Silver Wheaton: Royalty Gains

11/20/2014 7:00 am EST


Carlton Delfeld

Editor, The La Jolla Letter and Pacific Gains

I believe the case for investing in silver is getting stronger by the day, as silver prices have pulled back down sharply to prices not seen since 2010, explains Carl Delfeld in Wealth Daily.

Silver’s scarcity is also enhanced by its many uses in industry and technology.

In 2012, only 10% of production went to minting silver coins and medals. There are rumors that Apple’s (AAPL) recent production delays are due to shortages of metals such as silver.

Despite sagging silver prices, the US Mint is selling record amounts of silver coins, and in the first half of 2013 alone, India imported 130 million ounces of silver.

Silver mining stocks are one option, but market silver prices are a bit below mining production costs, so this is not a good place to be right now. Miners are doing all they can to rein in costs and this will serve them well when prices inevitably rebound.

However, my favorite silver stock does not mine any silver at all. Instead, Silver Wheaton (SLW) follows a “royalty model,” investing upfront in mines in exchange for the silver by-product.

Silver Wheaton buys interest in this by-product silver for around $4 an ounce and then sells the silver at spot prices. This gives it better margins, lower risk, and better diversification than owning and managing mines directly.

In other words, the company shares in the upside for the price of silver without construction problems, the issue of coming in way over budget, or those pesky environmental liabilities.

Silver Wheaton has silver interests in three of the top five silver deposits in the world and agreements in Canada, the US, Mexico, Peru, Argentina, Portugal, Sweden, and Greece.

The company’s dividend policy is to pay out 20% of the previous quarter's operating cash flow. The shares are down 31.9% in the last three months, more than the silver ETF.

This could be a great entry point, and while I am not yet ready to buy aggressively, there is nothing wrong with starting a small position in SLW now while looking for a turnaround in silver prices next year.

When silver prices turn, they will probably move explosively. Don’t get caught flatfooted. Get started and prepare for the bounce.

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