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How to Trade Rising Silver Prices

Silver Wheaton CEO Peter Barnes reveals how his company will take advantage of rising silver prices.
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) -- Many analysts believe silver, the poor man's gold, can offer more upside than gold making silver stocks an even better investment.

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Silver prices

year to date are up 25% as compared with

gold prices

, which are up 15%. Pure silver companies are hard to come by. Most miners produce silver as a byproduct while they really mine for gold and large silver producers like

Coeur D'Alene Mines

(CDE) - Get Coeur Mining, Inc. Report

are trying to diversify into gold to take advantage of prices of $1,300 an ounce.

Silver Wheaton


, on the other hand, is perfectly happy committing only to silver and simultaneously has found a way to take advantage of record-high gold.

Silver Wheaton is a silver royalty company and buys byproduct silver from gold companies for $4 an ounce and then sells it at spot price, which is currently more than $21 an ounce. The company earned 16 cents a share in the second quarter and net earnings were up 200%.

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Shares have rallied 68% year to date. The stock recently received a downgrade at


to neutral from buy although its price target was increased to $27.50 from $26 as well as one from

Credit Suisse

to neutral from outperform based on valuation.

Silver Stock to Play Rising Silver Prices

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I sat down with the Silver Wheaton CEO Peter Barnes at the Denver Gold Forum to see how significant $1,300 gold prices were for his company.

What does $1,300 gold mean



: I mean, what does $21 silver mean to our company which is roughly where we are now? It means that for every ounce we sell we are getting $17 of cash flow which we can give back to shareholders or we can invest in further growth for the shareholders. I mean it's massive. We have the highest margins in the precious metal industry.

How does your company work



: The silver market is unusual. Seventy percent of the silver that is produced in the world is actually a byproduct from other mines ... only 30% of silver is produced by silver miners. Whereas you look at gold, copper, 90% of gold and copper come from gold copper mines so 70% of silver is being produced by guys who aren't even really that interested. So what we'll do is we'll give them cash upfront to get their byproduct silver that they're not that focused on and that gives them cash to build another copper mine or another gold mine.

It doesn't seem like you have a whole lot of competition. Am I right about that



: Yeah, I mean at the moment we're the only company focused on that 17% of the silver market that's byproduct and as a result we've become the largest royalty company in the world in six years. I mean we're twice as big as

Franco Nevada

and they've been around four times as long as we have.

How do you think you did it so well



: I mean there's a lot of luck involved. It's a good business model, its luck, it's having good people and I feel that we have the best people I have ever worked with.

When you and your team are looking at projects to obtain silver is there any criteria that you use; any countries that you particularly want to be invested in



: Our key focus is creating shareholder value so if you put money into a difficult country you can easily lose that money so we go for low political risk.

Our whole model is trying to give better exposure to the silver price than you can through the normal silver mining company but with less risks. I mean we don't have a lot of the risks the traditional mining companies have so we're always looking at taking the risk out of it. So we're not going to go into high-risk countries; there's no need to.

So what countries do you like



: I mean we don't focus on countries, we focus on high-quality assets in low-risk countries. So countries that are good: I mean the states, obviously, if you can get permits there that's a good country to operate in, Australia, Europe, Chili, Peru, Argentina's not so good, maybe Mexico. I mean there's a lot of good countries

out there. We are getting most of our silver in mines in about a dozen countries right now and they're all low political risk.

What are some of the trends you're noticing in the silver community



: What's driving gold and silver now is investment demand ... When that starts tailing off and it will eventually, the good news for silver is that the industrial demand is also building and that will take over for it.

You had a great second quarter, what are your expectations for next quarter



: I think if silver prices stay strong our production trends upwards significantly over the next three years. This year we'll have about 23 million ounces of production. If we make no more acquisitions our production is at 40 million ounces a year in three years time. So if silver prices stay where they are I think you'll see a general trend upwards in our earnings and cash flows.

How do you manage the volatility in the silver price



: We don't. Our shareholders are looking for exposure to the silver price and we think the silver price is going up. I think that most people invest in silver companies think the silver price is going up so they actually want that upside to the silver price.

The way we've structured our company

is for a 10% increase in the silver price, our cash flow goes up 14% so as a result ... in six years we've become a $9 billion market cap ... And in that time period silver is up 200% but our share price is up 700%.

What are some of the trends you are noticing at the Denver Gold Forum?


: I think first of all that most people think that the metal price is going to continue to be strong going forward and I think that's driving a lot of investment decisions. There's been a couple of big M&A, big acquisitions, over the last few months. I think you'll see that continuing and I think that creates opportunities for companies like ours.

How would M&A create opportunities for you guys



: Well, if company A wants to buy company B and they have to offer some cash and they've got to get that cash from somewhere. And if they produce byproduct silver, we can pay them a lot of cash for that.


(SYMBOL) by Alix Steel in

New York.

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Alix Steel


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