Silver Wheaton Corp. (NYSE:SLW) has been doing well in the stock market in the past several weeks: Shares of Silver Wheaton spiked by 37.6% since the beginning of July (up-to-date). This recent rally was partly driven by the recovery in the silver market: The price of silver jumped by 17%. Will Silver Wheaton's latest run continue? Or will it reach a halt? Let's analyze the latest developments related to Silver Wheaton.
Second quarter results
During the second quarter of 2013, the company's revenues fell by 17% compared to the second quarter in 2012. Moreover, the company's operating profit tumbled down by 49.5% to its lowest level in years.
The table below summarizes Silver Wheaton's changes in revenues in the past several quarters and my projection for its revenues in the third quarter of 2013.
Let's break-down Silver Wheaton's earnings results between its two main precious metals: Silver and gold.
During the second quarter, the amount of silver sold fell by over 24% (year-over-year).
But this wasn't the only factor that adversely affected the company's revenues. The price of silver also declined by over 20%. These two factors contributed to the nearly 40% plunge in silver revenues.
The table below summarizes the recent changes in revenues, volume sold, and price changes during the past several quarters.
Looking forward for the third quarter, if we assume the company will reach its annual goals in terms of silver produced, and if we assume the current average price for the third quarter won't change, then the company's revenues from silver will fall again by nearly 21% (year-over-year).
The company's gold sales, unlike its silver sales, sharply rose during the quarter. Despite the sharp rise in amount of gold sold (in ounces), the sharp drop in the price of gold still had an adverse effect on Silver Wheaton's revenues.
The table below shows the recent developments in the company's gold sales.
As seen in the table above and based on the price of gold in July and August, the adverse price effect will be harsher in the third quarter than in the second quarter.
The sharp rise in the company's production was due to its newly acquired Sudbury and Salobo mines earlier this year and the increase in its 777 mine's production.
Further, the rise in gold production resulted in an increase in gold's percentage out of total revenues: In the second quarter, gold sales accounted for 29% of total sales; in the first quarter of 2013, this percentage was only 13.5%. In the third quarter, gold's percentage will rise again and may reach 32%.
The sharp increase in gold sales has also negatively affected Silver Wheaton's operating profitability that reached 44% in the second quarter of 2013. Gold has a lower profit margin than silver has: In the second quarter, silver's profit margin (after accounting for cash costs) was 82%. Gold's profit margin was only 72%. Therefore, the growing gold production will continue to reduce the company's operating profitability in the coming quarters.
Does Silver Wheaton have a silver lining?
Here are three factors that could keep this company an interesting investment:
1. Silver Market: The price of silver tumbled down during July only to bounce back in August. The current price of silver is at its highest level since May. The main issue will continue to revolve around the Federal Reserve's next move. If the Fed won't announce it will start tapering QE3 in the upcoming September meeting, this could result in silver price rising. In any case, the demand for the physical metal has increased mainly in China and India, which could keep the price of silver from tumbling down again;
2. New projects: Silver Wheaton's new projects including its Sudbury and Salobo mines have had a sharp increase in production. This trend is likely to keep augmenting the company's revenues;
3. Dividend: The Company's dividend might fall again in the coming quarter if its operating earnings will decline again. Currently, however, the company's dividend yield is around 1.5%, which is still better than Barrick Gold Corporation (NYSE:ABX), which offers a lower yield, or ETFs such as SPDR Gold Trust (NYSEARCA:GLD) and iShares Silver Trust (NYSEARCA:SLV) that don't offer a dividend. Moreover, these ETFs have management fees, which make them even less attractive as an investment.
Silver Wheaton's profit margin may not be as high as it was last year, but the company still has a silver lining: Its ongoing growth in gold production; solid dividend; and financial stability. These factors make this company an interesting investment. Therefore, for investors who wish to expose their portfolio to precious metals, Silver Wheaton might still be a good starting point.
For further reading see "Do Gold and Silver Protect you from Inflation?"