My favourite precious metal stock - SLW

I am bullish on gold for the last 5 years. I have made a lot of money trading precious metal and related stocks.

Most of the stocks move directly with the metal. So you need only to find a few fundamental sound companies and trade accordingly.

But my favourite PM stock is Silver Wheaton ( SLW).

Silver is a lot more volatile that gold. If gold goes up, silver will outperform gold and vice versa.

Lets begin by stating the reason why I like silver more than gold. Based on historical ratio with price of gold >$1000, silver price was around $62. Today, silver is trading around $17 or about 60 times gold to silver ratio. This ratio will return to around 20 if there is a monetary crisis. In early 1970 when Nixon abandoned the gold standard and during the world war one, gold to silver ratio dropped to 17. As the dollar falls eventually, silver will return to around this ratio.

I use SLW as a proxy to trade silver. For juniors, I hold some stocks on SQI ( or Silver Quest ) traded on Canadian Venture exchange.

Silver Wheaton has a great business model. I bought tons of SLW at the peak of the credit crisis under $3 and today it is trading around $15. This is one stock that I hold long term. I use my “dynamic collar” strategy to manage the trades.

SLW is the largest silver streamer in the world. It is essentially the purchase of silver by product from base-metal miners who do not want the hassle of smelting and dealing with the silver from their mines. SLW has 12 long term agreements with companies like Gold Corp, Glencore Mining, Lundin mining etc which will produce 17 to 19 million ounces of silver equivalent ( the company gets some gold too ) in 2010. It is a win-win agreement. The miners get guaranteed income and SLW gets guaranteed supply of silver.

Some of the agreements are producing big profits. For example, SLW had an agreement with Luismin mine in Oct 2004 to get silver at $4.2 per ounce for 25 years. In the next few years, Luismin mine had produced 29.3 m of silver with a gross sales of $335m. Average price of silver over this time was $11.5 and thus SLW made $7.3 per ounce for 4 years during the agreement.

SLW fundamentals are more than what you can ask for. The $2.5 billion company has zero debt, almost 600 m ounces of silver reserves, a 63% operating profit and a secure cash flow from mines in seven countries.

A rise in silver price will give SLW more juice in operating profit and income. Today silver sells for more than $17 per ounce. A fair price of SLW should be around $16.00. The stock will fluctuates with silver prices. So as long as you believe silver price will rise, this is a good stock.

Again, stay hedged and manage it accordingly with a dynamic collar. It could drop drastically if silver price collapses.