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4348480-9531350043046651145540Silver Wheaton00Silver Wheaton-199263038100Date- April 5, 201400Date- April 5, 2014Ticker: SLW(NYSE/TSX)Recommendation: Hold Price: 22.78Price Target: $18.34-$25.79MultiplesEPS P\FCFRevenueEBITDAEV/EBITDAP/NAV2011A$1.5616.36 730.0618.815.353.862012A$1.5817.73849.6701.517.614.102013A$1.0613.44706.5532.115.252.142014E$0.9315.16685.9533.113.092.29Highlights -684123190500Silver Wheaton is a unique silver and gold streaming company. Silver Wheaton has 19 active streams. Each stream represents a mine which they pay an upfront sum in return for a fixed percentage of the mine’s future production. Each year as the metal is delivered to the company, Silver Wheaton pays a fixed cost for each ounce of ore which is set in the contract and subject to inflationary changes. What this means is that Silver Wheaton can lock in silver and gold prices at a fixed cost, with little to no future operating expenses.The company benefits from high margins. Silver Wheaton’s business model and differentiation is what contributes to their high margins. The majority of competitors compete in the gold space, which has lower margins than silver. Silver Wheaton maintains higher margins because silver is usually a byproduct of the mine and the costs associated with production are attributable to the primary product. Silver Wheaton has a solid portfolio of growing projects. Silver Wheaton has 5 projects underway, 2 of them have significant road blocks in the form of local government issues and have not been incorporated into future production forecasts. The remainder of the projects are on schedule, and will start significantly increasing ore production by 2015 and onward. Silver Wheaton’s management has forecasted silver production increasing by 35% from 2013 to 2018. Silver Wheaton’s Management is patient, and makes deals with long run considerations. During the past 2011-2012 bull market for silver, management did not participate in any new deals. They recognized that new contracts would be out of line for longer run costs. Silver Wheaton spent $2 billion on new streams in 2013 alone, when silver prices were depressed. Silver Wheaton’s stock price is highly correlated with Silver price. Silver Wheaton’s stock follows silver prices impacting Silver Wheaton’s top line. With the recent downturn in silver price, Silver Wheaton’s stock has reflected this. 11557033655000-571500-14564300Business DescriptionSilver Wheaton is the largest precious metal streaming company in the world. The company engages in a stream of precious metal from a mine at a fixed cost, in exchange for an upfront payment. Silver Wheaton maintains a focus on high quality ore, in politically stable countries. Silver Wheaton after engaging in a streaming deal, receives a percentage of the ore sold from each mine per year until the streaming contract expires.History Silver Wheaton was founded in 2004, and was previously controlled by Goldcorp. In February 14, 2008, Goldcorp divested its ownership in Silver Wheaton completely and sold its stake. Before Goldcorp’s ownership, the company went by Wheaton Rivers Minerals, Ltd. -434340762000Management-57213591186000The company has 28 full time employees. The current CEO, Randy Smallwood, has been in place since 2011, and was hired full time to the company in 2007. Smallwood has been involved with the company since 1993, where he was a part of the original Wheaton Rivers Minerals Ltd. Lack of management continuity is a concern. The former CFO, Nolan Watson, left to co-found Sandstorm gold in 2008, a smaller competitor. Many other executive positions have experienced quick turnover, including the Chief Legal officer, the VP of Investor relations, and VP of business development, and VP of Tax.StreamsSilver Wheaton has streams located in Mexico,?Chile, Argentina,?Brazil, Peru, Sweden,?Greece, Portugal, Guyana, Canada and the United States. Silver Wheaton’s key streams are the Penasquito, San Dimas, 777, Yaliyacu, Salobo, and Sudbury mines. Company RelationshipsSilver Wheaton maintains important relationships with a variety of companies, namely Primero, Goldcorp, Hudbay, Glencore, Vale, and Barrick among others. Having these relationships is important. When a company needs to finance a mine, they can consider the streaming option with Silver Wheaton. Silver Wheaton has also made clear that they are willing to enter into smaller junior mining company streams, as most companies currently cannot obtain more debt, and do not want to finance through equity from depressed share price.