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Investment Overview for Silver Wheaton (NYSE:SLW)
Below are key drivers of Silver Wheaton's value that present opportunities for upside or downside to the current Trefis price estimate for Silver Wheaton:
Silver Shipments and contracts
- Goldcorp Silver Shipments: Goldcorp's Peñasquito mine completed its first full capacity production in 2011. Silver Wheaton will receive silver from this mine for the entire life of the mine. It is estimated that the mine will supply Silver Wheaton an average of 7 million ounces annually for the next 22 years. These are the estimated numbers, calculated using the production capacity and the reserves and resources at the Peñasquito mine. If Goldcorp is unable to increase the current production levels during the Trefis forecast period, it will lead to a significant downside to the Trefis price estimate. If production levels remain flat and remain below 5 million ounces by the end of our forecast period it would result in a downside of about 5% to our price estimate.
Tax liability for the company
- Silver Wheaton Tax Rate: Silver Wheaton currently does not incur any significant direct/indirect income taxes as it carries out its operations from its wholly owned subsidiary Silver Wheaton Cayman, registered in the Cayman islands, where the company is exempt from income tax laws. We do expect that the company's tax rate will eventually increase gradually as governments around the global crack down on tax havens and loopholes. Should the company's tax rate remain at zero throughout the Trefis forecast period it would result in an upside of about 4% to the Trefis price estimate. However, should tax laws be completely overhauled and the company's tax rate increases to 10% by the end of our forecast period it would present a downside of about 6%.
Silver Wheaton Corporation is the world's largest silver streaming company. The company currently has fourteen silver purchase agreements and two precious metals agreements where, in exchange for an upfront payment, it has the right to purchase all or a portion of the silver production, at a low fixed cost, from high-quality mines located in politically stable regions.
Based upon its current agreements and forecasts for 2012, attributable production is expected to be between 26 to 28 million silver equivalent ounces which includes 15,000 ounces of gold. By 2016, annual attributable production is anticipated to increase significantly to top 47 million silver equivalent ounces, including 35,000 ounces of gold. Beyond the initial upfront payment, no ongoing capital expenditures are required to generate this growth and Silver Wheaton does not hedge its silver production.
We have divided the company into seven divisions, based upon the silver streaming contracts it currently holds.
Silver Interests in Barrick Gold is the most valuable division
Historically, Goldcorp was the highest contributor of silver to the company, with silver shipments in 2011 amounting to 5.6 million ounces as compared to Barrick Gold's 2.9 million ounces. However, we expect that Barrick Gold will take over the top position as Silver Wheaton should receive 7-8 million ounces of silver in 2014 when the Pascua Lama mines go into production. The contract for Lagunas Norte, Pierina and Veladero mines ends in 2014, which will offset the production growth.
Fixed rate contracts provide some visibility
Silver Wheaton's business model is to provide some of the necessary capital to other mining companies via an upfront payment to assist in the construction of mines. In return the company gets a portion of the silver for a specified period (generally the life of the mine) at a fixed cost. Most of the companies assisted by Silver Wheaton produce silver as a byproduct of their mining operations. Accordingly, it is a mutually beneficial arrangement for the participating companies.
On average, Silver Wheaton pays about $3.90/oz of silver procured from the mining companies. This fixed price is subject to change based on inflationary factors. The company does not have to pay for any additional development costs for any projects after the initial payment. Silver Wheaton sells silver at spot market prices and does not hedge.
Increased demand from emerging markets
Since 2009 China's imports have been increasing consistently and in 2010 it became a net importer of silver. Chinese net silver imports surged fourfold from 2009 to 2010. 2011 was no different. The growing middle class and domestic demand in economies like India and China has fueled growth in silver prices.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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