Will Silver Wheaton Plummet Further?

Dec.23.13 | About: Silver Wheaton (SLW)

Shares of Silver Wheaton Corp. (NYSE:SLW) have sharply decreased during December: The stock fell by 5.8% since the beginning of the month (up-to-date). The weak silver market, especially after last week's FOMC decision to taper QE3 by $10 billion, is also dragging down Silver Wheaton's stock. Gold and silver ETFs such as iShares Silver Trust (NYSEARCA:SLV), SPDR Gold Trust (NYSEARCA:GLD) have also suffered from the weakness of precious metals and sharply declined during December. Will Silver Wheaton continue to plunge? What should we expect from the company's performance in the fourth quarter?

Fourth-quarter report

The company is likely to release its fourth-quarter earnings report during the middle of January 2014. Until then, let's see how the company may have done during the quarter. Based on the company's expectations, production of gold and silver in the first three quarters of 2013, and the changes in the prices of precious metals, I guess the company's revenues will sharply decline in the fourth-quarter compared to the parallel quarter in 2012. The main reason for the drop in revenues is sharp fall in precious metal prices. The fall in prices will offset the expected rise in both gold and silver production. The table below summarizes the changes in the expected revenues of the company in the fourth quarter. It shows a 21% drop in revenues during the fourth-quarter of 2013, year over year.

Click to enlarge

Let's turn to analyze the company's silver and gold production. Let's start with silver.

As you can see in the table below, the company's silver revenues are likely to decline by roughly 26%.

Click to enlarge

The plunge in the price of silver will offset the potential rise in silver sales (in ounces).

Moreover, the company's gold production is likely to also rise by over 31%, which will nearly eliminate the 24% decline in the price of gold. Most of the expected rise in gold production is due to Silver Wheaton's acquired Sudbury and Salobo mines at the beginning of the year along with the rise in the company's 777 mine's production.

Click to enlarge

Keep in mind, these sales volumes could be lower due to 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 2013, the company sold, on average, only 83% of its silver output. During the first nine months of 2013, this ratio was 86%. In the above calculations I assumed the ratio will be 90%; if the company sells sustainably less than its production, this could reduce even further its revenues.

In terms of profitability, in the third-quarter the company's profit margin fell from 72% in 2012 to 47% in 2013. This trend is likely to continue in the fourth-quarter due to thee reasons:

  1. Low gold and silver prices: The sharp drop in precious metals prices will narrow the company's profit margin.
  2. An increase in production costs: The cash cost of silver production rose by over 2% in the third-quarter; cash cost of gold production increased by over 27%. Higher cash costs are also likely to shrink the company's profit margins.
  3. A rise in the share of gold revenues from total revenues: Gold has a lower profit margin than silver; therefore, the rise in share of gold revenues out of total revenues means Silver Wheaton's profitability will contract.

These factors suggest the company is likely to show another drop in profitability in the fourth-quarter. In such a case, this could also cut down Silver Wheaton's dividend payment for the next quarter.

Bottom line

The upcoming fourth-quarter earnings report isn't likely to show an increase in profit margin or revenues. Even Silver Wheaton's higher gold and silver production won't offset the sharp drop in precious metals prices. Further, the potential drop in profitability could result in a reduction in the company's future dividend payment. Finally, the ongoing weakness in the silver market is also likely to keep Silver Wheaton's stock low.

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.