Silver Wheaton Corp. (SLW) was upgraded to a “buy” at UBS as a result of a more optimistic view of the risks associated with its credit facilities. Analyst Dan Rollins expects that it will be able to renegotiate its debt covenants and de-lever its balance sheet through silver stream acquisitions and/or the divestiture of equity investments.
“Last year was a disappointing one operationally for Silver Wheaton,” he told clients, noting that the company’s sales guidance was reduced throughout 2008 from 15 million ounces to 11.4 million. Sales were also below original expectations as a result of lower-than-anticipated production from theLuisman mine in Mexico and Yauliyacu in Peru.
However, while Vancouver-based Silver Wheaton struggled operationally, it did sign four more silver stream contracts in 2008, Mr. Rollins noted. This follows a much bigger deal in 2007 that saw the largest pure silver company in the world pay $485-million in cash to acquire 25% of the life-of-mine silver produced from Goldcorp Inc.’s (GG) Penasquito project.
UBS estimates that Silver Wheaton sold 11.3 million ounces of payable silver in 2008 at an average gross operating margin of $10.84 per ounce. Based on those figures, it forecasts 2008 fully diluted earnings per share will come in at $0.31 and operating cash flow of $0.43.
At the end of the year, UBS said Silver Wheaton likely had approximately $14-million in cash and $373-million in debt on the books.
Mr. Rollins values Silver Wheaton on a price to net asset value basis, which factors in UBS’s silver price forecast of $8.95 per ounce in 2010. This yields a price target of $7.50 per share, up from $5.75 previously, and representing upside of nearly 35%.
He also expects a reserve/resource update in 2009 and approval of a shareholders’ rights plan.