In a recent interview with CNBC, Silver Wheaton Corp. (USA) (NYSE:SLW) CEO Randy Smallwood said that as long as central banks continue to pursue a course of quantitative easing, he sees the prices of both silver and gold rising. In the same interview he discussed a recent move by his company to become more involved in the gold market through its purchase of two gold streams from Brazil’s Vale SA (NYSE:VALE). While Smallwood didn’t give any specific price targets, he stated that he remains bullish on the space. Silver Wheaton is increasingly well positioned for the coming economic realities and should be considered a buy for the long term.
Quantitative easing
Confusing the situation, however, are remarks made by the chairman of the Chicago Fed, Charles Evans, this week. Evans, who is a voting member of the FOMC this year, said: “I tend to think it might be possible to turn off the quantitative easing. We might be able to stop before 7 percent.” This projection seems completely at odds with other comments made during the same interview in which he said that rates would remain depressed until the 6.5% unemployment level or beyond. He also said that he did not foresee the labor market reaching the desired level until mid-2015.
The only way that all of these comments are consistent is if you read them as Evans saying we could stop if we want, but we’re not going to. Printing money is just too much fun. The Fed could stop any time it wants, but it does not have a problem – it’s not denial if you’re not a print-o-holic. Smallwood characterized the actions of central banks very accurately: “We see our currencies of the world are racing to devalue each other faster so that they can compete against each other.”
The bullish case for metals
Given the position of the Fed and other central banks, it seems clear that loose monetary policy is going to be the order of the day for some time. While the Fed has inserted the 2.5% inflation level as a safety valve for shutting off the spigot, there remains the possibility that by the time “QE4EVER” stops, putting the brakes on inflation will be all but impossible. Against this inflation, silver and gold are attractive.
Smallwood further explains: “We’re confident in precious metals as becoming a story of value. It’s a hard asset that can’t be printed, can’t be reproduced [and] it’s still pretty tough to find this stuff.” This is compounded in the case of Silver Wheaton by the streaming business model employed by the company. Rather than operating mines, the company acquires the “streams” of precious metals that are produced at a given mine. The price paid by the company is agreed upon and fixed ahead of time, meaning the company earns the spread between its cost and the prevailing market price.
A golden opportunity
While Silver Wheaton is primarily focused on the silver market – the company controls the largest silver reserve on the planet and roughly 800 million ounces – it seems to be seeing opportunities in the gold market. The company agreed to pay $1.33 billion in exchange for 25% of the gold produced at Vale’s Salobo mine. It also paid $570 million for 70% of the gold produced at a series on Vale’s mines in the Sudbury, Ontario, region for the next 20 years.
The transactions are outside the norm for Silver Wheaton in two ways. The most obvious is that the company focuses primarily on silver production, occasionally blending other metals into a deal as an element of the overall transaction. The other major departure is that this deal is somewhat more speculative. The company’s typical model is to pay a set price for every ounce of metal that is mined. If a small amount comes out, Silver Wheaton buys at the agreed price; if more metal is mined, still the agreed price stands.
In the case of these transactions, the company paid a set price for a percentage of the total production, making it far more aligned with Vale than it usually chooses to be. While there are almost certainly covenants and provisions build in to the deal, Silver Wheaton’s foray into the gold market is of special note. The company is very solidly positioned to perform, and with each passing stream that is added to the portfolio, the more attractive the stock looks. Based on each of these factors, Silver Wheaton is a buy at current levels.
The article Silver Wheaton Goes for the Gold by Investing originally appeared on Fool.com and is written by Doug Ehrman.
Fool contributor Doug Ehrman has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned.
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