How times have changed. Three months ago when I reported on Silver Wheaton’s (SLW) 2nd quarter results, I put forth the opinion that the stock would be a good value buy if the share price dropped below $12 from its current $14 to $15 trading range. Well the shares were not a good value at $12 and they fell all the way to $2.56 on October 27.
The stock has been hammered for what I see as two reasons:
- Spot silver has fallen over the last 4 months from $17 per oz. to under $10.
- Falling base metal prices (lead, copper, zinc) may force the shut down of the mines where SLW gets its silver production as a by-product to the mine’s main focus.
I will respond to the second reason first. On the conference call management noted that it currently receives 85% of its silver from 3 mines that have been in production for over 100 years. There is almost no chance it will shut down and will probably shift to mining higher grade ores. It has been focusing on the lower grade ores that recent high metal prices made profitable and will now shift to higher yield ores to maintain profit levels.
As to silver prices, the online investment sites and discussion point to over supply, under supply, conspiracy theories and market manipulation. Silver Wheaton management believes that prices will recover next year, but at this point I think it is impossible to predict where precious metals will go. I do know that SLW purchases its silver at an average price of under $4 per oz. and will stay profitable at much lower silver prices if it comes to that.
The 3rd quarter earnings came in at 9¢ per share, right in the 9-11¢ quarterly earning it has been stuck in for the last 10 quarters. Silver sales have been stuck in the 2.7 to 2.9 million oz. per quarter range, defying company predictions of increased production from its contracted sources.
This time the company reduced its 2009 projections to 15-17 million oz. from its previous guestimate of 19 million oz. To invest in this stock means that you believe at some point in time silver production and sales will start ramping up significantly, increasing revenues and profits. This company does have 40%+ earnings per year growth in its future somewhere. When is the question.
Disclosure: SLW is a component of my site’s Opportunities Portfolio and last week I doubled the number of shares in the portfolio. The SLW position is currently about 2.5% of the portfolio.