Silver Wheaton Corp. (SLW) hasn't performed well in recent months. The company's stock declined in the last two months of 2012. This downward trend might have stemmed from the company's decision to cut its dividend payment by 30% to 7 cents a share in the fourth quarter and the third quarter financial results. Moreover, the decline of silver during recent months may have also played a part in the drop in Silver Wheaton's stock. Is the rally of silver and Silver Wheaton over? Let's examine the recent developments related to the silver market to answer this question.
During last month, shares of Silver Wheaton decreased by 1.8%. In comparison, the price of silver decreased by 9.1%. iShares Silver Trust (SLV) fell by 9.2%. The chart below presents the developments of Silver Wheaton, silver and S&P500 index (normalized prices to the end of September, 2012). As seen, both silver and Silver Wheaton have under-performed the S&P500.
So what is up ahead for silver and Silver Wheaton?
Fourth Quarter Reports
The upcoming financial reports of Silver Wheaton might be better than in the third quarterly reports. CEO Randy Smallwood thinks the company's revenues will catch up with its strong build up in production. The company's rise in production was due to its new operations including the 777 mine and the growth in other mines such as Zinkgruvan and Peñasquito. The purchase of the 777 and Constancia from Hudbay Minerals did put some weight on the company's cash flow during the year: in the first nine months of 2012 Silver Wheaton paid nearly $640 million for these operations and to Barrick. This resulted in a net change in cash flow of ($285) million. But since the company had a nearly $555 million on hand, the company isn't facing liquidity problems. Moreover, the company's debt-to-equity ratio is very low at nearly 0.02, which also suggests the company's financial risk is low due to its very low leverage. I guess not only the company's revenues will bounce back in the fourth quarter, but also its operation profitability.
The chart below shows the operation profitability of Silver Wheaton in recent quarters.
As indicated in the chart herein, the company's profitability is partly linked with the price of silver. During the last quarter of 2012 the price of silver rose by nearly 8.8% compared to the third quarter and by 3.2% compared to the same quarter in 2011. So, assuming the company's total ounces of silver sold will increase by 20% compared to the third quarter in 2012 (the same growth rate in the fourth quarter of 2011), the total amount of silver sold will reach 6.9 million ounces. Thus, the total revenues will grow by nearly 26% compared to the third quarter and by 1.5% compared to Q4 2011. This crude estimate is very conservative and the total amount of silver sold might be much higher than this estimate.
But if silver won't rise in the months to follow, the profitability and revenues of Silver Wheaton will be adversely affected by it. So will silver resume its rally?
Silver Continues to Stagnate
The price of silver didn't perform well during 2012 as it rose by only 2%. This modest growth, however, was better than the silver's performance in 2011 - the price of silver decline by nearly 10% during the year.
One of the factors that may have contributed to the rally of silver is the rise in its demand as a safe haven investment. But if you subscribe to the theory proposed by Paul Krugman that explains the growth in the price of gold, then the low long term interest rates are among the prime factors for the spike in the prices of gold and silver.
This theory suggests that if the long term real interest rates will plunge, this could help rally precious metals.
In recent months the long term interest rates didn't decline despite the FOMC's decision to expand QE3 and purchase long term securities.
Moreover, the monetary easing programs of the Fed seem to have a diminishing effect on the prices of precious metals and the economy. In such a case, the upcoming FOMC meeting at the end of the month might have little positive effect on silver and gold, even if the Fed will decide to introduce additional stimulus.
If you believe the price of silver will increase on account of a potential rise in inflation or a devaluation of the USD, then keep in mind the USD remained strong during the year against most currencies and the U.S inflation was around 2% despite all the steps the Fed took.
My guess is that even the debate over raising the debt ceiling or minting a $1 trillion coin isn't likely to pose a threat on the U.S economy or have much of a positive long term effect on precious metals.
Therefore, I think most of the growth in revenues in 2013 of Silver Wheaton will come from its growth in operations including from the 777 mine. The price of silver will slowly dwindle and thus may adversely affect the stock of Silver Wheaton in the months to follow.
For further reading see" Gold and Silver Outlook for January"