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The Best Way to Cash in on Silver’s Next Run-Up

Commodities / Gold and Silver 2012 Sep 23, 2012 - 01:01 PM GMT

By: Investment_U


Best Financial Markets Analysis ArticleMike Kapsch writes: Over the past 10 years, silver prices have jumped an astounding 630%. In comparison, gold prices have risen 450%.

However, unlike gold, after hitting a 30-year high in April of last year, silver prices dropped 45% to $26.25 in June.

And today, the shiny metal presents a prime opportunity to ride its next run-up for major gains.

That’s because, even though silver prices sunk last year, demand for it continues to hover around record levels.

According to The Silver Institute, in 2011, total silver demand around the world hit 1.04 billion ounces, down slightly from 2010’s 1.07 billion ounces.

This was still the second-highest level in 12 years. And demand this year continues to surge, as well.

What makes silver such a great investment today, perhaps even more so than gold, is that in addition to being a hedge against currency inflation and devaluation, silver is used in a number of industrial applications that are causing supplies to dwindle.

In fact, on the earth’s surface, silver is actually rarer than gold.

How high could prices go?

Well, historically, gold prices have been just about 16 times higher than silver prices. Today, they’re an astounding 51 times that of silver.

In order for silver and gold prices to correlate with their historical average, silver needs to be $107 per ounce. Currently, it’s valued at about $33.

It’s only a matter of time before silver prices push much higher, perhaps to heights never before seen, and there may be no better time to invest than right now.

Even Better Than Buying Silver Directly

While owning silver bullion outright is a great investment today, over the past several years, another investment has flat out blown away the colossal gains physical silver has seen.

I’m talking silver streaming companies, specifically Silver Wheaton Corp. (NYSE: SLW) (TSX: SLW), the largest silver streaming company in the world today.

Since Silver Wheaton’s initial public offering in 2005, the company has experienced gains of over 1,000%.

It’s an astronomical sum.

But don’t be fooled…

Shares still have plenty of room to run higher.

For Silver Wheaton, profit margins for the company are an astounding 74.5%. Operating margins are also an incredible 76%.

In addition, revenue and earnings per share are both up over 20%. Not to mention, the company has five times more cash on hand than debt.

And as if this weren’t enough, the company just reported that it has “never been busier.”

In all, Silver Wheaton has agreements to purchase silver from 15 operating mines, as well as three precious metals agreements, with 13 mining partners around the world.

It’s the kind of gem you’d want to own should silver prices continue to climb higher…

So how exactly does Silver Wheaton, and other companies like it, make money?

Let’s take a closer look.

Royalty and Streaming 

Royalty and streaming companies, such as Silver Wheaton, are basically banks for mining companies.

They provide financing to miners in exchange for future payment.

These future payments can come in one of two ways:

  1. Royalty companies finance mining projects in exchange for cash payments on any future sales produced from any discovery.
  1. Streaming companies finance mining projects and receive payments in the form of what’s called a “stream.” A stream commits the mining company receiving the financing to either give away a certain number of ounces of the metal per year to the streaming company or a certain percentage of the ounces produced each year from the mine.

The main difference between a royalty company and a streaming company is that streamers receive the physical metal from the mines they’re financing instead of cash payments.

You’ll find streams are the more commonly preferred method of payment among mining companies.

And these firms can also provide financing for miners involved in a number of commodities including gold, zinc, copper, nickel and platinum.

For investors, silver streaming companies are not only a great way to play any rise in silver prices, but they also provide as a hedge against volatile fluctuations in the market.

That’s because the typical mature streaming firm is invested in anywhere from 10 to 50 different mines that are paying them streams.

So if one the mines it’s financing encounters problems, there are still streams from other mines that can help make up for any losses. Mining companies, on the other hand, may only be invested in one or two mines, leaving them susceptible to major price corrections.

Plus, there isn’t any liability for streaming companies in terms of the rising construction, exploration, and production costs that miners constantly face. Once a mining company and a streaming firm have reached a deal, it becomes the miner’s responsibility to pay for any extra costs, not the streaming company.

From a silver bull’s standpoint, investing in a silver streaming company such as Silver Wheaton is, and has been, a no-brainer.

As if this weren’t enough, silver streaming companies are also taxed more favorably than precious metal ETFs. It’s just one more reason why more investors are adding them to their portfolios today. (To read more about that, click here.)

But here’s what makes Silver Wheaton the premier silver streaming company.

A Business Model Like No Other

Silver Wheaton focuses its attention specifically on by-product silver.

This is because approximately 70% of all silver production occurs as a by-product of other precious metals production, such as gold, copper, zinc and lead.

The price that Silver Wheaton pays for future silver production, which is pre-determined in their agreements, is just about $4 per ounce, with a small inflationary adjustment.

Not only does this kind of business model end up being a win for Silver Wheaton, but for silver miners and investors, as well.

You see, mining companies will typically receive their payments from Silver Wheaton upfront, in cash, which can be used to continue growing their company, either through exploration, production expansions, or by making acquisitions.

On the other hand, the proceeds can also be used to pay down debt and strengthen their capital expenditure.

Simply put, Silver Wheaton helps mining companies grow their businesses by offering cash instead of other forms of funding such as debt and equity.

And for investors, Silver Wheaton’s fixed costs for future silver production reduce shareholders’ downside risk while providing an opportunity to cash in from any increases in the price of silver.

Another benefit for Silver Wheaton investors is that the company doesn’t contribute to future capital expenditures or exploration costs, yet it still benefits from the production and exploration growth that result from these expenditures.

This makes the company a potential (excuse the pun) goldmine for investors.

But just remember, even though Silver Wheaton is poised for major gains over the coming years, always mind your trailing stops and never allocate too much into any one stock.

Good Investing,


by , Investment U Research

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