We talked about a long play on SLW for yesterday's post, possibly our trade of the year for 2017 but maybe ABX and maybe DBA and maybe GILD – it's going to be an easy year for Secret Santa Hedges!
Anyway, SLW is what they call a "streamer" where a company makes an agreement with a mining company to purchase their production at fixed prices. It's like a futures contract but with more bite and they dollar-cost average so imagine they buy silver at roughly the 4-year moving average (16 quarters), less a discount for their guarantees, and they sell it at market prices.
As you can see, that was not a great deal for them working off those 2012 and 2013 contracts but now we're selling the 2013, 2014, 2015 and 2016 contracts into the 2017 market and it's going to get really exciting once the last of 2013 costs wash out of inventory. You can already see the effect in the financials:
| Year End 31st Dec | 2010 | 2011 | 2012 | 2013 | 2014 | 2015 | TTM | 2016E | 2017E | CAGR / Avg | |
| $m | 423.4 | 730 | 849.6 | 706.5 | 620.2 | 648.7 | 833.6 | 873.7 | 1,022 | +8.9% | |
| $m | 125.2 | 561.1 | 600 | 387.7 | 202.9 | -157.3 | 36.2 | ||||
| $m | 153.4 | 550 | 586 | 375.5 | 199.8 | -162 | 15.0 | 275.6 | 398.2 | ||
| $ | 0.44 | 1.55 | 1.65 | 1.05 | 0.56 | -0.41 | 0.008 | ||||
| $ | 0.44 | 1.55 | 1.65 | 1.05 | 0.68 | 0.22 | 0.38 | 0.62 | 0.90 | -12.8% | |
| % | +16.2 | +249.1 | +6.5 | -36.0 | -35.6 | -67.2 | -9.3 | +178.5 | +45.1 | ||
| x | 76.5 | 44.8 | 27.5 | 18.9 | |||||||
| x | 0.43 | 0.25 | 0.61 | n/a | |||||||
The made 0.53/share last year in a crappy market and this year they are on track to make 0.60 or better but a sustained move in silver above $20 can send their earnings well over $1/share so it's a great inflation play on a company that operates fairly well in any environment. Like ABX (who we also love), they've focused on working with lower-cost mines to insure future earnings growth.
In our Long-Term Portfolio, we already have 40 short 2018 $15 puts that we sold for $4.80 ($19,200) in December of last year. After a wild ride, the stock is back where we started but those short puts are now $1.97 ($7,880) due to premium decay for a first year profit of $11,320 (58%), right on track. We had longs on SLW in the STP, but we cashed them on the bull run (which is why they were in the STP and not the LTP!).
For the LTP, I want to add 20 2019 $15 ($5.50)/$25 ($2.75) bull call spreads for net $2.75 ($5,500), which pay $20,000 at $25.
In the Options Opportunity Portfolio (OOP) we'll play it like this:
- Sell 10 SLW 2019 $17 puts for $4.20 ($4,200)
- Buy 20 SLW 2019 $15 calls for $5.50 ($11,000)
- Sell 20 SLW 2019 $25 calls for $2.75 ($5,500)
That's net $1,300 on the $20,000 spread so the potential upside is $18,700 back on cash (1,438%) and ThinkorSwim says the net margin on the short puts is just $3,226 so it's a super-efficient trade and we'd be happy to buy more if it goes lower, which it might on a stronger Dollar. Worst-case is we get assigned 1,000 shares at $17 ($17,000) plus the $1,300 cash we spent so net $18.30 a share is our worst case and yes, it's an aggressive ownership – that's how we're making 1,438% back on cash, silly!
If we end up owning 1,000 shares of SLW, I can see that, at the moment, we can sell the 2019 $17 calls for $5, which would drop our net to $13.30, which is why you have to learn to think several moves ahead when setting up options plays and you'll find the risks are a lot more manageable when you have a good plan going in!
