, I believe this is really a distraction for investors; its business model makes it well positioned to benefit from the tailwinds that, over the long term, will drive the price of silver higher.
You see, silver, unlike gold, has a wide range of industrial uses. It is an important element used in the manufacture of electronic components including electronic touch screens, LEDs and semiconductor stackers used in the manufacture of high-tech products such as smartphones. These products are experiencing ever-growing demand.
Then you have the secular trend of green energy. Governments globally are introducing ever-higher clean energy targets as a means of reducing carbon footprints and combating global warming. One form of clean energy that continues to grow in popularity is solar power generation; a number of countries, including China, Japan, and Germany are establishing ambitious solar energy targets.
This bodes well for the outlook for silver because its conductive properties are a core component used in the manufacture of photovoltaic cells. In order to construct sufficient photovoltaic cells to generate one gigawatt of electricity, about 2.8 million ounces of silver is required for their construction.
Now, with China expected to triple its installed solar capacity to 100 gigawatts by 2020, along with the targets of other countries, a tremendous amount of silver will be required. This will affect an already constrained supply situation, driving prices higher in the long term.
Each of these factors bodes well for silver miners in the long term, but it is Silver Wheaton that is the best means of cashing in on these tailwinds.
So what?
As a precious metals streamer, Silver Wheaton doesn’t engage in mining activities. Rather, it lends money to miners and in return is entitled to purchase gold and silver at prices well below the market price. At this time, its average purchase prices are US$4 per ounce for silver and US$400 per ounce for gold, which, even at current prices, gives it a considerable margin.
It also has a far lower cost structure than miners, and this allows it to remain profitable at prices that the miners can’t. These reasons, coupled with Silver Wheaton trading at less than half of its 52-week high, make it a particularly attractive long-term investment at this time.
