Silver Wheaton Goes for the Gold


In a recent interview with CNBC, Silver Wheaton CEO Randy Smallwood said that as long as central banks continue to pursue a course of quantitative easing, he sees the prices of both silver and gold rising. In the same interview he discussed a recent move by his company to become more involved in the gold market through its purchase of two gold streams from Brazil's Vale . While Smallwood didn't give any specific price targets, he stated that he remains bullish on the space. Silver Wheaton is increasingly well positioned for the coming economic realities and should be considered a buy for the long term.

Quantitative easing
The Federal Open Market Committee, FOMC, made clear last December that it intends to keep interest rates near zero until there is a "substantial" improvement in the unemployment rate. The term was finally defined as meaning until either inflation creeps above 2.5% or unemployment falls below 6.5%. The sentiment was repeated last month and appears to be exactly the type of central bank behavior that Smallwood is talking about.

Confusing the situation, however, are remarks made by the chairman of the Chicago Fed, Charles Evans, this week. Evans, who is a voting member of the FOMC this year, said: "I tend to think it might be possible to turn off the quantitative easing. We might be able to stop before 7 percent." This projection seems completely at odds with other comments made during the same interview in which he said that rates would remain depressed until the 6.5% unemployment level or beyond. He also said that he did not foresee the labor market reaching the desired level until mid-2015.

The only way that all of these comments are consistent is if you read them as Evans saying we could stop if we want, but we're not going to. Printing money is just too much fun. The Fed could stop any time it wants, but it does not have a problem - it's not denial if you're not a print-o-holic. Smallwood characterized the actions of central banks very accurately: "We see our currencies of the world are racing to devalue each other faster so that they can compete against each other."

The bullish case for metals
Given the position of the Fed and other central banks, it seems clear that loose monetary policy is going to be the order of the day for some time. While the Fed has inserted the 2.5% inflation level as a safety valve for shutting off the spigot, there remains the possibility that by the time "QE4EVER" stops, putting the brakes on inflation will be all but impossible. Against this inflation, silver and gold are attractive.

Smallwood further explains: "We're confident in precious metals as becoming a story of value. It's a hard asset that can't be printed, can't be reproduced [and] it's still pretty tough to find this stuff." This is compounded in the case of Silver Wheaton by the streaming business model employed by the company. Rather than operating mines, the company acquires the "streams" of precious metals that are produced at a given mine. The price paid by the company is agreed upon and fixed ahead of time, meaning the company earns the spread between its cost and the prevailing market price.

A golden opportunity
While Silver Wheaton is primarily focused on the silver market - the company controls the largest silver reserve on the planet and roughly 800 million ounces - it seems to be seeing opportunities in the gold market. The company agreed to pay $1.33 billion in exchange for 25% of the gold produced at Vale's Salobo mine. It also paid $570 million for 70% of the gold produced at a series on Vale's mines in the Sudbury, Ontario, region for the next 20 years

For Silver Wheaton, this deal is an extension into the gold market after it made its initial foray when it agreed to purchase 100% of Hudbay Minerals' gold production at its 777 mine through 2016. This is in addition to the right to buy all silver produced at the 777 mine, along with the company's Constancia Mine. Similarly, Silver Wheaton will pay an upfront lump sum to Vale and then a per-ounce surcharge on top of that.

Looking forward, Silver Wheaton expects this deal to help boost gold's contribution to revenue generation from 12% to 25% over the next five years. For investors wondering whether this indicates a fundamental shift in Silver Wheaton's focus, fear not. The company is still focused on silver, but at the same time, it is not against diversifying by adding "the right' gold streams" to its portfolio. Based on this outlook, the company is solidly positioned to perform, and with each passing stream that is added to the portfolio, the stock looks increasingly attractive. Based on each of these factors, I believe Silver Wheaton is a buy at current levels..

If you are looking for a company whose success is determined by the metals market, but without involving itself in the risks of physically mining the metals, then Silver Wheaton provides a unique play on the future of silver. SLW chooses to finance the mining of silver; it has grown sales and net income every year since 2008, and also has increased competitive advantages over its limited peer group. More details about our outlook for Silver Wheaton can be found here in our Motley Fool analyst report.

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