Silver Wheaton: Steaming Profits

09/18/2014 7:00 am EST

Focus: STOCKS

Stephen Leeb

Founder and Research Chairman, Leeb Group

As the need for energy production grows increasingly urgent, one path to some of the biggest long-term profits will be silver, thanks to its key role in solar energy technology, explains Stephen Leeb, editor of The Complete Investor.

About 90% of photovoltaic installations use silver. And growth in solar has been surging-from roughly one gigawatt in 2000 to more than 130 gigwatts in 2013-with a lot more to come.

This will propel silver prices higher. It's estimated that in 2015 solar energy could require 100 million ounces of silver. That number could double or triple by the end of the decade and account for 20% to 30% of demand for silver.

Silver's special properties make it essential in photovoltaics: along with its durability and reflectivity, silver is the best thermal and electrical conductor. That's why you'd be hard-pressed to find an electronic device that doesn't use silver.

As a silver play, we recommend Silver Wheaton (SLW), the world's largest silver streaming company. It has proven its mettle in silver bull and bear markets alike. The stock rises more than the metals when silver prices are rising and declines less when prices are dropping.

As a streaming company, Silver Wheaton enters into agreements to buy output from miners at a fixed price. This keeps its costs fixed and predictable. Growth comes from consummating additional deals and, of course, from appreciation in the underlying metal.

Miners typically enter into such agreements so as to sell a secondary metal, for instance, a mine that produces mainly gold may look to stream its silver output.

The streaming company enjoys a beneficial asymmetry in that when metal prices fall, miners typically mine less, leaving the streaming company with less metal to buy at the agreed-upon price. And unlike most miners, it isn't stuck with the high fixed costs of keeping a mine running.

When metals prices rise, miners typically raise production, resulting in more metal the streaming company can buy at a price that has become favorable.

Based on current contracts, Silver Wheaton should obtain about 35 million ounces of silver in 2014, rising to as much as 55 million ounces by 2020. This combination of rising production and the potential for sharply higher silver prices positions the stock for a multi-fold gain in the year ahead.

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