Contrarian Investors: Does Silver Wheaton Corp. Have More Room to Run?

Here’s what investors need to know about Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW).

| More on:
The Motley Fool

Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) has rallied more than 30% in 2016, and investors are wondering if the strong run will continue.

Let’s take a look at the streaming company to see if it deserves to be in your portfolio.

A unique model

Silver Wheaton doesn’t own any mines; it simply provides upfront cash to mining companies to help them move their properties from development to production. In return for the cash injection, Silver Wheaton is given the right to purchase gold or silver produced at the site for a very attractive price.

How cheap?

Silver Wheaton’s average cash cost for 2015 was US$4.58 per silver equivalent ounce. Silver trades for about US$15 per ounce right now.

Why would a mining company do this?

Mining is a capital-intensive business. When times are good, miners are able to raise funds through debt sales and equity offerings, but the market tends to go through cycles, and investors are not always willing to fork over cash when the going gets rough.

The past five years have been particularly difficult.

Many miners are now saddled with huge debt positions and very low stock prices. In order to secure the funds they need to grow, they turn to companies like Silver Wheaton.

Most of Silver Wheaton’s supply is contracted on mines set up to produce one of the base metals, such as copper or zinc. These properties also produce some gold and silver by-product, and that is what the mining company sells to Silver Wheaton.

The deal works well for the miner because the company can access important cash without taking on new debt or diluting shareholders. Silver Wheaton benefits because it secures a supply stream of gold and silver for many years at low prices.

Setting up for better times

The meltdown in metals prices in recent years has been tough on Silver Wheaton’s shareholders, but the company has taken advantage of the difficult times to secure strong production growth at very attractive prices. Output in 2015 hit a record 47.7 million silver equivalent ounces, and 2016 production is expected to be 54 million ounces.

With most of the growth fully funded, Silver Wheaton is poised to rake in some big profits if silver and gold prices continue to recover.


Silver Wheaton is involved in an ongoing dispute with the Canada Revenue Agency (CRA) for taxes payable on income earned by foreign subsidiaries. If Silver Wheaton loses the case, it could be required to pay more than $380 million for 2005-2010. The company also says 2011-2013 charges could total US$310 million.

The CRA issue is expected to linger, but most of the risk is probably priced into the stock.

Should you buy?

Silver Wheaton’s shares have already bounced 50% off the 12-month low, so most of the easy money has already been made. However, if you are a long-term bull on silver and gold prices, Silver Wheaton is a great way to play the recovery, and further upside is definitely possible on stronger precious metals prices.

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 Silver Wheaton. (USA). Silver Wheaton is a recommendation of Stock Advisor Canada.

More on Metals and Mining Stocks

Metals and Mining Stocks

Better Metals Buy: Gold Stocks vs. Lithium Stocks

Gold is the evergreen choice as a hedge against inflation and weak markets. In contrast, battery metals may offer unique…

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Wednesday, March 22

The Federal Reserve’s interest rate decision and economic projections are likely to keep the TSX highly volatile today.

Read more »

gold stocks gold mining
Metals and Mining Stocks

Gold Stocks Are Gaining Steam: Are They a Buy at Current Prices?

Gold stocks will likely steal the limelight this year, making up for their last year's underperformance.

Read more »

edit Sale sign, value, discount
Energy Stocks

2 Cheap Canadian Stocks You Can Buy for Less Than $50

You can buy Suncor Energy stock, and this gold stock at cheap valuations today

Read more »

A golden egg in a nest
Bank Stocks

How to Protect Your Retirement Portfolio From a Banking Crisis

The US banking crisis has created a market sell-off. Know how safe your money is and protect your retirement portfolio…

Read more »

Initial Public Offering (IPO) concept image, businessman selecting stock trading interface
Metals and Mining Stocks

Lithium Royalty IPO: Is it the Best Way to Invest in Lithium?

Lithium Royal stock went public on the TSX after it raised $150 million via an IPO. Is LIRC stock a…

Read more »

gold stocks gold mining
Tech Stocks

These Stocks Are Half-Priced, But Are They Actually Worth Buying?

Two top growth stocks have fallen by 50% in the last 12 months, and only one of them is worth…

Read more »

tsx today
Metals and Mining Stocks

TSX Today: What to Watch for in Stocks on Thursday, March 2

Macroeconomic concerns and more corporate earnings could continue to keep TSX stocks volatile today.

Read more »