Can Silver Wheaton Turn It Around?

Nov.20.13 | About: Silver Wheaton (SLW)

Shares of Silver Wheaton Corp. (NYSE:SLW) have slightly declined during November: The stock slipped by 1.8% since the beginning of the month (up-to-date). The ongoing drop in silver price is pressuring down the company's stock. Other silver and gold investments including iShares Silver Trust (NYSEARCA:SLV), SPDR Gold Trust (NYSEARCA:GLD) and Goldcorp (NYSE:GG) have also decreased during the month. Will Silver Wheaton rally from its recent fall? Let's examine the latest developments related to Silver Wheaton including its third quarter earnings report.

Third quarter results

The company's recent third quarter earnings report came out earlier this week and didn't meet investors and analysts' expectations: Its revenues remained nearly flat compared to the second quarter of 2013 and slightly rose by 3.1% compared to the third quarter in 2012.

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The table above summarizes the company's changes in revenues in past quarters. The slightly higher revenues were mostly due to the rise in gold and silver production that partly offset the drop in precious metals prices. Let's break down the changes in gold and silver sales separately.

The adverse effect of the prices of gold and silver didn't come as a surprise. The main issue was the lower than expected gold sales in ounces. The table below shows the company's gold revenues, ounces sold and prices of gold in the past several quarters.

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The sharp drop in the price of gold has slightly offset the rise in gold sales (in ounces). The company's gold sales rose on account of higher production in its Sudbury and Salobo mines that Silver Wheaton had acquired earlier this year. Despite the rise in gold sales, it didn't meet the expectations mainly due to the sharp drop in gold sales from the 777 mine by 28% (quarter-over-quarter).

The table below shows the changes in the company's silver sales in the past quarters.

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Silver revenues fell by 19.4% during the past quarter. Most of drop in sales was due to the 32% drop in silver price. Silver sales (in ounces) have slightly offset the decline in silver price. Regarding the company's silver production, Silver Wheaton has recently updated its contract with Barrick Gold (NYSE:ABX) with reference to the Pascua-Lama project to extend the completion date to the end of 2017 in exchange for the production from Barrick's other mines for an additional year. The current deal might also fall apart if Barrick's situation doesn't improve, which could affect the Silver Wheaton's silver production in 2017 and forward.

The company's operating profit reached only 47% in the third quarter. In comparison, in the third quarter of 2012, the company's profitability was 75%. Due to the decline in profitability, the company's dividend payment in the fourth quarter has declined to $0.09 per share.

Besides the drop in precious metals prices, the company's profit margin also slipped during the third quarter because of the higher gold sales compared to silver sales: Gold sales account for 28% out of total sales in the third quarter of 2013. Back in same quarter in 2012, gold sales accounted for only 7.6% of total sales. The Gold's gross profit margin is 70.5%, while silver's profitability is 80.5%. Moreover, the company is projected to increase its gold sales in the coming quarter, which will further cut its profit margin.

In the coming quarters, the company's gold operations will continue to rise and will continue to take a larger share of the total revenues mix. This trend is also likely to reduce the company's profitability in the coming quarters. Moreover, the company's decision to expand its Constancia Project to include gold - nearly 35,000 gold ounces in the first five years and then 18,000 gold ounces in the life of the mine - will also further shift the company's interest towards gold in the coming years.

Will Silver Wheaton rally?

The recent earnings reports and latest developments in regards to Silver Wheaton's contract with Barrick may have had some adverse effect on the company's stock. Moreover, the shift towards gold is likely to further cut the company's profit margin. Therefore, the company's high profit margins of over 70% may have passed, especially as long as silver and gold prices are at their currently lowest levels in years. Further, the company's obvious strong correlation with the price of silver is likely to keep pushing down the stock, especially if the FOMC decides to taper QE3 in the near future. But the company's financial stability and ongoing growth towards new projects are likely to keep Silver Wheaton's revenues rising and partly offset the adverse effect of the price of silver.

For further reading see" What is These Gold Companies' Silver Lining?"

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.