43 Million Reasons to Love Silver Wheaton

Christopher Barker, The Motley Fool
Updated

When silver fetched just $16.90 per ounce a little more than two years ago, I offered my readers 13.6 billion reasons to adore Silver Wheaton (NYS: SLW) . Even as the prevailing price has doubled since that time, the long-term outlook for silver going forward remains a dazzling reflection of the metal's coveted industrial applications and monetary pedigree. If you share my expectation for silver to continue trending higher for quite some years to come, then the reasons to adore Silver Wheaton may be expanding faster than the U.S. national debt.

Forty-three million of those reasons correspond to the silver streamer's monster haul of 43 million silver-equivalent ounces (SEOs) annually by 2015. From anticipated 2012 production of 27 million SEOs, that's nearly a 60% growing spree in the span of three years.

Now that Goldcorp's (NYS: GG) gorgeous Penasquito mine is completing its final ramp-up to bring Silver Wheaton's attributable share of silver production from 5.3 million ounces in 2011 to more than 7 million ounces annually, investor attention now turns to the next big surge in Silver Wheaton's monumental growth trajectory. Barrick Gold (NYS: ABX) remains on track to enter production at its world-class Pascua-Lama mine in mid-2013, with Silver Wheaton's annual share of silver production expected to average 9 million ounces annually over the first five years. While Barrick has to do all the work and incur all the rampant cost-escalation risk that continues to affect the industry, Silver Wheaton gets to kick back and watch new production volume file in that's roughly equivalent to superstar minerFirst Majestic Silver's (NYS: AG) targeted 2012 output.


Pondering Silver Wheaton's future profitability at the looming scale of 43 million ounces offers more sheer fun per number-crunching step than any other stock out there. With an essentially fixed cash cost structure of just over $4 per ounce, a Fool has only to plug in his or her own silver-price forecasts for a glimpse of the profits to come.

As a baseline, consider that Silver Wheaton yielded $550 million in net profit for 2011 based upon sales of 21 million SEOs at an average realized price of $34.65 per SEO. With a net profit margin of 76% -- a product of the company's ingenious business model -- it's no wonder I've called Silver Wheaton the most profitable company in the world.

So, in a back-of-the-envelope sort of way, if we apply the 2011 realized silver price to 2015 sales volume of about 40 million ounces (allowing for some lag between production and sales volumes), we could expect to see 2015 net earnings of about $1.05 billion. By those metrics, Silver Wheaton currently trades for just over 11 times 2015 earnings. If, however, you believe that silver is more likely to average $50 per ounce in 2015, then the multiple drops down to less than 8 times 2015 earnings.

Of course, with a cash balance of $840 million that's hungering to fund additional accretive stream transactions -- not to mention the potential addition of currently stalled streams from projects such as Pan American Silver's (NAS: PAAS) Navidad project in Argentina -- readers are advised to remain watchful for sustained volume growth over the very long haul. It is on that basis, after all, that I ultimately see shares of Silver Wheaton topping $100. I have maintained my bullish CAPScall on Silver Wheaton since 2006, and I invite you to join the more than 2,500 members of the community who likewise believe Silver Wheaton will continue to outperform.

At the time thisarticle was published Fool contributorChristopher Barkercan be foundblogging activelyand acting Foolishly within the CAPS community under the usernameTMFSinchiruna. Hetweets. He owns shares of First Majestic Silver, Goldcorp, Pan American Silver, and Silver Wheaton. We Fools don't all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has adisclosure policy.

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