Silver Wheaton is arguably among the very best silver stocks to own for exposure to rising silver prices. The company negotiates off-take agreements with mining firms that typically produce silver as a byproduct of mining operations. These deals are "win-win" in nature. Silver Wheaton benefits by locking in an annual stream of silver at a set price, and the partner company is able to use this contractually agreed upon revenue stream to buttress their own operations, primarily focused on other minerals. Silver Wheaton has six silver off-take agreements in place, and according to CEO Peter Barnes, the company is talking to another ten to fifteen companies. Each new contact win has been highly accretive to Silver Wheaton and given the nature of fixed price off-take agreements, Silver Wheaton has considerable leverage to rising silver prices.
Originally, the company was part of Wheaton River's assets. Following Goldcorp's 2005 takeover of Wheaton River, Goldcorp sold 18 million Silver Wheaton shares to reduce its holdings to 49%. As an independently traded pure play on silver, Silver Wheaton has outperformed the price of silver by a wide margin. But there have been exceptions to this rule, and we are currently witnessing just such a divergence. This is a fantastic buying opportunity.
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In the above chart we compare Silver Wheaton to the iShares Silver Trust, a reasonable proxy for silver prices. Beginning in early January, the divergence is clear: silver bullion has left Silver Wheaton in the dust. But the under performance has largely been due to the initial rumors about a pending Goldcorp sale, and now, the waiting game for the actual transaction. Goldcorp agreed to sell to Canadian investment banks its entire remaining 108 million share Silver Wheaton horde. In the deal, Goldcorp will receive C$14.50 per common share, and the investment banks will then underwrite a share offering. The discount to prevailing market prices is normal industry practice when moving large share blocks. Furthermore, when a deal like this is in the works, it's almost always the case that the stock will hover around the offering price for some time.
The offering is scheduled to close on or before February 14, 2008. The offering was over-subscribed, with many institutional investors chomping at the bit to have the opportunity to buy large blocks of Silver Wheaton without moving the stock up massively in the wake of such accumulation. Alas, dear reader, this is how the big boys play, and most individual investors never get such preferential treatment. But understanding how the game works can at least give the "little guy" an edge in picking up some table scraps. Silver Wheaton's current quote under $15 is an artifact of this Goldcorp strategic decision.
We believe by the end of February Silver Wheaton should be on its way to retesting its old high. Silver should continue to move higher this month, with prices over $18 per ounce as a distinct possibility. But our bullish expectations for Silver Wheaton's near-term performance is also colored by our belief that investors haven't fully appreciated why Goldcorp's strategic decision is highly beneficial to Silver Wheaton. Goldcorp needed development cash, and the Silver Wheaton holding was of modest consequence compared to Goldcorp's other assets. Arguably, the Silver Wheaton position wasn't fully reflected in Goldcorp's share price anyway. To Silver Wheaton's advantage, the company can now more readily negotiate silver off-take agreements with Goldcorp competitors. Silver Wheaton is now a strong, independent company and there's no need for any ongoing relationship with Goldcorp. With the overhang of Goldcorp shares removed, prospective Silver Wheaton shareholders will no longer have to wonder when and if the Goldcorp share block would potentially flood the market.
Both silver and gold are in long-term bull markets. Volatility in bullion prices is often wicked, but by now it is quite clear that the current bull market for bullion is shaping up to be bigger than any previous witnessed by living investor memory. Consider this: the last time gold peaked over $800 in the 1980s, it did so for only a few trading days. The previous high was merely the "mania spike" associated with the last stage of the 1970s-80s bull market run. A similar observation can be made with silver. Today, however, you would be hard pressed to find mainstream financial media commentary placing today's sustained elevated prices in proper historical perspective -- never mind adjusting for inflation. As strange as it may seem to those new to the silver and gold market, we are in the early innings of this bull market move. Within a few years gold should easily be over $2,500 and silver, over $100.
Silver Wheaton will be among the strongest blue-chip company performers. We're adding 2,500 shares to the Investor Intelligentsia model portfolio on the open and it just may happen that we will not be selling our position until "Silver Wheaton" is a household name at the latter stage of our current precious metals bull market - a few years down the road.
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