Silver Wheaton (SLW) undervalued by nearly 30 percent?

I like to think of Silver Wheaton as the Apple of the mining industry. Both companies make mounds of money skimming profits off the labor of others.

I like to think of Silver Wheaton Corp. (NYSE:SLW) as the Apple Inc. (NASDAQ:AAPL) of the mining industry. Both companies make mounds of money skimming profits off the labor of others.

Apple takes a cut of music, app and book sales on its various devices. Silver Wheaton makes money via a process known as silver streaming. In a word, they loan giant mounds of cash to companies developing new mines, then they get that money back in the form of cheap silver when the borrowers gets their mines operational. Often, these arrangements can stretch more than a decade into the future.

So long as silver prices stay high, then, Silver Wheaton’s profits do, too. In fact, one site thinks Silver Wheaton’s shares are undervalued by nearly 30 percent. Trefis values SLW at $40.57 a share.

“(Silver Wheaton’s business model) gives it an edge over the conventional mining companies as it does not incur any kind of operational losses in volatile market conditions,” Trefis wrote recently in a post on Forbes. “Since the company does not own any of the mines, it does not incur any operational and capital costs associated with the production. Moreover, it is not as much exposed to political risks as conventional miners are.”

All told, Silver Wheaton has 14 active silver purchase agreements and two purchase agreements for other precious metals including gold. Silver Wheaton’s most important stream comes from Goldcorp Inc. (NYSE:GG), which had its first full year of silver production at the Peñasquito mine in Mexico in 2011.

The Peñasquito mine alone accounts for nearly 25 percent of Trefis’ price target on Silver Wheaton. “It is estimated that the mine will supply Silver Wheaton an average of 7 million ounces annually for the next 22 years,” Trefis writes. That’s a lot of silver, and Silver Wheaton’s cash costs for that metal will be just $3.93 per ounce (per the company’s year-end production numbers).

Overall, Silver Wheaton’s cash costs for silver in 2011 stood at $4.09. That same year, silver prices averaged $35.12 an ounce.

2012 is proving to be less predictable. And that extreme volatility could drive investors toward solid, more-established companies like Silver Wheaton. Because Silver Wheaton’s business model distributes risk across more than a dozen companies in jurisdictions around the world, investors can rest assured that SLW will be able to weather even extreme silver price shocks.

For icing on the cake, Silver Wheaton shares are yielding 1.26 percent. A limited downside and lots of upside make the current weakness in the mining sector look like a buying opportunity in Silver Wheaton.

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