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Silver Wheaton Equity Researc
October
22th
2012
Metals and Mining
Sector
Macic 2011 2012
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PRICE CHARTS
Price Chart One Year Silver Wheaton
Silver Wheatons stock price correlates closely with silver price, which can be volatile because investorstend to sell silver during a down market. In Q2 2012, as the debt crisis in Europe deepened and investorsflocked out of silver, SLW stock price plummeted along with physical price. During Q3, silver price climbedback up due to brighter market outlook and expectation of further monetary policy from the U.S. FederalReserve. Following the annoucement of QE3 by the Federal Reserve in September, silver price and SLWstock price have held close to its 52-week high of $40.00.
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Price Chart One Year Silver Wheaton VS. Comparable Companies
Silver Wheaton stock price tracks closely with silver spot price. As of October 22nd, 2012, by looking at theprice chart alone, Silver Wheaton is relatively overvalued compared to price of physical silver and some ofits peers. However, due to its unique business model and deal growth, overvaluation might be justified, aswill be discussed below.
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Price Chart One Year Silver Wheaton VS. TSX Composite
Silver Wheaton stock price correlates closely with S&P/TSX Composite.
NEWSAND EVENTS
Precious metals (gold and silver) are the ultimate hedge against inflation. With expansionary monetary
policies coming out from central banks around the world, gold and silver prices will continue to increase. In
September 2012, the U.S. Federal Reserved announced QE3, buying $40B Mortgage Backed Securities
every month indefinitely. In the same month, the European Central Bank announced it will engage in
unlimited buying of troubled European Sovereign Bonds from nations such as Spain and Italy. Furthermore
in Asia, Bank of China and Bank of Japan are both stimulating their economies by increasing credit and
injecting money supply. More money supply directly leads to inflation and ultimately higher gold and silve
prices.
Being a silver royalty and streaming company, Silver Wheaton is well positioned to take advantage of the
potential of a silver spot price increase. Recently, the company announced an upward revision to its one
and five year production guidance due to the addition of two new silver streaming deals. For fiscal yea
2012, attributable silver equivalent production is forecast to increase from 27 million silver equivalent
ounces to 28 million silver equivalent ounces, including 42,000 ounces of gold. For fiscal 2016, annua
attributable production is anticipated to increase 90% compared to fiscal 2011 levels, growing toapproximately 48 million silver equivalent ounces, including 100,000 ounces of gold.
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In late September, 2012, Silver Wheaton announced that it has closed the previously announced purchase
from HudBay Minerals Inc. (Hudbay) of 100% of the life of mine silver production from its currently
producing 777 Mine (777), 100% of the life of mine silver production from its Constancia Projec
(Constancia), as well as 100% of gold production from the 777 Mine until Constancia satisfies a completion
test, or the end of 2016, whichever is later. At that point, Silver Wheaton's share of gold production from
777 will be reduced to 50% for the remainder of the mine life. Silver Wheaton will pay Hudbay total cash
consideration of $750 million, of which $500 million was paid upon closing, with two further payments o
$125 million each to be made upon the satisfaction of minimum capital expenditures having been incurred
at Constancia. In addition, Silver Wheaton will make ongoing payments of the lesser of $5.90 per ounce o
silver and $400 per ounce of gold (both subject to an inflationary adjustment) or the prevailing marke
price per ounce of silver and gold delivered. Silver Wheaton made the initial upfront cash payment of $500
million using cash on hand. Subsequent upfront cash payments totaling $250 million are also expected to
be financed with the remaining cash on hand and continued strong operating cash flows.
COMPANY RISK
As a silver royalty and streaming company, Silver Wheaton is able to reduce its geopolitical and
operational risks that are commonly associated with mining companies. Because the company does not
own mines, it can effectively diversify projects in politically stable countries such as the U.S., Sweden
Mexico and Peru. In addition, Silver Wheaton is not affected by ongoing capital or exploration costs and
increases in cost of production.
The Bloomberg Default Risk for Silver Wheaton is IG2 with 0.0031% chance of defaulting on debt. Deb
accounts for 0.7% of its total capital and equity accounts for 99.3%. Weighted Average Cost of Capital is
18.7% - high compared to its peers and may suggest higher risk and volatility. The 180-Day Volatility is
37.41, which is around the industry average of 38.93. A beta of 1.62 suggests volatility higher than the
industry average.
Credit Rating Moody's Recommendation VaR
IG2 N/A N/A
Volatility Implied Volatility WACC BETA
37.41 42.83 18.70% 1.62
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PEER COMPARISON
Because of its unique silver streaming business model and not having to pay for cost of production, SilverWheaton has a EBITDA Margin much higher than its peers. EBITDA Margin for LTM is more than 20% higher
than the average of its peers. Silver Wheaton is trading at a P/E multiple of 24.82x, close to the peer
average of 23.26x. The company should be trading at a multiple higher than the industry average because
the higher EBITDA Margin. The market capitalization ins Silver Wheaton is $13.47B, far exceeds that of its
peers. Largest of any of its peers.
Ticker
Market Cap
(Billion) Price Div Yield
EBITDA
Margin
Current
P/E
3 Month
Return
1 Year
Return
TSX: SLW C$13.47 C$39.13 1.00% 83.86% 24.82 x 3.42% 30.70%
TSX: PAA C$3.17 C$21.13 0.94% 43.54% 10.15 x -13.49% 10.41%
NYSE: CDE C$2.55 C$29.56 N/A 48.59% 35.19 x 10.09% 38.77%TSX: SVM C$1.00 C$5.95 1.68% 59.19% 18.85 x -36.10% 6.43%
TSX: FR C$2.54 C$22.59 N/A 60.37% 27.27 x -19.50% 20.28%
Average C$4.55 C$23.67 1.21% 59.11% 23.26 x -11.12% 21.32%
REVENUEAND EARNINGS
Silver Wheatons main source of revenue is from the sales of silver, which accounts for 95.98% of revenue
with the remaining percventage rest coming from gold. During the past three years, the company has
done well in growing its sales numbers. From 2009 to 2010 and from 2010 to 2011, revenue increased by
77% and 72.43%, respectively. In 2012, due to the decrease of the silver price in the middle of the year
revenue of Silver Wheaton slowed down to a growth of only grew by 13.18%. Given the current increasingtrend in silver price, it is estimated that Silver Wheaton will be able to achieve a revenue growth rate of
32.65% in 2013.
Two factors drive revenue growth at Silver Wheaton. First is the potential rise in physical silver prices
Whileith Central Banks around the world continue implementingadopting expansionary monetary policies
investors will continue to buy invest in precious metals to preserve purchasing power, driving up prices
The Ssecond driver of revenue is the increase in the number of royalty deals the company is able to
secure. When the silver price decreases, the company is able to engage in attractive deals by providing
upfront capital financing in exchange of the right to purchase the silver within the mine at fixed low prices
Regardless of volatility in the underlying commodity price, Silver Wheaton is well positioned to benefit in
the long term.
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Q1 Q2 Q3 Q4 Total
Est 2013 284.00$ 268.00$ 273.50$ 270.50$ 1,096.00$
2012 199.64$ 201.41$ 195.80$ 229.40$ 826.25$
2011 158.18$ 194.75$ 185.20$ 191.87$ 730.00$
2010 85.94$ 95.00$ 92.83$ 149.58$ 423.35$2009 37.57$ 41.40$ 69.77$ 90.55$ 239.29$
Revenue (Million)
Comment on net income growth as well.. what % increases year to year?
Q1 Q2 Q3 Q4 Total
Est 2013 210.00$ 185.00$ 188.00$ 182.00$ 765.00$
2012 147.18$ 141.41$ 139.00$ 169.33$ 596.92$
2011 122.18$ 148.07$ 135.04$ 144.75$ 550.04$
2010 50.56$ 15.25$ 23.67$ 63.90$ 153.38$
2009 15.11$ 18.44$ 33.57$ 50.81$ 117.93$
Net Income
Q1 Q2 Q3 Q4 Total
Est 2013 0.59$ 0.52$ 0.52$ 0.51$ 2.14$
2012 0.42$ 0.40$ 0.39$ 0.49$ 1.70$
2011 0.35$ 0.42$ 0.38$ 0.41$ 1.56$
2010 0.15$ 0.04$ 0.07$ 0.19$ 0.45$
2009 0.06$ 0.06$ 0.11$ 0.16$ 0.39$
EPS
Revenue Annually:
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Revenue Quarterly:
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Income Annually:
Income Quarterly:
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EPS Annually:
EPS Quarterly:
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FUNDAMENTAL RATIO ANALYSISSilver Wheaton uses its resources efficiently, having a Return on Equity ratio of 22.38% and a Return on
Asset ratio of 19.38%. Both Current Ratio and Quick Ratio are at 5.03, which demonstrate that the
company has little short-term debt that needs to be repaid. Debt to Capital Ratio is 2.88, which means the
company has little leverage since only 3% of companys assets is debt. Furthermore, revenue growth for
next year is expected to be 14.4%. This is low compared to previous years likely due to higher silver prices
limiting opportunities for new royalty deals. Gross Margin and Net Profit Margin are above 70%, which both
far exceed the industry average of 53.39% and 22.65% repsectively. This again is a result of the
innovative silver streaming model the company has. Lastly, to value the company for the year 2013,
estimated leading P/E of 20.49 is multiplied with the estimated EPS for 2013, which results in a valuation of
$43.85 per share.
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Revenue Growth ROE Current Ratio Price to Book
14.40% 22.38% 5.03 4.89
Gross Margin ROA Quick Ratio Est P/E Value
75.32% 19.38% 5.03 20.49 43.85$
Net Margin Forward P/E Debt/Capital Est EPS
70.21% 20.49 2.88 2.14$
CASH FLOW ANALYSIS
As of October 2012, Silver Wheaton has a strong cash position of over $1B, which the company keeps
ready ifin case of any attractive roytalty deals emerge. The company generated $667.66 million of cash
from operational activities in the last twelve months; investing activities in capital expenditures
tookaccounted for away $125M decrease in cash due to capital expenditures and financing activities in
the form of divident payouts accounted for took away $127.84M due to dividend payouts and retiring of
long term debt accounted for $28.56M of long term debt. In total, the company added a net of $414.44M
inof net cash in the last twelve months.
Net Cash Position Dividend Div. Growth Rate (for year) Price/Cash Flow
$1122.62 (millions) $0.3 200% 20.76
FCF Per Share Dividend Yield OCF Ratio
$1.50 1.03% 3.73111
FCF Yield Dividend Payout OCF/Net Sales
3.82% 22.51 0.821511
TECHNICAL ANALYSIS
Two technical indicators were used to estimate short-term entry and exit points. First is the 50
Day and 200 Day Simple Moving Averages that are used
Describe your technical analysis methodology and findings here. Discuss the indicators you used,
as well as what the trends they suggest or confirm. Do this for each chart used and feel free to
use more than or less than four as long as your point is made.
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50 Day Simple Moving Average: Add 200 as well on this
I looked up the RSI (at 53 currently) . Would be a good idea to suggest a limit order just above
the 50MA (volume is declining)
Explanation
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Bollinger Bands:
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SELECTION METHODOLOGY
In this section you will discuss the criteria and methodology you used to select this company
from the multitude of securities in your particular sector. Be sure to not breeze over this section
as poor justification for selection may affect the chances of your pick being voted on. This should
not be longer than two paragraphs. Also include reasoning behind price target
Comment on SLWs unique business model (higher margins, less expenses)
-Filtered by market cap (largest in sector)
-Expect silver prices to continue upward trend due to expansionary monetary policy, therefore
our price of X is justified.
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