Central Fund of Canada Limited (USA) (CEF), Silver Wheaton Corp. (USA) (SLW): Should You Be Buying Silver?

This is not unusual for an index but it is illogical. Historically, small companies and companies with strong insider ownership perform better than large companies and companies with low insider ownership – which means a free-float market cap weights companies based on the exact inverse of how it should.

Despite this problem with the index, The Global X fund is easily the best opportunity for investors looking to invest in silver miners.

My favorite personal investment over the past four or five years has been Silver Wheaton Corp. (USA) (NYSE:SLW). Silver Wheaton Corp. (USA) (NYSE:SLW) has a fairly simple model. The company helps miners fund the exploration and beginning of operation of mines that do or will produce silver in exchange for the right to buy all or a portion of the silver produced by the mine for $4/oz going forward.

The company is able to do this because of the fact mentioned above; that most silver is mined as a secondary metal. Silver Wheaton Corp. (USA) (NYSE:SLW) targets copper or gold miners that are willing to sell all the silver they produce to get cheap financing for the copper or gold they are really focused on. So far, Silver Wheaton Corp. (USA) (NYSE:SLW) has secured contracts at 19 mines in nine countries on three continents.

In 2012, the company had silver-equivalent sales of $850 million and net earnings of $586 million. It currently trades at market cap of $8 billion, which is a multiple of 13.7x its net earnings. To value the company, I used management’s projection that in 2017 it will “produce” 53 million silver-equivalent ounces. I used this number to project revenue, keeping the 69% margin it has today and applying a multiple to the projected earnings. The following tables show the projected market cap for several scenarios and then the IRR for each scenario.

Numbers in millions

Conclusion

For investors who want to diversify their portfolio and protect their downside if the US experiences another economic calamity, silver is a great investment. I would recommend the investments discussed in this article and would advise investors to learn more about gold and silver investing.

Mike Price, MSF owns shares of Silver Wheaton. (USA). The Motley Fool has no position in any of the stocks mentioned. Mike is a member of The Motley Fool Blog Network — entries represent the personal opinion of the blogger and are not formally edited.

The article Should You Be Buying Silver? originally appeared on Fool.com is written by Mike Price.

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