Shares of Silver Wheaton Corp. (SLW) recorded in April their worst performing month in recent years. One of the main reasons for this fall was the plunge in silver prices during recent weeks. The minutes of the March FOMC meeting (along with several other reports) may have triggered the recent fall in bullion prices. Will silver and Silver Wheaton rally? Let's examine the recent developments related to the silver market.
During April, shares of Silver Wheaton tumbled down by 21.7%. In comparison, the price of silver plunged by 14.7%. iShares Silver Trust (SLV) fell by 14.5%. On the other hand, the stock market continued to rally as the S&P 500 index increased by 1.8% during last month.
So what is next for silver and Silver Wheaton?
First Quarter Financial Reports
Silver Wheaton will publish its first quarter of 2013 financial reports on May 10th. In anticipation for the company's quarterly financial results, let's speculate what the company has done during the first quarter of 2013. To that end, I will break down the analysis to the company's silver and gold sales. Based on the company's 2013 outlook (opens pdf), it plans to produce 33.5 million silver equivalent ounces, including 145,000 ounces of gold. Assuming the company will sell 92% of its produced bullion (in 2012 the ratio between ounces produced and ounces sold was 92%) and assuming equal distribution of production throughout the year, then the company is likely to augment its gold production in the first quarter of 2013. The table below shows the breakdown of the changes in production and changes in average quarterly price of gold.
One of the issues will be whether the newly acquired Salobo and Sudbury mines will start off the year at the expected pace. Another growth source will be from its 777 mine that is expected to produce in 2013 70,000 ounces of gold. Despite the recent tumble in the price of gold, its quarterly price was only 2.7% lower than the same quarter in 2012.
The company's silver's production, unlike its gold production, is expected to decline in 2013 by roughly 4% (y-o-y). Based on the above assumptions, the company's sales (in ounces) in the first quarter are likely to remain virtually unchanged (y-o-y). On the other hand, the price of silver declined by nearly 8.4%. Thus, sales from silver are expected to decline in the first quarter.
The table below summarizes these findings.
This means, most of the company's growth in revenues will come from its gold mining operations.
As indicated in the table below, which sums the sales from silver and gold, the company's revenues are still expected to rise in first quarter of 2013.
Keep in mind that the profit margin on gold is lower than that of silver: in 2012, the company's profitability (after accounting only for the direct cash costs of production) in silver was 87% while for gold it was 79%. The rise in gold's share of revenues is likely to also pull down the company's profitability.
Looking forward, Silver Wheaton is likely to maintain its growth mainly via its rise in gold production. On the other hand, the recent tumble in the prices of gold and silver are likely to curb its growth in sales and cut down its operating profitability.
So what's next for gold and silver?
The recent FOMC meeting ended with no big changes to the Fed's policy. The upcoming minutes of the FOMC meeting that will be published on May 22nd might shed some light on the future steps of the Fed in regards to its QE3 program. This program doesn't seem to help pull up the demand for precious metals as safe haven investments against a potential devaluation of the US dollar. But if the Fed winds down its asset purchase program, people might steer away from gold and silver. Moreover, the ongoing recovery of the equity markets is pushing investors back to the stock market and out of bullion.
Conversely, the demand for the physical metal seems to rally: Russia continues to raise its gold reserves, and the upcoming wedding season in India, among the leading importers of gold, is likely to boost the demand for gold.
But if the demand for gold and silver as investments continues to diminish, precious metals prices are likely to keep falling, which will keep cutting the profitability of companies such as Silver Wheaton.
The bottom line is that Silver Wheaton is likely to keep augmenting its gold production, which is likely to translate into higher revenues. But if the current downward trend in the bullion market persists, the company's profit margins and growth will also dwindle.