Following the purchase of Silver Wheaton back in July, the share price of the world's biggest silver streaming company rallied up over 40%. Our target price was based on strong production and reserve growth, together with a silver price assumption of $18.5/oz in 2011. We saw little reason to revise this upwards hence the sale.
Silver Wheaton was added to provide exposure to the uptrend in the silver price. It is the world's largest silver streaming company, which buys the future silver producing stream of a mining company. It doesn't own the mine but gets the full benefit of the future silver production. The benefit to the mining company is that they get a big cash payment upfront that pays for the development of the mine. It is very difficult to hedge silver production forward given the illiquid market. The bonus for Silver Wheaton is that it is guaranteed production over the mine's life at a typical cost (inflation-adjusted at 2% per annum) of US$3.9 per ounce, versus the current price of US$14.4.
