Wednesday, September 9, 2009

The Silver Lining: Silver Wheaton (SLW)

The Gold to Silver ratio represents the price of silver ($SILVER) relative to the price of gold ($GOLD); simply the price of gold divided by the price of silver represented in the form of a ratio. If the price of gold is $1,000/oz. and the price of silver is $20/oz. then the gold to silver ratio would be 50:1, or simply "50" (1,000 divided by 20 is 50).Need to learn how to trade to stay ahead? For your best chances, click here

Natural Supply
One factor determining the gold to silver ratio is the physical ratio of these naturally occurring elements in the earth's crust. According to the U.S. Geological Survey, on average silver occurs at 0.07 parts per million, and gold at 0.004 parts per million in the Earth's crust. Thus, the naturally occurring gold to silver ratio is 17.5:1.

Historical Ratio
Historically, the price of silver drops faster than gold in a precious metals bear market and rises faster than gold in a precious metals bull market. The ratio is therefore applicable in determining market direction. Just look at the recent rise in gold & silver prices in the annotated chart below.

In the last great precious metals bull market, 1960 - 1980, silver outperformed gold about 2.3 times (230%). Gold rose from $35 to $850 or a gain of 2,429%. Silver rose from 90 cents to $50, or a gain of 5,555%, and 229% better than gold.

Current Ratio
The 200 year average for the ratio is about 30:1. As of September, 2009, the gold to silver ratio sits at about 61 where gold is $950/oz and silver is $16.35/oz. If the ratio just reverts to its historic average of 30, silver will outperform gold very nicely.

One can trade using the Silver ETF (SLV) or trade an individual stock, my pick is Silver Wheaton ticker symbol (SLW). Silver Wheaton Corp. operates as a silver streaming company. The company purchases silver form Luismin, Peñasquito, Campo Morado, and La Negra mines in Mexico; Zinkgruvan mine in Sweden; Yauliyacu mine in Peru; Stratoni mine in Greece; Mineral Park mine in Arizona; and Keno Hill property in Canada. The company was incorporated in 1994 and is headquartered in Vancouver, Canada. homepage

What makes SLW attractive is the recent Barrick Gold deal (link to story)


Provides immediate cash flow.
Silver Wheaton will receive 100% of the silver production from three of Barrick's currently producing mines, effective September 1, 2009, until the end of 2013.
This immediately enhances Silver Wheaton's production and cash flow profile, by adding average annualized silver production of approximately 2.4 million ounces until Pascua-Lama commences production.
Significantly increases Long Term Growth Profile.
Silver Wheaton will receive 25% of the life of mine silver production from Barrick's Pascua-Lama project, expected to be one of the largest and lowest cost gold mines in the world.
Pascua-Lama is a key Barrick growth asset and is the third largest silver deposit in the world, with an estimated mine life of over 25 years.
Silver Wheaton's 25% share of the estimated average annual silver production for the first five years (2013 to 2017) is 9 million ounces, boosting overall silver sales by 30%.
Barrick has provided a completion guarantee, requiring them to complete Pascua-Lama to at least 75% of design capacity by December 31, 2015. If Barrick does not meet completion by December 31, 2013, Silver Wheaton will continue to receive silver production in 2014 and 2015 from the currently producing mines, until Barrick satisfies the requirements of the completion guarantee.

I'm looking for SLW to pullback nearterm to the $10 level, it is currently trading at the upper end of it's ascending channel. As it pulls back one could lower their cost basis by selling an October put option, the $11 put (SLWVR) could bring in $0.65 as the stock trades at $11.66 or start accumalating the stock here, the option expire in 5 weeks a 52% yield. This bears watching as is an alternative trade option.

*click on chart to expand image

No comments: