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- November 14, 2012
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Mining is for suckers.
I’ve told you this before… and you may think that as the editor of a resource and mining advisory, I’ve lost my mind saying so. After all, I’ve recommended plenty of mining companies, and most of my readers love the idea of owning them.
But strictly from a business standpoint, mining sucks…
Finally, for your efforts, you’re selling a commodity just like everyone else’s. There’s no special brand of gold or uranium. You have no “pricing power” like Apple has with its iPods. You’re also subject to crazy swings in the price of your product, which you have no control over.
When you get it right, the business of mining can be far more profitable than investing in bullion. But most mining investors – public and private – lose their shirts in it.
But there’s a way to get terrific upside exposure to a bull market in precious metals, specifically silver, without getting into the risky business of mining.
I’m talking about “silver streaming.”
A “silver streamer” is essentially a company that purchases the silver byproduct from base-metal miners. And Silver Wheaton (NYSE: SLW) is the largest silver streamer in the world.
Simply put, when a copper miner (or zinc miner or iron miner) extracts ore from his mine, that rock likely includes a lot of minerals other than copper – including silver. The copper miner doesn’t want the hassle of smelting and dealing with the silver from his mine. So a silver streamer, like Silver Wheaton, is there to take it off his hands…
Silver Wheaton will swoop in and make a deal up front for the silver. It’s a good deal for the base-metal miner because he gets guaranteed income for his silver. And it’s a great deal for Silver Wheaton because it gets a guaranteed supply of silver at a low, fixed price without the hassles and risks of actually mining it.
Silver Wheaton’s strategy has paid off so far… It’s up about 150% this year versus silver’s 70% rise. But its results will get even better as the price of silver goes even higher…
Silver Wheaton’s costs are fixed, so any increase in the silver price goes straight to its net profit. And as the silver price goes up, people will pay more for the stock.
Say we buy shares when they trade for $43 and silver goes for $25 per ounce. When the silver price hits $30 per ounce, history says the stock should race up to $57. So while silver rises 20%, our stock jumps 33%.
That’s leverage. And that’s why we want to own Silver Wheaton at times, like today, when silver is poised to race higher. Of course, the leverage works both ways, so there are periods when Silver Wheaton shares are cheap relative to the metal.
I put together a table that shows us when Silver Wheaton is a great buy – and when it’s gotten too expensive. I got these figures by finding the average price per ounce of reserves the market was willing to pay at various silver prices. Then, I calculated how many ounces of silver we get per Silver Wheaton share. Slap on a 10% discount, and we’ve got a conservative “price guide” for Silver Wheaton. Take a look…
Today, silver sells for nearly $30 per ounce, and Silver Wheaton shares are $39. Our fair-value calculation says at the current silver price, Silver Wheaton should be closer to $57. That means we can buy shares well below fair value right now.
– Matt Badiali
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