December 11, 2008
– Comments (19) |
RELATED TICKERS: SLW
Hey man I wanted to thank you for the tipoff about Silver Wheaton. This pick has turned into a real money maker especially today, and I hope it turns into the ultra-mega 10 bagger like you predicted!
Who doesn't love sinchy? Whoa, it's wierd talking to myself.
Awww... [blush] With kittens and all! :P
I'm so glad the pick is working for you!
With a cost basis of $12.90 in my real life portfolio, I can't necessarily join you in jumping for joy quite yet, but this sure is a nice start! :)
For anyone who missed the SLW article, here you go.
Of course, we are not likely to see anything resembling a straight-line recovery from the sub-$3 lows back to the neighborhood of my cost basis. The road ahead for pms, while I believe they will continue to trend upward from here, will likely be characterized by even more volatility than we've seen to date. Decide now, while you're feeling great, whether you're in for the long haul or a quick gain. If, like me, you're looking to the long-term picture where a devaluing USD is likely to press gold and silver to new highs, then you won't mind the dips one bit.
Unfortunately for me, I was not able to purchase more SLW at the recent lows because I was constantly writing about it. So, I am indeed purring like a kitten to know that at least some of my fellow Fools were able to benefit from my sacrifice. :) This is why I love my job!
Thanks again for the shout-out, and Fool on!
sell half, keep the rest if you like it. I've never bothered to try to figure out SLW's opaque financials, but as a corporate offspring of Goldcorp, I have to assume the worst. With no cash and lots of debt, they are highly leveraged to the silver price cycle... if you are a bull on silver here, you probably like this stock. If like me you are neutral on silver, than the debt risk is just too much, take your profits with at least 50% of your shares as this market is so tough, take the profits when you got 'em.
I would listen to GMX....Chris (Sinchi) is probably one of the best analysts in this space - but I think he's ignoring ( possibly downplaying - because it has started cropping up in his articles) the magintude of the balance sheet risk these juniors carry.
The issue is a conundrum:
(1) We are possibly looking at longer term High inflation ( could be hyper, who knows). So gold and silver are good plays. If you want outsized gains and are willing to risk your money - buy Long OTM LEAPS on Gold ( maybe thru GLD and possibly GDX - which is a group. Safer bets should be ABX and NEM)
(2) Shorter term - disflationary forces abound which wreck havoc on balance sheets which are not clean
I am also sitting on a nice 45% gain on SLW.TO and a 50% gain on ABX.TO....
And I am trying to decide whether im in this for the long run or if I should sell and take profit.
I also read that article TMFSinch. Although I had already purchased SLW, it did make me feel a little more confident in my pick.
I always read your blogs, keep em coming.
If your goal is locking in profit regardless of long-term earnings potential, then I can't argue with GMX's advice. However, his characterization of SLW's financials as opaque is utterly preposterous. Aside from how insanely cheap the shares were below $3, the other main reason for my wishing to delve into a detailed valuation analysis of SLW is the fact that SLW has THE MOST TRANSPARENT FINANCIALS IN THE INDUSTRY, bar none!
Dealing in only one metal, SLW has none of the discrepancies between total costs and costs after by-product credits that so often obscures the forecasts for most miners. They carry none of the risks associated with potenetial development cost overruns that every other miner has to contend with. Second, SLW has paid up-front for rights to the silver streams at a fixed price, making SLW the only pm 'miner' with measurable, fixed costs over the long haul. The terms of every silver stream deal ever penned are available right on their website, and they offer a treasure trove of data on projected production volumes at every project in their portfolio.
The company carries a very reasonable $351 million in long-term debt relative to its $1.11 billion market cap. Besides, as I pointed out in the article:
"Silver Wheaton has targeted silver production of about 16 million ounces for 2009. With the production cost fixed at $3.90, cash flow from operations in 2009 would be roughly $98 million at $10 per ounce of silver. If silver stages a recovery to an average of $15 for 2009, the company will rake in about $178 million, or more than one-half the company's entire long-term debt of $351 million."
