Fundamental Drivers to Silver Wheaton’s Rally

Silver Wheaton’s (NYSE: SLW) shares have jumped in recent weeks and are trading above $33 currently. We saw a sharp mover higher in silver spot prices last week in part due to strong fundamental demand from major markets like India and China in addition to overall risk-off trade in global equity markets last week which caused investors to pile back into precious metals like gold and silver. Below we include our quick analysis on some of the fundamental drivers of the recent moves and what it means for Silver Wheaton. The company competes with silver manufacturers like Silver Standard Resources (NASDAQ:SSRI), Pan American Silver (NASDAQ:PAAS), Bear Creek Mining Corporation (CVE:BCM) and Endeavor Silver (NYSE:EXK).

Demand in India has largely been driving Silver Prices…

Silver has been pushed to its current price of about $36.70 per ounce by the rising global demand. The biggest contributor to this push has been the strong demand for silver in India after the precious metal hit the lows of $33 per ounce earlier this month.

Silver and gold imports for the country surged by 500% in May on a month-on month basis and 222% compared to May 2010. ^[1] India’s bullish sentiments towards precious metals is evident from the fact that over the last month, the Reserve Bank of India granted permission to seven new banks to import gold and facilitate investments. Moreover, with India’s benchmark indices – Sensex and Nifty – under-performing on weak global cues, investors have shied away from stocks and are investing in precious metals.

… and China is expected to follow suit…

China also expects a lot of demand for silver this year. Philip Kalpwijk, executive chairman of GFMS (a leading global consultancy), detailed in a conference recently that the increased focus towards silver investment products, combined with a forecast 16% annual growth in industrial demand will lead to China’s total silver demand outstripping its supply. “There is a widening demand for silver as investment in China because of its lower entry point. It is also being increasingly recognised as an physical investment asset, which will support demand.” he added. ^[2]

… which brings us back to the effect on Silver Wheaton

Silver Wheaton is the world’s largest silver streaming company with more than 14 silver streaming contracts with the producers and miners. The company primarily enters into these contracts with companies that produce silver as a by-product of their gold and copper mining activities.

Their $4 per ounce purchase agreements give it an edge over the conventional mining companies as it does not incur any kind of production losses in volatile market conditions. Moreover, since the company does not own any of the mines, it does not incur any operational and capital costs associated with the production. Therefore upside to silver prices leads to significant upside in the company’s margins.

Our price estimate for average silver prices for the year is at $41 per ounce. The gold and silver demand peaks in India during the festive season around November, and we can see some highs during that period. Our $43 price estimate for Silver Wheaton is at a 30% premium to the current market price.

See our full analysis for Silver Wheaton

1. Latest Gold Market Shocker: India’s Gold and Silver Imports soar 500%, Beakon Equity [↩]
2. China gold imports to surge, Reuters [↩]