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Silver Wheaton Corp. Message Board

  • keyaindavis keyaindavis Nov 17, 2008 6:02 PM Flag

    why is SLW underperforming SLV???

    Underperforming silver and other related companies tied to silver. I'm thinking of adding more here but just wondering if ppl. see a reason why SLW is singled out?

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    • You understand finance (althoguh tau has nothing to do with finance, i think you mean vega). You are right, the contract has a delta of 1, just like a stock. But underlying that is the value of that contract, which does not have a delta of one because of everything I already stated. I never claiming what you state, my point regarded the effect on SLW price relative to silver is like the relationship of an option to its underlying. Not about Contracts.

      SLW has a PNL profile that creates no losses at any price. Whether the contract calls for them to "buy" the silver is irrelevant. Its like you are waving a sledgehammer around on this argument and nothing can change what you keep saying. You make a make a bearish case for silver maybe even that their mines will be closes due to low base metal prices or something. but this is a silly argument.

      Effectively, you are proving your own ignorance. It is good to have divergent views out there, thats what makes it a market. And if you scare all the lambs into dumped their SLW some more so it goes below 2, thats GREAT for me! I'll get to cost average down even more. But give us some reasonable arguments, geez.

      Also not perhaps this is a non-sequituer too, as i think i made my argument already, but a great way to think about SLW is like this. Say we consider mines as stocks. SLW owns preferred equity claims on these mines. The dividend (silver) is due every quarter but the mine is allowed to not pay it if they do not pay a regular dividend (mine anything else). Nevertheless, the silver due does not get nullified, it just accumulates when there is a next dividend payable.

      The point is SLW contracts have a senior claim that if anything would only be delayed. Whats also true is if silver were near 4 dollars, most of these mines would temporarily be closed, as they would not be economical. This would benefit SLW since they would not be realizes silver sales as well at little to no profit. Again, just a side note but another reason your comment is bunk.

    • The company pays around 3.90 per oz OR the prevailing market price -(whichever is lower.) So even if the price goes below $4/oz which is laughable, the company won't lost money per oz. Other things could hurt them - like less production due to lower metals prices, but the 3.90 barrier is not a concern.

    • Those oil prices were 100% right. They fully and properly incorporated all available information at the time. Prices change as new information becomes available.

      With ~99.999% certainty, the price of oil will be different tomorrow. That does not mean the price today is wrong. That means that more information will become available between now and then. The price is correct today, and it will be correct tomorrow.

      When oil was $150, the world's economies were growing very rapidly as was the demand for oil. Today, the world's economies are in recession, and oil demand is declining.

      Just because new information becomes available, does not mean oil was mispriced before that information was available.

      Silver, oil, SLW, GM, 3 month Treasuries, etc. are all properly and accurately priced based on all available information. But all will be priced differently, but accurately, tomorrow.

    • "Markets are very rarely wrong, let alone "certifiably insane". when oil was $147 in early July was it wrong or insane? Or is it wrong or insane NOW, only 4 months later with oil at $55?

      Markets get the price 'wrong' frequently. As sentiment swings from overly optimistic to overly pessimistic prices go too far in each direction.

      There is a lot of selling that has to be done to meet hedge fund and mutual fund redemptions. There are few buyers. The selling still gets done, but the prices go lower and lower, beyond any rational valuation. But the selling MUST BE DONE!

      That does result in 'insane' prices, and 'wrong' valuations but they will exist for only a short time.

      SLW at under $3 is beyond ridiculous unless you think we are heading into a deflation that will make the early 1930s seem mild by comparison.

      THAT is the question, what is directly ahead? Bernanke has written papers about the Great Depression and how it could have been avoided with enough stimulous. That means he is going to print and print and print until prices start up again. If he succeeds he'll have a new problem, prices he can't control and inflation explodes. If this scenario plays out I'd expect $50 silver and SLW at $50 as well.

      All of this takes more than a short term perspective. You have to be willing to gives things a while to play out; which is what I am doing.

    • Simple economics 101. The expected return of stocks is high relative to the expected return of other investments. This is because there is more risk in stocks. More risk = more return. This is why people own stocks.

      Efficient market theory (A little more advanced economics) tells us that markets are efficient. This means that markets properly value all investments based on all known information. Prices change because new information enters the market. A good way to think about this is a simple example.

      Let's say 1,000 people follow SLW closely. They read the financials. They follow the mines and the prices of commodities and the dollar and the health of major stockholders and the risk free rate and the weather in Bolivia and the thickness of the CEO's briefcase and a million other pieces of information. Any piece of new information that might affect the price of SLW is immediately incorporated in the price of the stock (when the market is open) because at least a few of these people will become aware of it, and act on that knowledge. It is supremely naive to think that any one individual can out analyze 1,000 people. The knowledge of the many is much greater than the knowledge of the one. That is what markets do, they amalgamate information.