As for former parent Goldcorp, well GMX and I have gone back and forth on that company before. :) [Remember?] While acknowledging some serious shortfalls in the effectiveness of company management in the past, in retrospect no one in their right mind can argue with their move to sell their entire 48% SLW stake back in January for about triple what the stake would be worth today even after the recent rally! With the $1.5 billion in proceeds, GG paid down its entire $1 billion debt to achieve the cleanest balance sheet among all the world's major miners ... of anything let alone gold! With $473 million in cash and no debt, Penasquito coming into full production next year, and with some of the highest quality gold assets in the world, Goldcorp could outperform with the Geico cavemen running the show! This company cannot fail going forward. Would I run out and throw money at the stock in the midst of this rally? - no! But I would most certainly keep GG near the top of my watchlist.The next time these manipulated gold prices get hammered down by the unregulated shorts at the investment banks, I would treat that as an opportunity.
Thanks, I think. :P
I just wanted to point out that, with a $1 billion+ market cap and targeted production of 16 million ounces of silver next year, we can't really classify SLW as a junior.
In any event, I assure you that I am plenty concerned about the potential for mass bankruptcies among the junior players. If it occurs, I believe you will see a flurry of activity all at once ... where dozens of companies would be pushed to the brink by the same lack of credit and / or debt calls and the cash-rich majors and intermediates stepping in to buy the most desireable of the distressed juniors. It all depends on what the prices do in the near term as well as whether credit begins to flow again. There are so many operations that are cash-flow neutral at sub-$9 silver and sub-$800 gold that it would be truly frightening if prices were to return to those levels for any extended period. I believe I have covered that issue widely in my work, and that I've drawn significant attention to the debt burdens of the companies I cover. :)
I'm holding many of my junior shares simply because the losses they have taken to date makes them relatively small speculative plays within my overall portfolio. But that doesn't mean I'm buying more juniors here. I'm in a big-time wait-and-see mode.
Chris.....Yes it was a compliment. And I did read your article on the potential problems with the miners. AND unfortunately I know the pain from my RLP too...and YES I am taking the same speculative stance.
However, like you I am reticent moving into miners at this point.My suggestion to you is that you should have a section in all your articles about the financial health/sustenance of the company. I looked into SLWs numbers here at the fool - on the face of it - they have a dwindling cash position - however their debt is relatively low and Long Term.
But recently I had posed this question to you on EXK - which turned up on my Bankruptcy screener and so did AU - which GMX has a red thumb on.
Hans....apologize for hijacking the blog ....Chris maybe you do a piece on this
Opaque was the wrong word to use. My apologies. I don't understand how they generate money, some sort of agreement to buy GG's silver and then sell it or something. I've never understood it and haven't tried to. I understand mining, and that's what I follow, if I want a spec silver play, I'll buy CDE (I'm not looking for one though) NXG is my under a buck spec play, and with news like we got yesterday with the Y/D mine, we're in great shape.
I think AU is in deep trouble. Don't know about Endeavour, haven't followed it, not looking for that sort of company at the moment.
It's really not complicated, and SLW is hardly a spec play. SLW pays upfront cash to miners for purchase rights to their silver production at about $3.90 per ounce either for the life of a given mine or for very extended periods of 25 years or more. They acquire these assets -- silver streams -- at very reasonable prices by targeting either A.) companies for whom silver is but a by-product who value predictability of revenue from that by-product, and/or B.) companies who need capital in the near-term to bring an asset closer to production. GG created the entity as a very creative vehicle for creating stable income for silver by-product, and it stands today as one of the most unique business models in the industry. It is, in my opinion, an infallible model selling for an insane valuation.
I had a very nice phone conversation with a VP from Endeavour yesterday. I don't see any cause for alarm. The company held working capital of $10.9 million at the end of the third quarter relative to a $50 million market cap. I don't know what your bankruptcy screen is all about, but the company has NO DEBT, so I would suggest that maybe some statistical glitch caused it to show up there.
