Silver Wheaton Equity Research Report (TSX: SLW)

7/30/2019 Silver Wheaton Equity Research Report (TSX: SLW)

1/16

Silver Wheaton Equity Researc

October

22th

2012

Metals and Mining

Sector

Macic 2011 2012


2/16


3/16

www.mMac Investment [email protected]

Silver Wheaton Equit

Research Re or

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.

Generously Sponsored By:

3


4/16



Research Re or

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.


4


5/16



Research Re or

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.


5


6/16



Research Re or

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


6


7/16



Research Re or

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.


7


8/16



Research Re or

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:


8


9/16



Research Re or

Revenue Quarterly:


9


10/16



Research Re or

Income Annually:

Income Quarterly:


10


11/16



Research Re or

EPS Annually:

EPS Quarterly:


11


12/16



Research Re or

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.


12


13/16



Research Re or

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.


13


14/16



Research Re or

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


14


15/16



Research Re or

Bollinger Bands:


15


16/16



Research Re or

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.


Documents

Silver Wheaton Equity Research Report (TSX: SLW)