SLW_logo.gifSilver Wheaton is the only mining company with 100% of its revenue from the sale of silver. Let’s use the term “mining company” lightly. Silver Wheaton does not actually own or operate any mines. Instead, they sign deals with established mining companies where silver is produced as a by-product (of base metal or gold mining) and is not properly valued by the market. Where silver is not the core product of a miner, it is often valued at far less than it is worth. Silver Wheaton pays a lump sum for future production plus an on-going fixed amount per ounce and assumes none of the political or production risk. The supplying mine likes this arrangement because it provides up-front cash to be used for expanding production of its core metal. This business model creates strong upside potential with limited downside risk for Silver Wheaton shareholders. With only 5 employees, they are more aptly described as a royalty company than a mining company.

ian_telfer.jpgSilver Wheaton was the brainchild of Ian Telfer, who hurriedly spun the company off from Wheaton River Minerals when Coeur D’Alene Mines made a hostile bid. About 62% of the company’s outstanding shares are now owned by Goldcorp. Mr. Ian Telfer, President and Chief Executive Officer of Goldcorp, stepped down in his role as a director of Silver Wheaton in April and appointed long-time associate, Peter Barnes. Mr. Barnes brings more than 20 years of senior management experience to the role and, in his previous mandate as Executive Vice President and Chief Financial Officer of Goldcorp Inc. (and, formerly, Wheaton River Minerals Ltd.), helped build one of the best performing precious metal mining companies in the world. The relationship between Silver Wheaton and Goldcorp seems to benefit both companies, but I think Silver Wheaton will reap the greatest rewards. Jim Damberger labeled Silver Wheaton as Goldcorp’s in-house bank and goes into detail about how this arrangement benefits SLW in a great piecehe wrote for SilverSeek. The bottom line is that Telfer is a step ahead of his peers and after demonstrating his acumen with Wheaton River Minerals, we are happy to be on board with his latest endeavor.

Another interesting dynamic created by Silver Wheaton’s business model is that it may actually remove much of the short-selling that has been blamed for suppressing silver prices in the past. Tom Szabo, writing in a February SeekingAlpha article, details how Silver Wheaton has turned the silver market on its head.

Silver Wheaton has figured out how to step into the shoes otherwise filled by the financial intermediaries responsible for the majority of short positions in COMEX silver. Now Silver Wheaton, an obvious silver bull, and not a bullion bank, will control when and at what prices the silver from these two mines will come to market.

And since Silver Wheaton has very little operating expenses, it does not need to sell silver into the market at any particular point in time unless it needs capital to make further acquisitions.

In effect, Silver Wheaton has figured out how to monetize by-product silver and create a win-win situation for both (1) the miner who now has capital to pursue mine expansion, exploration or debt/equity liquidation and (2) for Silver Wheaton which has provided its shareholders with an attractive leveraged exposure to rising silver prices.

Yes, Virginia, Silver Wheaton has in fact purchased the forward production of by-product silver and is officially a direct competitor of the financial intermediaries who were the only game in town before Mr. Ian Telfer and crew came along.

Having silver purchase contracts with three separate mines, Silver Wheaton expects to sell approximately 15 million ounces of silver in 2006, growing to 20 million ounces by 2009. The Company purchases 100% of the silver produced by Luismin mines in Mexico and the Zinkgruvan Mine, in Sweden. Silver Wheaton also has a contract to purchase 4.75 million ounces of silver from the Yauliyacu Mine in Peru.

slw_mine.jpgThe Luismin Mine has proven and probable silver reserves of 45 million ounces. In addition, Lusimin’s inferred silver resources total 188 million ounces. Luismin has historically converted resources to reserves at a rate of 90% which would result in a mine life of over 17 years. The Luismin operation expects to increase its silver production of 9.5 million ounces in 2006 growing to 13 million ounces from 2009 onwards.

The Zinkgruvan Mine has proven and probable silver reserves of 26 million ounces, measured & indicated resource of 6.8 million ounces and an inferred resource of 29 million ounces of silver. The Zinkgruvan operation expects to produce 1.9 million ounces of silver annually and have a mine life through at least 2022.

The Yauliyacu Mine has proven and probable reserves of nearly 14 million ounces, measured & indicated resource of 52 million ounces and an inferred resource of 65 million ounces of silver. Yauliyacu is a also a long-life mine that is expected to produce 3.5 million ounces of silver annually, although Silver Wheaton’s contract appears to be for only 4.75 million ounces in total.

Silver Wheaton also owns 19% of Bear Creek with measured and indicated resources estimated at 250 million ounces and an additional 60 million inferred ounces of silver.

Need some icing on the cake? Silver Wheaton stands to benefit significantly from Goldcorp’s potential acquisition of Glamis. In a Sept 27 news release, Goldcorp announced that Silver Wheaton will receive a right of first refusal on future silver production from the Penasquito Project, located in Zacatecas, Mexico. The Penasquito project, expected to come into full production in 2009, has estimated production in excess of 20 million ounces of silver per year.

Silver Wheaton (SLW) has 220 million shares outstanding and a market cap of $2.1 billion. We favor the leverage of Silver Wheaton warrants and prefer the series A or B for additional leverage. With this amount of leverage to the silver price and room until the end of 2009 or 2010 to see it materialize, Silver Wheaton warrants are one of the most attractive investment vehicles available. Any entry point with the stock price under $10 is a steal.

SLW.WT – (Cusip # 828336115): 117.5 M (or 23.5 M consolidated)
Terms: 5 warrants for 1 common share, Exercise price C$4.00, Expiry Aug 5 2009

SLW.WT.A – (Cusip # 828336123): 40.5 M (or 8.1 M consolidated)
Terms: 5 warrants for 1 common share, Exercise price: C$5.50, Expiry Nov 30, 2009

SLW.WT.B – (Cusip # 828336131): 7.8 M
Terms: 1 warrant for 1 common share, Exercise price C$10.00, Expiry Dec 22, 2010

Full disclosure: The author owns Silver Wheaton warrants.