Here's EXK's big challenge: costs. That $10.9 million can be eaten up pretty quickly if the company continues to operate at a loss. Because the company had been investing money in developing production growth towards targeted doubling of production to 4.5 million ounces per year, costs were $9.52 per ounce last quarter. At recent spot prices, that hurts, and the company has taken actions appropriately to scale down production growth efforts until prices resume their climb next year as anticipated. This is from their Q3 report:
Bradford Cooke, Chairman and CEO, commented, "Endeavour enjoyed another quarter of strong production growth and our third consecutive quarter of reduced cash costs at our two operating mines in Mexico thanks to the completion of our 2008 capital upgrade programs and ongoing operational improvements under the guidance of David Howe, Endeavour's Vice President of Mexico Operations. Guanajuato Mines production in particular has outperformed our expectations so far this year and Guanacevi has also improved its performance." "However, the dominant theme in the Fourth Quarter, 2008 will be the ongoing global financial crisis, which has negatively impacted not only the silver price near-term but every company, commodity and market world-wide. Management therefore decided to rein in the scheduled production growth in Q4, 2008 and for the foreseeable future because the spot silver price should rebound in 2009 so there is no sense in pushing production growth at this time. Endeavour will be in a good position to capitalize on the next upward move in the silver price by resuming its silver production growth at that time." "In every crisis there lies risk and opportunity. In Q4, 2008, management turned its attention to cutting costs while silver prices are temporarily depressed. Executives have taken a 10% pay cut, a 10% labour reduction is now under-way, and all non-essential exploration and capital programs have been deferred. Management is also evaluating new merger and acquisition opportunities that have come up recently with a view to building a stronger company in advance of the next leg up in the commodity cycle."
In closing, let me point out that EXK has a ton of options before it would resort to bankruptcy. A small junior like this with zero debt and solid assets in the ground should be able to vie for scarce bank funding should the need arise. Credit is tight, but not absent completely. The lack of any debt is a huge advantage for this company! Second, the company could always pursue a joint venture with a larger silver miner like Fresnillo (also operating in the region) to secure the capital necessary for further production growth. But those are simply hypotheticals, since I believe a company of this size will be able to obtain financing if needed.
I will always look to balance sheets and report upon their condition if I see potential problems. I'm not sure which article you're referring to, but I was trying to say that I've written scores of articles that focused upon balance sheet health and the importance of minimizing exposure to debt in this environment.
Oh yeah, by the way, TMFSinchiruna is also silverminer. :) I couldn't remain a non-All-Star forever. :P
You sneeky little..... HAHAHA
why would someone sell them silver at $3.90 an ounce. If that is really all there is to it, SLW should be making a mint as they are ripping off the entire mining industry.
Why admit to having no knowledge of how a company operates and then proceed to make a spurious claim like that? I explained precisely why companies would want such a deal in my comments above. They're not ripping anyone off... they get a great price, but they give up capital up-front. At least read my article that spawned this thread in the first place.DYODD
I'll buy as much silver as I can possibly afford forward at $3.90. Assuming $7.80/oz silver, which I can't think we'd get much lower than for long, I get a double. Assuming I get the silver in less than 6 years, I'm making a compounding 12%+ return. Hmm, I'll have to check these guys out, maybe being the corporate offspring off GG isn't so bad after all. I still have a soft spot in my heart for RBY even though the stock goes down down down (thank god I don't own any.)
Thanks Hans for doing what I should have. I too "mega luff" you and should have posted before now. Its been a refreshing change to ride SLW up for the past week or so. Now I have to decide whether to take some profit or not.
Thanks for the write up and its effect on my portfolio.
crazyness, what a move today. Enjoy longs, you deserve it.
this is crazy,,, SLW has gone up everyday since this thread has started.
I sold ABX.TO today for a quick 55% gain. I am in it for the long run with SLW tho.
Thanks again Sinch!
Just wanted you to see your post was linked from my article here: