Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) took a pretty big hit toward the end of September, dropping from $37.84 to $29.89 by October 11, leaving some investors concerned that the company might be running out of steam. Instead, the company is on the rise again, bouncing off that low to rise rather quickly to over $32 a share. So the question investors now have is, can it keep going?
To answer that question, it helps to understand the factors at play when talking about Silver Wheaton.
The first factor has to do with an overall understanding of how silver reaches the market. Believe it or not, most miners don’t primarily dig for silver. Instead, they dig for some other kind of metal and find silver as a by-product. Approximately 70% of silver comes from these types of mines.
Commodities have been depressed for quite some time now. If this continues, it’s unlikely that many new mines will launch, which could hold back new silver supply from reaching the market. If this happens and demand increases, the price of silver could rise rather quickly.
Another thing to understand is the business model behind Silver Wheaton. It’s not actually a mining company. Instead, it’s known as a silver streaming company. Essentially, it acts as the financier for miners that are looking to launch. For example, a copper mine might need money to go to production. Silver Wheaton will give it money in exchange for the right to purchase any gold and silver found at discount prices.
And the method works. In Q2 2016, Silver Wheaton paid US$4.46 per ounce in average cash costs. And for gold, which it has been investing in more and more, it only paid US$401 per ounce. Those are lucrative margins considering the spot price for silver is US$17.58 and the spot price for gold is US$1,268. You can see why investors are so anxious for Silver Wheaton to do well.
The final factor at play is the overall market for gold and silver. Gold is the reason why the price of Silver Wheaton increased so much in the first half of the year. As the price of gold increased, the margins for the company increased, sending the shares up. Silver Wheaton bought 130,000 ounces in the first half of 2016, so the impact of gold is significant.
And silver is the nearly same way. The only difference is that, unlike gold, silver has industrial benefits. It acts as a conductive agent to help with the transfer of electrons. Solar panels require about 0.7 ounces of silver for every panel; therefore, as countries around the world invest in renewable and clean energy, I expect demand for silver to increase substantially.
Is Silver Wheaton the right stock for your portfolio?
In the short term, I can’t answer that. No one knows if this rally will continue. But in the long term, I am quite confident that Silver Wheaton is a great stock to own. It has a lucrative business model, it generates amazing margins, and its commodities might experience some shortages in the coming years. All in all, the conditions are ripe for Silver Wheaton to continue growing.