-2990857620000Forward Growth -363855595300Source: Silver Wheaton00Source: Silver WheatonSilver Wheaton makes a commitment to increase its production target, despite already holding such a large position among silver producers. Silver Wheaton has a variety of assets that are planned to come online in the future, and increase cash flow. Over time they expect Penasquito production to increase, the Constancia mine to come online in 2015, and the Rosemont mine to come online in 2017. Finally, the Salobo mine is expected to add higher tonnage and better grade ore later this year. San Dimas, or their largest mine, will continue to mature and slightly increase production each year going forward as well.Silver Wheaton also has an early deposit on a project called Toroparu, and has delays in Pascua-lama. For the purposes of this valuation, we have excluded any future production increases from both mines. Pascua-Lama has been promised to come online to at least 75% production by December 2016, and because of the amount of delays that have already occurred, and the uncertainty Barrick faces going forward, this has been excluded.Industry Overview and Competitive PositioningSilver Wheaton is the largest streaming company and the largest name in silver production. Silver Wheaton has the largest market cap among the royalty and streaming companies, and looks to maintain that position. Fluctuations in the precious metals price add uncertainty to Silver Wheaton’s price going forward. Recent outlooks of silver show an expected decline in price. Silver Wheaton’s leverage to the silver price plays an important factor in stock price going forward. Because Silver Wheaton’s costs are fixed at contract, their margins increase and decrease with silver price. However their fixed cost structure protects their downside, and silver price must decrease 50% for the company to become unprofitable. CompetitorsSilver Wheaton (8.998.8mm market cap) Streaming Company; Silver focusFranco Nevada (7598.6mm market cap) Streaming/Royalty company; Gold focusSandstorm Gold (675 mm market cap) Streaming company; Gold focusRoyal Gold (4200.8 mm market cap) Streaming/Royalty Company; Gold focusFirst Majestic Silver (1266.4 mm market cap) Mining Company; Silver focusHecla Mining (1062.3 mm market cap) Mining company; Silver focusPan American (2190.7 mm market cap) Mining Company; Silver focusGold Corp (20218.8 mm market cap) Mining Company; Gold focusBarrick Gold (23642.8mm market cap) Mining company; Gold focusSource: CapitaliqIndustry OverviewSilver mining Companies: Hecla, Pan American, First Majestic - These companies are the next 3 largest silver focused companies. However, Silver Wheaton realizes lower fixed and larger production annually.Gold mining companies: GoldCorp, Barrick Gold. - These companies are the largest capitalized out of the industry, and have significantly larger assets and production over Silver Wheaton. Goldcorp is extremely important because of the past close ties between Silver Wheaton and Goldcorp. Barrick is important because it is the largest gold producer annually, and has a commanding presence in the precious metals space. Silver Wheaton has streaming deals with both companies, but these companies actually mine the precious metals. Additionally, gold is not the primary metal that Silver Wheaton streams, and therefore these companies have limited competition.Gold Royalty Companies: Franco-Nevada, Royal Gold. - These companies are mostly royalty companies, which is less favorable than streaming company. Royalty makes claims on the primary products of mines, and therefore have stricter contract terms. The payment terms for royalty companies can include restrictions on payment periods, royalty percentage, and can fluctuate with commodity prices. Gold also has lower margins, but these companies also compete in other precious metals such as palladium and platinum. Gold Streaming Company: Sandstorm gold. - Sandstorm is the closest in business model to Silver Wheaton. Sandstorm’s current CEO is one of Silver Wheaton’s past CFOs. The company has decided to pursue streams much like Silver Wheaton, but focuses mostly in the gold space. The company is much smaller than Silver Wheaton, but has large growth potential in bringing the streaming business model to the gold space. Company relationships within the precious metals spaceIn recent years, the company relationships between different companies have been friendly. Most acquisitions in the space are friendly, and mergers are often mutual decisions. Many of the mining board of directors hold important roles in other companies, which helps encourage mutual agreement and good terms between most companies in the mining space. This is important for Silver Wheaton for the climate of company