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There's Still More Upside in Silver Wheaton

NEW YORK ( TheStreet) --The rollercoaster ride that has characterized precious metals markets this year continues, with silver prices hitting recent highs above $25 before heading lower.

This volatility has extended to silver-streaming company Silver Wheaton (SLW - Get Report) as well, which is trading nearly 30% lower on the year, even after its rally during the summer months. But as the broader metals market attempts to stabilize, the stock's weakness has run its course and long-term opportunities can be seen at current levels.

So, while we have seen some major declines in the company's year-over-year earnings, there is mounting evidence that the worst days are behind us and that Silver Wheaton is positioned once again to start producing the stronger earnings numbers seen in the past.

During the second quarter, Silver Wheaton's production rose to a record at 8.6 million silver-equivalent ounces -- a yearly increase of nearly 30%. Rising productivity, however, failed to generate similar increases in sales. Annualized sales were only higher by 4% for the period, coming in at 7.2 million ounces.

But where Silver Wheaton really establishes itself as a industry leader with its streaming model is in its ability to keep silver costs low, at an average of $4.14 per ounce.
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For long-term investors, most of the attraction in Silver Wheaton comes from the company's contracts to buy metal from miners at pre-determined prices, thus reducing operating risks and exposure to fluctuations in metals prices.

Nevertheless, weak points can be seen in recent earnings and revenues numbers, as a 20% decline in sales prices weighed on both. Operating margins declined by more than 20%, earnings fell to $91 million, and revenues were 17 percent lower than last year's, coming in at $167 million.

But even with these negatives, Silver Wheaton's margins are holding above 55%, which indicates highly efficient operational activities and strong positioning in the sector.

The company's low cost structure and superior business model have been aided by increased metals demand in emerging markets (particularly India and China), which helped propel stock values higher over the summer.
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