      This is true in the absence of insider information. And it is illegal and immoral to use insider information.

      So you see, the price of any investment incorporates all known information and there is no opportunity to earn excess returns other than through the randomness of unknowable future events.

      There is no such thing as undervaluation. It does not happen in efficient markets. Overvaluation can occur when shorting is difficult, such as the recent housing bubble. There is no economical or efficient way to short a house. So overvaluation can occur when shorting is costly or difficult, because negative information cannot be effectively incorporated in the market. This is why the "insanity of markets" only results in overvaluation, never undervaluation.

    • yeah that made no sense but whatever, he's right that the debt is hardly a concern for a company with such stable cash flows (stable in consistancy of good profitability), and an inability to lose money.

    • I'm curious how they can settle all their debts for cash. If you look on the Yahoo finance site, the balance sheet for SLW says $9M in cash and $878M in long term debt. What am I missing?

    • Sir, I quote what you just wrote: "Markets are very rarely wrong, let alone "certifiably insane". The insanity of markets does not result in undervaluation.."

      What a dumb statement!!! If that was true, then nobody would buy any stocks since there would be no such thing as undervaluation....

    • SLW has zero costs as it can retire its debt for cash, and only buys incremental silver at $3.90 an ounce.

      It always has the option of buying silver at wholesale, and retailing it kitco style.

      It wouldn't take much to buy a wholely owned retail subsidiary and enjoy the huge profit over spot.

    • Here is why SLW is underperforming SLV:

      SLW management was suprememly stupid when they signed those silver contracts. They bound themselves to buy the silver output from those mines even if the purchase was unprofitable. If silver prices remain low for any extended period of time, SLW goes bankrupt because they are FORCED to buy the silver at $3.90, even if the spot price is $3.91.

      SLV can survive extended periods of low silver prices, because it is a proxy for holding physical silver. It is almost impossible for SLV to go bankrupt, while SLW is certain to go bankrupt given low silver prices for any extended period of time.

      Had SLW management had anyone with a brain on their team, they would have structured those contracts as OPTIONS and not contracts. Options are always more valuable than contracts because options give the holder the right, BUT NOT THE OBLIGATION, to purchase at a set price. If spot silver drops too low, SLW could just say, "Thanks, but we won't be buying your output until the price recovers." The least they could have done is set the contract price at the lesser of $3.90 or half the spot price. Thereby building in a profit margin. Instead, the price is set at the lower of $3.90 or the spot price.


      That is why SLW is underperforming SLV.

      • 4 Replies to bushsbestfriend
      • For someone claiming to understand finance you are pretty dumb.

        Effectively SLW contracts are options. If the price goes below 3.90 then they pay spot. This is equivalent to an option which would return 0.

        Why is it like this. SLW contracts are mutually beneficial and structured to align incentives. SLW pays 3.90 instead of zero to defray production costs (as otherwise the mine might be more likely to shut down). By agreeing to buy the silver regardless they simplify the situation for all parties.

        SLW functions completely like a call option on Silver, which is why at low prices they are more immune to silver drops despite the higher operating leverge, and when silver prices are significantly in the money there is also less price volatility.

        One reasons for the massive swing in SLW is silver from say 14 to 8 is the "sweet spot" of volatility, before SLW gains more of its value from optionality and when operating leverage is increasing. Recall how SLW did on the upside and this helps explain what is going on.

        However, this move is beyond overdone. My analysis has SLW trading as if silver prices were and are likely to remain between 5.5 and 7 for the next few years. Not only is that extremely bearish but one could go out in the market and "delta hedge" SLW with shorting SLV. This would create an arb situation. However its hard to execute and I would much rather just own SLW, which I think at these silver prices should be at 7-8 dollars.

        If only SLW had not used up its cash and credit, and could have done buybacks at these prices or struck deals with now highly desperate for financing junior miners....

      • I am sorry but your argument (not slw management) is so stupid itself...

        you seem to think that this option of first refusal as you put it would come at no cost to slw...are miners so stupid...why would they mine silver if their counterparty (slw) would be just able to tell them to fuck off if silver price is not good enough...with such an option of first refusal, the delivery price would easily jump to 7.00 per ounce (not the current 3.90) and it is exactly then slw would go know why? Because they would have no business at a silver price below 7.00...

        sir, you have no brain!

      • SLW is still a good deal. Spot silver does not go below $6 for the next several years. I blame SLW poor performance on the bear market. Small caps, especially commodities, are getting thrown out indescriminately. Patience my friend.

      • 1000s of investors say the same about you.

        You just Mr. Short & Distort SLW

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