relationships to be friendly. By being less hostile to outside deals, Silver Wheaton can approach companies and try to make future deals without any conflict, and can continue to maintain the streaming deals with current companies under amicable terms.SWOT Analysis.StrengthsSilver Wheaton has strong margins because of its streaming model. Silver Wheaton has an already robust portfolio of silver mining streams, and continues to expand using its innovative business model. Silver Wheaton has no operating costs, and its fixed costs are below the cost of most traditional miner’s cost per ounce of silver and gold. Most of the operating profit is derived from Silver Wheaton’s subsidiary, Silver Wheaton Ltd. that operates in the Cayman Islands. This helps the company have an extremely low tax rate. By having long life streams, the company’s production is stable for years to come.WeaknessesSilver Wheaton has shifted slightly away from Silver streams, and this last year has increased gold streaming. If Silver Wheaton continues to increase gold streaming faster than silver, margins could suffer.Silver Wheaton has very little controlling power over the mine, if there are any delays; they are subject to the streaming company’s decisions.While no mine has over 20% of the company’s production, any hindrance or shutdown of the larger mines, specifically the Penasquito, Salobo, Yaliyacu, and San Dimas mines will extremely hinder the production. Silver Wheaton relies on these mines for low cost production.Reliance on a few key individuals to make extremely important forward decisions; if management doesn’t carefully review each deal, they are in risk of decreasing profit. Management turnover could also impact these decisions.OpportunitiesSilver Wheaton’s model is attractive to smaller companies that cannot raise capital any other way. Many mining companies are highly leveraged, and are not willing to issue equity at low share prices, so the Silver Wheaton business model is very attractive.Silver Wheaton is well positioned during the current market. They have another 1 billion in revolving credit, and have the capital and strong cash flow to continue to acquire high quality silver and gold assets at a historically low price.Silver Wheaton continues to sign deals in the lower silver price environment, and if a significant silver or gold price increase ever occurred, they would stand to benefit greatly.Silver Wheaton could try to broaden its metals base to Palladium and Platinum. Franco Nevada has royalty deals, and if Silver Wheaton can get streaming deals, they could bring the streaming model to this space.ThreatsIf tax laws change in Cayman Islands, Silver Wheaton may have less favorable tax laws. However, the management has stated they will move operating to any country that has a lower tax rate. Silverstone resources Ltd. located in Barbados serves as a past example.If the price of Silver and Gold falls, the margins Silver Wheaton realizes will suffer. Silver Wheaton faces competition from its streaming and royalty rivals. Specifically in securing new gold deals.Legislation blocking the development of existing mining projects can block and reduce future mining production. A good example of this is the Pascua-Lama project, and its negative implications for Silver Wheaton.Investment Summary We are initiating coverage on Silver Wheaton with a “Hold” rating. Present valuation of Silver Wheaton reflects the market’s concern for future silver prices. Silver Wheaton has organic growth in production, but decreasing silver prices will hurt the top line. Silver prices are forecasted to remain depressed in coming years. Silver Wheaton is an innovator with its streaming model, but its production growth cannot overcome the future silver prices. Silver Wheaton’s growth is driven by past acquisitions that will come online in the near future. Moreover Silver Wheaton’s ability and desire to expand production will sustain this growth. The company also is benefited by low interest and tax rates, which help keep costs down.Business ModelIn the precious metal space one of the riskiest aspects of mining is exploration and development. When exploring a mine, considerable cost and time are needed, and there is no guarantee for success. Silver Wheaton adds value to their business model because they eliminate the risky exploration phase, and capture the majority of the upside in the production phase. Moreover, Silver Wheaton’s business model is attractive to mining companies. They are an intermediary between mines and a bank, which lets them take advantage of the excess demand for financing for mines, and the short supply of loans available to miners.Long life of high