Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) is back above $30 on the TSX, and investors who missed the latest rebound are wondering if the rally has legs.
Let’s take a look at the current situation to see if this stock remains attractive.
Easy way to play gold and silver
Silver Wheaton does not own any mines; it simply provides mining companies with upfront cash to help them move their projects from development to production.
In return, Silver Wheaton is given the right to purchase gold or silver produced at the mine for a very attractive price. These streaming deals are normally done on mines set up to produce base metals such as copper or zinc, and the gold or silver that comes out of the mine is considered by-product.
Silver Wheaton then sells the metals on the open market.
How big are the margins?
Silver Wheaton reported Q3 2016 average cash costs of US$4.51 per ounce of silver and US$390 per ounce of gold. The company’s average realized sale prices for the quarter were US$19.53 per ounce of silver and US$1,336 per ounce of gold.
So, the company booked some nice margins on the sales.
Investors like Silver Wheaton because the stock gives them a way to benefit from rising gold and silver prices without taking on the direct risks associated with owning the miners.
Precious metals outlook
Gold and silver have been on the rise since the middle of December, and the trend appears to be picking up steam.
What’s going on?
President Trump’s aggressiveness towards important trading partners is making investors nervous. At the same time, analysts are keeping a close eye on Italy’s banking crisis, Brexit developments, and the potential for election shocks in France, the Netherlands, and Germany.
These situations are now offsetting the headwinds coming from expectations on higher U.S. interest rates.
How high could Silver Wheaton go?
The stock is driven by gold and silver prices. If the current rally picks up steam and continues through 2017, Silver Wheaton could easily retest its 2016 high above $40 per share.
Should you buy?
If you are a precious metals bull, Silver Wheaton deserves to be on your buy list. At this point, however, I would keep the position small.
Gold and silver could continue to rally on further political uncertainty, but the markets might simply shrug off any shocks as they did last year and turn the focus back to the U.S. Federal Reserve.
If the Fed follows through on plans to raise rates three times in 2017, gold and silver might have difficulty extending their gains.
