Shares of Silver Wheaton Corp. (NYSE:SLW) have kicked off the year on a positive note as they have rallied by more than 10% (up-to-date). Further, the price of silver has increased by nearly 5% during January; the price of gold has rallied by 4%. As a result, Gold and silver ETFs such as iShares Silver Trust (NYSEARCA:SLV), SPDR Gold Trust (NYSEARCA:GLD) have also bounced back during the month. The recent recovery of silver might be a correction to its tumble in the last two month of 2013. Moreover, the market's reaction in December to the FOMC's decision to taper QE3 might have been harsh. Will Silver Wheaton continue to rally? How has the company performed in the fourth-quarter?
The company is likely to release its fourth-quarter earnings report during March 2014. Until then, let's examine how the company has done during the last quarter of 2013. According the company's annual projections, production of gold and silver in the first three quarters of 2013, and the shifts in the prices of bullion, I guess the company's revenues may have tumbled down by nearly 21% in the fourth-quarter year over year. Moreover, the company's profit margin has also narrowed by several percentage points. To get a better understanding of the changes in the company's operations, let's analyze the changes in prices and production.
Let's start with the company's silver and gold production. The table below shows the expected changes in Silver Wheaton's silver and gold production in the fourth-quarter of 2013 and previous quarters.
As you can see, Silver Wheaton's silver production is expected to rise by roughly 30% year over year. Moreover, the company's gold production is projected to increase by over 63%. Silver Wheaton's rise in gold production is mostly due to its acquired Sudbury and Salobo mines earlier last year as well as the rise in its 777 mine's production. Conversely, the company's Minto mine production is expected to fall. Bear in mind, the actual amount of bullion sold could be different from the amount of bullion produced. Back in the fourth-quarter of 2012, the company sold more silver and gold than it had produced. But in the third-quarter of 2013, there were delivery delays that led to a lower amount of silver sold compared to the amount of silver produced.
Despite the expected sharp rise in the amount of gold and silver produced, the company's revenues and profit margins are projected to fall. This is due to lower precious metals prices, rise in production costs and sharp increase in the amount of gold sold.
The table below summarizes the changes in profitability.
As seen above, in the fourth-quarter of 2013, the prices of silver and gold were 34% and 25%, respectively, lower than in the same quarter of 2012. Moreover, since gold is less profitable than sliver, the sharp rise in the amount of gold produced is likely to result in a lower profit margin for Silver Wheaton. The expected drop in the profitability is also likely to cut down the company's future dividend payment. Silver Wheaton's dividend has been cut down in the past four quarters.
The plunge in the price of gold and silver prices and the shift towards gold are likely to cut down Silver Wheaton's revenues and profit margins in the fourth quarter of 2013. This is also likely to reduce the company's future dividend payments. Nonetheless, the recent rally in precious metals prices in the past several weeks might lead to better results in the first quarter of 2014 and keep pressuring up the Silver Wheaton's stock.
For further reading see" Is Gold Making a Comeback?"
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.