Rankings   Forums   Features   Help    

Suntzu's picture
The Belle of the Ball

I recently started to establish a position in Silver Wheaton for my stokblogs portfolio. It's a stock I've traded in and out of over the last couple of years and I probably should have just bought and held. In my stokblogs portfolio I'll keep a core position and a trading position to help manage volatility.

Silver Wheaton was spun off from Wheaton River to be a silver play. Straight silver plays receive a much higher valuation in the market than a mixture of gold and silver (It makes it easier for the analysts as there is only one forecast to screw up rather than two!). Wheaton River merged with Goldcorp and the new Goldcorp retains a 62% interest in Silver Wheaton. In short, Silver Wheaton was designed to be a "football" where investors can bet on the price of silver without going to the futures markets. The following charts shows that Silver Wheaton closely mirrors the price of silver:






After reading a lot of the blogs here, I gather there are a lot of value investors and Buffet followers here. While not a value stock in the traditional sense,  slw.to does represent silver, which is a value play. Buffet holds a great deal of silver bullion, as does Eric Sprott. I respect both these gentlemen and their ability to make money in the markets.

A brief explanation as to why I believe silver is undervalued is in order. Traditionally (for the last 500 years or so) silver and gold were traded at a ratio of between 12 and 16 to 1. When the US stopped using silver in coins they had a very large stock pile of silver, which they have been selling into the market for the last 20 years or so. This suppressed the price of silver to the point where there are very few operating silver mines now. The market price was too low to create any incentive to build new mines. A mine takes 8 to 10 years to come on line so the supply/demand situation will probably be rectified by rising prices.

Right now the price of gold is about $550/oz. and silver is about $10/oz. This is a ratio of 55 to 1. If this ratio reverts to the mean of 16 to 1, either gold will fall to $160/oz., silver will rise to $35/oz or there will be some combination of silver rising and gold falling. I don't have a crystal ball, but I believe silver rising is the most likely scenerio. That's my take.
By Suntzu at 2006-02-16 20:32 | Stocks | SLW.TO | Suntzu's blog


Silver Wheaton

Suntzu:

Fascinating post once again.  I was just wondering how much silver does Silver Wheaton have in the ground?  To value the company, would I just take that amount, multiply it by $10/oz, and then divide it by the number of shares?

-theo
By Theo at Thu, 2006-02-16 22:55 | login or register to post comments

Valuing Silver Wheaton

Silver Wheaton is developing a couple of mines on their own. These can be valued by taking the value of the deposit, subtracting expenses and discounting when the silver will be produced. The farther out production will be, the larger the discount.

I think the real value is in the contracts they have with a couple of mining companies. Silver Wheaton has entered into forward contracts to purchase the silver coming from thier mines at a set price and they can then turn around and sell in into the market. You would have to look at each contract and then calculate the spread between the buy and sell prices. That's why they are so sensative to the silver price.

If you want to learn more about what metrics to use when valuing a mining company, there are some good books at the library, specifically, Canadian Security Analysis covers what metrics are most important in which industry.
By Suntzu at Fri, 2006-02-17 12:44 | login or register to post comments

Books/Valuation

Thanks for the book recommendation... I was just going to post a comment asking about this.  Any other books you recommend in the area of commidities/mining?
A couple of quick question about valuation:  Is there an approximate/set expense level per ounce of silver mined?  In calculating the expenses to mine the silver do we calculate the approximate cost to extract it, and discount based on current interest rates?   In discounting the revenue of the silver expected to be extracted there seems to be two factors:  The expecte price of silver at date of extraction.   Some type of rate of return factor (risk free rate? opportunity cost?)
Am I on the right track?  Will the book answer these questions?
By sharpsicle at Sun, 2006-02-19 14:42 | login or register to post comments

Valuation

Sharpsicle,
Expenses- that's the great thing about the contracts. The cost is constant and predetermined. As for the expenses of getting the silver out of the ground with a mine, that's a crap shoot. Labour and equipment costs are very unpredictable. With the current mining boom, both are in short supply and the costs are exploding.

Discounting- I don't think interest rates are the best way to do it. You could use that rate as the no risk rate, but you have to also discount the probability of the mine extracting its full reserves (taking into account the geological, political, currency, and economic risks). There's probably an equation to do this, but I'm not a math guy.

The book will outline what metrics are the standard with Bay Street. I think this is valuable as it lets you know what all the other guys are thinking. If you'll recall Keynes' description of the stock market as a beauty contest, where the most popular beauty wins, it makes sense to know what the others think "beautiful" is.

One indicator to look at when determining future value is the long term futures prices (available in Barrons). If they are upward sloping like a normal interest rate curve, you can use a higher multiple. If the grade of the curve is less steep, you would use a lower multiple. This is one of the reasons why the stocks offer leverage to the price of bullion.

Good trading.
By Suntzu at Mon, 2006-02-20 21:05 | login or register to post comments

SLW gain

Nice call on SLW.TO.  Your timing was great.  What is your target price?  Are you going to keep holding until the balance between silver and gold is corrected?  Theoretically, that could be a significant gain.
By Theo at Sun, 2006-02-26 21:29 | login or register to post comments

Actually, last year would

Actually, last year would have been great timing. I just used a pullback to jump on the train. As for a target price, I don't have one. I'll keep my long term position for such a long time that setting a target is futile. I'll sell my trading position when it gets seriously overbought. Considering it just set a new high on good volume, that could be a while. If you have any targets, I'm all ears.
By Suntzu at Sun, 2006-02-26 22:29 | login or register to post comments

WTZ and Sprott

I have no target ideas right now because I have not yet learned how to evaluate those stocks.  But my Canadian Security Analysis is in the mail...

On related Sprott and silver news, I was just analyzing WTZ because they got acquired on Friday.  I noticed Sprott Asset Management owns 9.3% of the company.  They really cleaned up!  Perhaps WTZ will be a huge catalyst for all silver companies such as SLW.TO.
By Theo at Sun, 2006-02-26 23:05 | login or register to post comments

RE: WTZ and Sprott

I'm shocked that Sprott is making money:) I think there will be a lot of consolidation in the industry. I don't think SLW is much of a target though. It's already majority owned by Goldcorp. Goldcorp could bid for the outstanding shares, but I'm not holding my breath.
Good investing,
Suntzu
By Suntzu at Mon, 2006-02-27 11:10 | login or register to post comments