Resource Investor - New Silver Wheatonhttps://www.resourceinvestor.com/pebble.asp?relid=36180
A similar analog may be fast emerging in Silverstone Resources [TSX:SST], a C$150 million company quickly adopting the same pure-silver royalty model that has driven Silver Wheaton to such success.
With the finalization of an agreement with Lundin Mining [TSX:LUN] first announced in June, Silverstone has secured buying agreements with 3 mines – resulting in nearly 3 million ounces of silver being purchased in 2009 at an average cost just below $4 per ounce silver.
The Lundin agreements cover the Aljustrel and Neves-Corvo mines in Portugal. Lundin, a base metal producer, agreed to sell off the approximately 1.7 million ounces of silver per year at $3.90 per share and $85 million (half in cash, half via the issuance of 19.65 million shares).
But even with this hefty share dilution, Silverstone remains at an extremely compelling discount to ‘big brother’ royalty company Silver Wheaton. At $14 per ounce silver, Silverstone’s 3 million ounce 2009 production levels should net it operating cash flow (less interest payments and the approximately $3.90 per ounce purchase price, of course) of about $30 million – or about $0.33 per share full diluted. At its current share price of C$2.30, this has the company trading at about 7x 2009 cash flow.
Compare this to Silver Wheaton, which should realize about $0.95 per share in cash for 2009, given high-end estimates for Penasquito production – putting the shares at an approximately 14x multiple.
Now, of course, the premium multiple ascribed to Silver Wheaton of course factors in the production growth and longer-lived nature of the firm’s largest project, Penasquito, which will last 17 years (versus 10-15years for Silverstone’s projects). But, even without doing a full discounted cash flow analysis to take this into account, it seems rather likely that this premium is a bit too large – and that the 50% discount Silverstone is currently trading at will be reduced in the near future.
Beyond Penasquito, there’s really no reason for Silver Wheaton to have a multiple relative to Silverstone - after all, when investing in a royalty company, one isn’t investing in management of that firm, but rather the management of the underlying operating company. Simply put, while Silver Wheaton’s long-lived assets do deserve a premium multiple, some portion of this is likely also due to the great marketing and IR job done by the firm (and Goldcorp) over the past two years, as well as a premium afforded to it for being the only ‘pure silver’ firm. It’s only a matter of time before Silverstone (and likely other yet to be seen silver royalty firms) begin to erode Silver Wheaton’s early advantages in this space.
For newer investors in the silver space, Silverstone provides the opportunity to get involved at the ground stages of a silver royalty company - just like Silver Wheaton a few years back.