-- Posted 5 September, 2006 | |

I love banks.  They always make money and never take any risk.

Ian Telfer at Goldcorp has found a new way to build an in-house bank.  He calls it Silver Wheaton (SLW).  The business model that he developed for SLW is brilliant.  I own scads of this company and have made lots of money from it.  And the company has only begun to get exciting.

The basic business model for SLW is to find deals where silver is produced as a by-product and is not properly valued by the market.  Silver producers (like gold producers) normally sell for premium PE ratios.  Base metal producers for example will have a PE of 8-12, whereas a silver producer may have a PE of 30-50.  Thus, a base metal producer that produces silver as a by-product only gets financial (stock value) credit for that silver as if it were copper or lead.  Same for gold producers who are evaluated more on the ounces of gold produced than on profit.  This has to do with gold price leverage.  Gold producers get little credit for silver production. 

Enter SLW.  SLW pays a lump sum for future production plus an on-going fixed amount per ounce.  The supplier assumes all political and production risk.  The supplier then has money to do with as required (often expand its own production).  Since SLW stock commands a premium as a silver producer, it can sell its stock with an inferred future PE of 3-4 times that of base metal company and pays only the normal PE price (plus a premium) to the supplier.   Sounds just like a bank.  Buy money for 3% and loan it out at 7% with collateral.  AND IT GETS BETTER.

Most of us believe that silver will double or more in the next 2-3 years.  SLW gets ALL the benefit from this.  Goldcorp is the major shareholder for SLW.  You can be sure that SLW gets all of the silver Goldcorp can supply.  Although I am not an accountant but an engineer, the other big bonus is that this type of financing probably does not show up as a debt on the Goldcorp books.  Win/win/win.

Now enter Glamis and its Penasquito project.  Estimated capital of $900 million is required.  Silver Wheaton is earning over $100 million per year AND could come up with another $600 million by diluting its stock at current prices by about 20%.  In return for a payment on the order of $900 million, SLW receives 20 million ounces per year of silver.  Thus SLW doubles its output by a 20% share dilution. In the cards??   I’m betting on it.

Glamis aside, in the latest web cast, SLW indicates that it will double in the next 12-18 months.  With current production at 16 million ounces (10 million from Goldcorp), add in the Glamis project and you have a 50 plus million ounce company in the next 5-6 years.  Since this business model is a financing arrangement and not a resource dependent arrangement, THERE IS NO LIMIT TO HOW BIG SLW CAN GROW.   Actual producers deal with things like cost escalations, strikes, and politics.  These are minimal for SLW.

One more trinket.  SLW owns 15% of Bear Creek with a resource estimate of 250 million ounces silver (open in all directions).

Maximum leverage for SLW can be obtained thru the ‘B’ warrants (SLW.WT.B) on the Toronto exchange.  Go to the SLW web site for details.