Will Silver Wheaton Resume Its Uptrend?

Sep.23.13 | About: Silver Wheaton (SLW)

Silver Wheaton Corp. (NYSE:SLW) has made a comeback in the stock market in the past three months: Shares of Silver Wheaton rose by 21.5% since the end of July (up-to-date). Nonetheless, during September the company's stock fell by nearly 6%. Moreover, during the month, the price of silver also fell by 6.8%. Other silver related investments, such as iShares Silver Trust (NYSEARCA:SLV), have also declined during the month. Looking forward, will Silver Wheaton resume its upward trend? Let's examine the latest developments related to Silver Wheaton.

Upcoming third quarter results

The company is likely to release its third quarter earnings report during the first week of October. Until then, let's examine the expected changes in Silver Wheaton's profit margins and revenues.

Based on the company's projections, the production of gold and silver in the first half of 2013, and the changes in the prices of precious metals, I expect the company's revenues will rise in the third quarter compared to the same quarter last year. In particular, I estimate the company's revenues will reach $179 million in the third quarter. This will represent an 11.1% gain compared to the same quarter in 2013. This estimate, however, could change significantly if gold and silver production doesn't meet expectations.

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.

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Let's turn to the changes in gold and silver prices and production.

Rise in gold sales

One of the big changes the company has been undergoing is in its rise in gold production: The rise is mostly related to its acquired Sudbury and Salobo mines at the beginning of 2013 and the rise in its 777 mine's production. This change is likely to result in lower profit margins. The table below shows my very crude estimate of the changes in silver and gold's profit margin in the third quarter (year-over-year) change.

As seen, silver's profit margin will decline to around 80% and gold's to around 70%.

Since the percent of gold's revenues of total revenues is expected to rise (see table below), this could result in a drop in Silver Wheaton's profit margin. 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%.

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Considering the expected decline in profit margins, this could result in a slightly lower dividend in the next quarters. The company's dividend is calculated as "20% of the average cash generated by operating activities in the previous four quarters divided by the Company's outstanding common shares at the time the dividend is approved."

In the past quarter, the company's dividend slipped to $0.10 per share. In comparison, in the second quarter the dividend stood on $0.12 per share. On the other hand, for new investors who consider purchasing this stock, the company's sharp drop in its stock during the year resulted in a rise in its dividend yield, which is currently around 1.66% (annual yield). Other gold and silver companies are less profitable but offer higher yields: Yamana Gold (NYSE:AUY) offers a dividend with an annual yield of 2.47%; Goldcorp (NYSE:GG) pays a dividend with a yearly yield of 2.32%.

Bottom line

The upcoming earning report of Silver Wheaton is likely to show growth in revenues but may also show a drop in profitability; this drop, in turn, could result in a decline in dividend. Moreover, the company's decision to expand its gold operations might keep lowering its profit margins in the coming quarters. On the other hand, the rise in Silver Wheaton's operations and its stable financial conditions are likely to keep it an interesting investment. Finally, one (obvious) factor that will keep affecting Silver Wheaton's stock is the silver market. Despite the decision of the FOMC not to taper QE3, I suspect silver price may resume its downward trend. In such a case, Silver Wheaton's stock is likely to follow.

For further reading see "Will Gold and Silver's Rally Reach a Halt?"

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.