Shares of Silver Wheaton Corp. (SLW) haven't performed well in the past month: The stock fell by 16% since the beginning of September (up-to-date). The recent decline in the price of silver may have contributed to the fall of this company's stock. Furthermore, other precious metals investments such as iShares Silver Trust (SLV), SPDR Gold Trust (GLD) and Barrick Gold (ABX) have also plummeted in the past several weeks during the month. Will Silver Wheaton bounce back from its tumble? Let's analyze the latest changes related to Silver Wheaton.
Third quarter results
The company is likely to publish its third-quarter earnings report during the first week of November and announce the exact date in the next several days. Until then, let's analyze the expected developments in Silver Wheaton's revenues and productions.
According to the company's forecasts, production of gold and silver in the first two quarters of 2013, and the shifts in the prices of bullion, I guess the company's revenues will rise in the third quarter compared to the parallel quarter in 2013. The main reason for the rise in revenues is due to the company's higher gold production. Conversely, the drop in silver production and precious metals' prices are likely to curb down the rise in revenues.
As seen in the table below, the company's silver revenues are likely to decline by around 17%.
The sharp drop in the price of silver will offset the potential rise in silver sales (in ounces).
On the other hand, the company's gold production is likely to sharply rise in the third quarter by over 500%, which will more than outweigh the nearly 25% plunge in the price of gold. Most of the growth in gold production is due to Silver Wheaton's acquired Sudbury and Salobo mines at the beginning of 2013 and the rise in its 777 mine's production.
Despite the above-mentioned numbers, they could be much lower. Another issue that could impede Silver Wheaton's growth in revenues is the gap between precious metals produced and sold. The delay in delivery could result in a much lower amount of precious metals sold. In particular, in the third quarter of 2012, the company sold, on average, only 71% of its silver output. During the first half of 2013, this ratio was 88%. In the above calculations I assumed the ratio will also be 88%. Nonetheless, if the company sells far less than its total production, this could also reduce its growth in revenues.
Let's turn to examine the company's silver and gold production per each mine.
The table above summarizes the company's silver and gold production in the past quarter and a rough estimate for the third quarter of 2013. Gold production is likely to rise mainly in the 777, Sudbury and Salobo mines. The silver production in the upcoming quarter is likely to be slightly lower than last year's production. Keep in mind, the delivery delay could play a role in the gap between silver produced and silver sold.
Looking forward, the company's gold operations will continue to grow and have a larger share in the total revenues mix. Since gold is less profitable than silver, this could mean Silver Wheaton's profit margin will further decline in the coming quarters. This shift along with the low prices of gold and silver could result in lower dividend payments. In the past three quarters, the company's dividend payment has declined from $0.14 per common share in the first quarter of 2013 to $0.10 per common share in the third quarter. This trend isn't likely to benefit the company's attractiveness as a stock.
Where is the Silver lining?
After all of this analysis, does Silver Weather have a silver lining? I still think so. The company has several strong points including: Growth in sales and production, financial stability, and high profit margins. The company's stock, however, remains strongly correlated with the price of silver, which is most likely the main driving force behind the recent tumble. Finally, the recent downward trend in the price of silver might reach a halt in the near future on account of the growing demand for silver in Asia and the uncertainty in the U.S surrounding the 2014 budget and debt ceiling.
For further reading see" Gold and Silver Outlook for October"