Silver Without Borders

10/26/2010 1:00 pm EST

Focus: COMMODITIES

Gordon Pape

Editor and Publisher, The Income Investor and the Internet Wealth Builder

Gordon Pape, editor of The Canada Report, says one Canadian silver company is doing well by buying and then selling silver by-products from mines it doesn’t own or operate.

Silver Wheaton (NYSE: SLW), which is based in Vancouver, BC, is the largest silver streaming company in the world. Silver streaming means the company buys some or all of the by-product silver production from mines it does not own or operate.

For example, the company has contracts to purchase silver streams from Goldcorp's (NYSE: GG) Penasquito mine in Mexico and Barrick Gold's (NYSE: ABX) Pascua-Lama project, which is on the border between Chile and Argentina. Both are primarily gold mines which are in the development phase.

The price of silver has been moving higher, and SLW is well-positioned to take advantage of it. Based on its current agreements, Silver Wheaton expects to produce 22.2 million ounces of silver and 20,000 ounces of gold in 2010, for total production of 23.5 million silver equivalent ounces.

The company said in its second-quarter report that annual production is expected to increase to approximately 38 million ounces of silver and 59,000 ounces of gold by 2013, for total production of over 40 million silver equivalent ounces. This growth will be largely driven by the silver streams from Penasquito and Pascua-Lama as they come into operation.

Silver Wheaton reported record second-quarter earnings of $53.3 million (15 cents a share, fully diluted) compared to $18.4 million (6 cents a share) in the same period last year. Silver equivalent production during the quarter was 5.7 million ounces (5.3 million ounces of silver and 5,800 ounces of gold), representing an increase of 33% over the comparable period in 2009.

Chief executive officer Peter Barnes described the results as "very solid", and indeed they were. "With Goldcorp's Penasquito mine in Mexico, the first of our cornerstone assets, continuing to ramp up silver production ahead of schedule, we look forward to an even stronger second half to the year," he said.

"In the face of continued global economic uncertainty, the price of silver performed very well in the quarter, leading to record cash operating margins of US$14.45 per ounce, and clearly demonstrating the advantages of Silver Wheaton's business model of low fixed operating costs."

The stock is not cheap. It closed [Monday above $27,] close to its all-time highs. The trailing-12-month [price/earnings] ratio is 49.5x, so you won't be getting in on the ground floor here.

A higher silver price and increased output should translate into higher profits and rising value for the shares. (Of course, a retreat in the price of silver would be negative for the share price.) The shares are actively traded on the [New York Stock Exchange], with daily volume usually well in excess of five million shares.

I recommend Silver Wheaton for aggressive investors who can handle the risk and who want to add more precious metals exposure to their portfolios.

A higher silver price and increased output should translate into higher profits and rising value for the shares. The stock does not pay a dividend so if you need cash flow, look elsewhere.

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