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Silver is cheap. Well, it is when compared to gold anyway.

On Friday morning gold hit $1397.70 an ounce, an all time high. (If you don’t correct for inflation.) Silver, on the other hand, moved up to $26.90 an ounce. That’s just a 30-year high.

See, cheaper.

You probably already own the shares of a gold miner or two in your portfolio. I think the momentum toward commodities is strong enough and the fear of inflation widespread enough so that you ought to move beyond gold to silver and other precious metals. (Today would also be a good time to review my post just in case you haven’t added copper miners to your portfolio.)

The silver stock that interests me most at the moment is Silver Wheaton (SLW). Because of its unusual structure, it’s pretty much a pure play on rising silver prices.

The company, a 2005 spin-off from Wheaton River Minerals, doesn’t actually own or operate any mines. Instead it buys long-term contracts to purchase silver from a wide variety of silver mines that include Goldcorp’s (GG) Penasquito mine in Mexico and Barrick Gold’s (ABX) Pascua-Lama mine in Chile and Argentina.  Projected 2010 “production” based on these contracts totaled 22.2 million ounces of silver and 20,000 ounces of gold—or 23.5 million silver-equivalent ounces. The company forecasts that “production” will climb to 40 million silver equivalent ounces by 2013. None of this silver or gold is hedged.

According to a company presentation at a HSBC conference this month, Silver Wheaton’s contracts are to purchase silver at the U.S. dollar spot price or at $3.90 an ounce—whichever is lower. With silver above $26.90 an ounce the lower price would seem to be $3.90 an ounce, no?

Silver Wheaton doesn’t do any mining or exploration so it doesn’t have capital or exploration costs. That’s not to say the company doesn’t have any production or exploration risks. The contracts the company signs with silver miners don’t entitle the company to any compensation if a mine doesn’t actually produce the amount of silver stipulated due to conditions at the mine or due to a shutdown of the mining company. On the other hand, some of the company’s contracts give Silver Wheaton the right to buy more silver if the output of the mine is above projections.

Way back in September when the price of silver on the December 2011 contract was $19.75 an ounce, Morningstar calculated that the fair value for the stock was $26 a share. Using that as a guideline, at $26.90 an ounce I get a fair value for Silver Wheaton of $35.40.

I’d look to buy the stock for any price less than that. And hold as rising silver prices take the price of the shares well above that fair value estimate.

So as of November 8, I’m adding Wheaton Silver to my Jubak’s Picks portfolio with a target price of $45 a share by April 2011.

By the way, this is definitely not a buy-and-hold stock. Silver Wheaton is unlikely to be able to continue to buy silver contracts at $3.90 an ounce. The higher the price of those contracts, the more exposure the stock has to any correction in silver prices.

And in commodity markets, there’s always a correction. Eventually.

Full disclosure: I don’t own shares of any of the companies mentioned in this post in my personal portfolio. The mutual fund I manage, Jubak Global Equity Fund (JUBAX), may or may not now own positions in any stock mentioned in this post. For a full list of the stocks in the fund as of the end of the most recent quarter, see the fund’s portfolio at