quality assetsSilver Wheaton’s streams have extremely long lives. Most contracts are for life of mine or 25 years long which means the company will continue to operate for a long time. Silver Wheaton adds value by focusing on high quality assets, which provide margin of safety to their operations for years to come.86677512763500Silver Wheaton vs. Silver spot priceSource: Capital IQValuation For our analysis we used the Discounted Free Cash flow model, and the comparable companies model. Discounted Cash FlowA discounted cash flow method was used to value the firm’s intrinsic value. We used the different analyst consensus values to determine a range of silver price realized by the firm. The model produced $37.18 for our median silver price, and $14.40 for the lowest expected silver price. The assumptions for the produced ore numbers were calculated by a combination of past production from individual mines, and expected expansion at each mine. We calculated the rate at which we expected the mines to grow according to management guidance. After this annual production estimate, we found silver ore sold annually by linear projection by finding the past relationship between ore produced and sold. We then applied this linear projection to our future production numbers. We made key assumptions regarding future capital expenditures. For 2014 we followed management guidance in projected capital expenditures. Based off of cash reserves and acquisition policies, we budgeted $100 million capital expenditures each year for the next 4 years. We considered this an added measure of conservatism because we budgeted capital expenditures and the expected increase of property plant and equipment, but not the impact on revenue these expenditures would cause. Additionally we made assumptions regarding the debt carried forward. Randy Smallwood has remarked in earnings calls that he expects to carry the debt forward due to current low interest rates. Also the we assumed that next year, they would draw on half of the $1 billion revolving credit to finance their capital expenditures for the year. We then forecast the repayment of the debt close to the year due, and make the assumption that they draw the rest of their revolving credit to help pay off the initial debt. This follows past history of debt repayment.The discount rate was modeled using a constant risk-free rate through 2018. We used Bloomberg’s 2 year smoothed beta to calculate cost of equity, and a Damodaran spreadsheet to calculate the equity risk premium. Terminal growth was based off of 2018’s projected sustainable growth rate. Comparable Company ModelUsing the comparable company model, we determined a price range of 15.04 – 21.63 for Silver Wheaton.Silver Wheaton is a niche company that has a loose industry it competes with. We defined the comparable industry using competitors that most resemble the company; however they aren’t direct comparisons (As mentioned above). The multiples we used were P/NAV, P/CF and lastly EV/EBITDA. These multiples are used most frequently in this industry for comparable analysis. P/NAV is price to book value per share; P/CF is price to cash flow per share. The price range we got was 15.04 – 21.63.8375655524500Price Target from DCF and Comparables modelsPrice Target Our price target range is $18.34-$25.79. In order to establish this, we weighted both the comparable and DCF models 50/50. The DCF was modeled heavily based off of company guidance, and we believe there is optimism built into their projections. The comparable is based off of past Bloomberg numbers, and future estimates of the comparable ratios reflect the negative outlook of analysts in the future price of silver. 873760-190500Spot Silver Prices vs. Long-term Analyst consensusA history of Silver Wheaton’s acquisitions, and the silver spot price.Source: Silver WheatonFinancial AnalysisProduction GrowthSilver Wheaton is increasing production through a series of new mines coming online. The production increase will be staggered, with the greatest increase in 2015, and then in 2017. 8293105778500MarginsWe predict that Silver Wheaton can continue to maintain its strong margins. The reason for this is the fixed cost will stay relatively low, but as they continue to deplete their silver and gold assets, the cost per ounce will increase with inflationary adjustments. These margins are based on the median case of Capital IQ silver price estimates. If the price significantly increase or decreased, the margins would do the same. These margins are within reasonable levels considering past margin levels, with significantly higher silver prices.88836521844000Balance Sheet & FinancingParagraph Text Times New Roman 9. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Aenean nec varius velit. Duis at purus felis. Duis vitae turpis enim. Phasellus tincidunt augue vel urna cursus et iaculis dui commodo. In et nisi venenatis ipsum tempus tristique sed sed tortor. Other Headings Relevant to CompanyParagraph Text Times New Roman 9. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Aenean nec varius velit. Duis at purus felis. Duis vitae turpis enim. Phasellus tincidunt augue vel urna cursus et iaculis dui commodo. In et nisi venenatis ipsum tempus tristique sed sed tortor. Etiam non libero eu lacus commodo congue sit amet ac lectus. Etiam facilisis fermentum nisi ut eleifend. Etiam vel augue ut leo elementum congue a sed arcu. Duis arcu dui, feugiat id egestas ac, tincidunt vel lacus. Cras ultrices orci sed neque condimentum sed tristique orci fermentum.Paragraph Heading: Times New Roman 9 BoldTechnical Analysis (on Silver Futures)There is significant support at the $18.60-$19.00 level. RSI indicate that the current price is a bit overbought. The support has been tested several times, and has held. Outside factors other than technical analysis play into short-run silver prices especially inflation and monetary policy. 2946406159500290890-114803Source:TDAmeritrade00Source:TDAmeritradeInvestment RisksParagraph Text Times New Roman 9. Lorem ipsum dolor sit amet, consectetur adipiscing elit. Aenean nec varius velit. Duis at purus felis. Duis vitae turpis enim. Phasellus tincidunt augue vel urna cursus et iaculis dui commodo. In et nisi venenatis ipsum tempus tristique sed sed tortor. Etiam non libero eu lacus commodo congue sit amet ac lectus. Etiam facilisis fermentum nisi ut eleifend. Etiam vel augue ut leo elementum congue a sed arcu. Duis arcu dui, feugiat id egestas ac, tincidunt vel lacus. Cras ultrices orci sed neque condimentum sed tristique orci fermentum.Vivamus sit amet varius velit. Vivamus felis lorem, eleifend ac scelerisque et, aliquet nec massa. Etiam id commodo tellus. Sed tortor magna, sodales sit amet vestibulum in, ultricies at est. Sed sagittis viverra ante, eu euismod arcu accumsan sit amet. Etiam volutpat auctor turpis id rutrum. Maecenas convallis aliquam pharetra. Duis elit odio, iaculis id fringilla ac, dapibus sed purus. Sed ornare consectetur nibh eu fermentum. Quisque quis elit justo, non pulvinar quam. Quisque sit amet justo nisl, in elementum odio. Phasellus magna ipsum, iaculis fringilla interdum eu, faucibus et lacus.APPENDIX-8160076835Source:CapitalIQ4000020000Source:CapitalIQ546108426557Source:CapitalIQ4000020000Source:CapitalIQStream InformationDisclosures:Ownership and material conflicts of interest:The author(s), or a member of their household, of this report [holds/does not hold] a financial interest in the securities of this company. The author(s), or a member of their household, of this report [knows/does not know] of the existence of any conflicts of interest that might bias the content or publication of this report. [The conflict of interest is…]Receipt of compensation:Compensation of the author(s) of this report is not based on investment banking revenue.Position as a officer or director:The author(s), or a member of their household, does [not] serves as an officer, director or advisory board member of the subject company.Market making:The author(s) does [not] act as a market maker in the subject company’s securities.Ratings guide:Banks rate companies as either a BUY, HOLD or SELL. A BUY rating is given when the security is expected to deliver absolute returns of 15% or greater over the next twelve month period, and recommends that investors take a position above the security’s weight in the S&P 500, or any other relevant index. A SELL rating is given when the security is expected to deliver negative returns over the next twelve months, while a HOLD rating implies flat returns over the next twelve months.Disclaimer:The information set forth herein has been obtained or derived from sources generally available to the public and believed by the author(s) to be reliable, but the author(s) does not make any representation or warranty, express or implied, as to its accuracy or completeness. The information is not intended to be used as the basis of any investment decisions by any person or entity. This information does not constitute investment advice, nor is it an offer or a solicitation of an offer to buy or sell any security. This report should not be considered to be a recommendation by any individual affiliated with [Society Name], CFA Institute or the CFA Institute Research Challenge with regard to this company’s stock. ................
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