Silver Wheaton Shares — 3 Pros, 3 Cons

In its latest quarter, Silver Wheaton (NYSE:SLW) posted a 180% increase in earnings per share to 42 cents. Revenues doubled to $194.8 million.

This kind of growth has become a habit for Silver Wheaton. And yes, it has been rewarding for shareholders. For the past three years, the average annual return was a sizzling 50.09%.

Keep in mind that the company�s CEO, Randy Smallwood, believes silver will hit $50 by the end of 2011 and $100 within several years. Of course, this should continue to turbocharge the shares of Silver Wheaton.

Then again, forecasts can are often wrong, especially about volatile commodities.

So, for investors looking at Silver Wheaton, let�s take a look at the pros and cons.

Pros

Innovative model. In 2004, Silver Wheaton launched its silver streaming business. Essentially, this involved financing the efforts of silver exploration companies. It is attractive to them because silver is mostly a byproduct of copper, zinc and gold mining operations. Thus, Silver Wheaton allows companies to better monetize things.

For this, Silver Wheaton receives ongoing royalties, with a fixed cost of about $4 per ounce. The result is a tremendous amount of leverage for shareholders.

Due diligence. Silver Wheaton has an experienced team that conducts much research when making an investment decision. It focuses on long-life, low-cost opportunities. At the same time, Silver Wheaton looks for politically stable geographies.

Diversification. In a relatively short period of time, Silver Wheaton has put together a portfolio of 19 streaming agreements. They include top-notch operations like Goldcorp�s (NYSE:GG) Pe�asquito mine in Mexico, as well as Barrick Gold‘s (NYSE:ABX) Pascua-Lama mine, which is along the border of Chile and Argentina.

Cons

Silver. True, silver has increased in eight of the past nine years. Yet it can be subject to wide swings. All in all, it is sensitive to changes in the economy, as silver is used in a variety of industrial applications, such as for smartphones, solar cells and medical products. In other words, a global recession easily could result in losses.

Control. Under its agreements, Silver Wheaton is not guaranteed any minimal level of production. As a result, if one or more mines go offline, the impact could be severe on revenues and profits.

Taxes. Silver Wheaton�s operating subsidiaries are incorporated in the Caymans and Barbados. This has meant significantly low tax rates. However, any changes in regulations could make a dent in Silver Wheaton�s finances.

Verdict

Silver Wheaton definitely has a great business model and a proven management team. In fact, the company generates substantial cash flows, which came to $168.3 million in the latest quarter. There even is a quarterly dividend (however, the yield is only about 0.4%).

Of course, the main driver will be the future price of silver. And in light of the economic uncertainty, investors likely will buy up the precious metal as a safe haven and a currency alternative. At the same time, there is likely to be less industrial demand.

So, in light of the economic uncertainties, it looks like the cons outweigh the pros on the stock — for now.

Tom Taulli�s latest book is �All About Short Selling� and he has an upcoming book called �All About Commodities.� You can find him at Twitter account @ttaulli. He does not own a position in any of the stocks named here.