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Silver Wheaton is a silver royalty company. It takes silver a company doesn't want, buys it for $4 an ounce and then sells it at spot price. The seller gets money to finance other projects whereas Silver Wheaton gets silver without the operational risk and with huge profit margins.
Not all companies like to finance their operations through royalties because they wind up giving production away, but gold companies, which would have sold silver as a byproduct anyway, have keyed into this type of funding. Silver Wheaton currently has 16 silver purchase agreements and two precious metals agreements.
Silver Wheaton delivers the cash upfront and then has the right to buy the agreed upon silver at a fixed cost. The company tries to stay in safe areas like the Americas and Australia. Some of its bigger partners include Goldcorp(GG) and Barrick Gold(ABX).
For 2010, CEO Peter Barnes is expecting 23 million ounces of silver production, and if the company doesn't grow over the next three years production will still hit 40 million ounces.
Silver Wheaton has been raking in the cash and taking advantage of recent mergers and acquisition activity in the gold sector. If a company wants to buy a smaller one but needs cash upfront selling its silver byproduct becomes an attractive solution.
Silver Wheaton reported record third-quarter net earnings of 20 cents a share, up from 11 cents a year earlier. Silver equivalent production was 5.9 million ounces, a 41% increase, and sales totaled 4.7 million ounces, a 2% jump.
Silver Wheaton paid $3.98 for an ounce of silver and $300 for an ounce of gold. Its cash costs were just slightly higher at $4.09 an ounce and its cash operating margin was $15.72 an ounce.
At of the end of the third quarter, Silver Wheaton had $255 million in cash and $400 million of credit under its bank debt facility. The company has $85.7 million in long-term bank debt and $120.3 million in long-term silver interest payments.
Silver Wheaton also has a $200 million non-revolving term loan and a $400 million revolving term loan with the former requiring quarterly payments of $7 million plus interest.
The company pays no dividend, but according to TheStreet Ratings is unlikely to face financial difficulties over the short-term. TheStreet Ratings has a buy rating on the stock.
Silver Wheaton currently has 11 buy ratings and five holds with an average price target of $41.90. The stock trades at a price-to-earnings ratio of 60.11, a premium to its peers. Shares returned 163.72% in 2010.
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