Will Silver And Silver Wheaton Keep Falling?

| About: Silver Wheaton (SLW)

Silver Wheaton Corp. (NYSE:SLW) hasn't performed well in recent weeks in the stock market as its shares declined. The price of silver also fell in recent weeks. Silver Wheaton's publication of the first quarter financial report showed growth in revenues. Conversely, its operating profitability slipped on account of the rise in gold sales. Will Silver Wheaton's stock continue to trade down? Will silver bounce back any time soon? Let's analyze the latest developments related to the silver market.

During May, shares of Silver Wheaton fell by 8%. In comparison, the price of silver declined by 6.2%. iShares Silver Trust (NYSEARCA:SLV) fell by 6.4%. Conversely, the stock market continued to recover as the S&P500 index increased by 3.1% during May (up to date).

So what's new at Silver Wheaton?

First Quarter Financial Reports

Silver Wheaton published its first quarter financial reports for 2013 at the end of last week. The company's revenues grew by 3.1% (y-o-y) while its total silver equivalent production rose by nearly 20%. Silver Wheaton's silver equivalent sales rose by only 13%. The share drop in the price of silver by almost 8% in the first quarter of 2013 compared to the same time in 2012 curbed the growth in revenues. When breaking down the company's production into silver and gold, it's worth mentioning several notes:

  1. Gold sales sharply grew by 338% in the first quarter (y-o-y) as indicated in the table below.

  1. Silver sales remained virtually unchanged as it grew during the quarter by only 0.4%.

  1. The realized price of gold fell by only 2% while the realized price of silver fell by a much sharper rate. Nonetheless, the profit margin on gold sales is lower than that of silver sales: in the first quarter of 2013, the company's profit margin (realized price minus cash cost, divided by realized price) for silver was 86% while for gold it was 78%. Considering that gold sales are likely to keep growing at a much faster pace than silver sales, the company's operating profitability is likely to suffer and further dwindle. Silver Wheaton's operating profitability fell from 75% in the first quarter of 2012 to 67% in Q1 2013.
  2. Even though the company's gold production sharply increased mainly due to the newly acquired Salobo and Sudbury mines, the sales from these mines were very small; this resulted in a ratio of sales to production of only 52%. In comparison, this ratio in silver is 92%. This low ratio in gold is due to the delay in delivery from gold mines. If the company would have sold 92% of the gold its mines produced, Silver Wheaton's revenues from gold would have reached $48.7 million and its total revenues would have been $226.7 million - a 13.5% gain from Q1 2012;
  3. The company also changed its dividend policy to be less volatile: over time the dividend will take into account the past four quarters instead of just the last quarter. There will be a transition until the company will adopt the new policy. In the meantime, the company's recent quarterly dividend reached $0.12 per common share.

So even though Silver Wheaton's dividend remained almost unchanged, and its revenues grew during the first quarter, the company's stock continues to drop most likely on account of the weak silver market.

Silver Market Remains Weak

The ongoing rally of the U.S stock market and the recovery of the USD are likely to be contributing factors for the currently weak silver market. Furthermore, next week (May 22nd), the FOMC will publish the minutes of its recent meeting. If the minutes will reveal that more members of the FOMC are considering slowly cutting down in the near future the current asset purchase program, this could drag the price of silver further down. Consequently, this will also pull down Silver Wheaton's stock.

Therefore, even if Silver Wheaton will increase its production quota, the decline of gold and silver prices are likely to pull down the company's profit margin and growth in revenues. If the Fed will eventually cut down its asset purchase program, if the USD will continue to strengthen against leading currencies, if the U.S stock market will continue to rally, and if the U.S inflation will remain stable, then the price of silver is likely to further dwindle.

For further reading see "Will Gold Recover from its Recent Fall?"

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.