3 Takeaways From Silver Wheaton's Earnings Report

Aug.14.14 | About: Silver Wheaton (SLW)


Silver Wheaton didn’t reach its quarterly goals at 18 cents a share.

The company’s attributed production fell by 13.8% in gold and 1.5% in silver.

The drop in precious metals prices more than offset the modest gain in volume sold.

Silver Wheaton (NYSE:SLW) recently released its second quarter earnings report. The company fell short of reaching its quarterly goals at its earnings per share reached 18 cents, while the market estimates were at 20 cents a share. Moreover, the company's attributed production, profit margins and net sales fell again. But this company could still reach its annual targets on account of expected increase in Sudbury mine. Let's examine the recent quarterly results and provide three takeaways from them.

1. Attribution production fell but is expected to pick up

The company didn't reach its quarterly goals in terms of attribution production and there were sharp falls in the 777 and Sudbury projects. Nonetheless, Vale (NYSE:VALE) the mining company that operates Sudbury estimates a rise in this mine's production in the coming quarters, which will more offset the drop in output in the past quarter.

Source of data from Silver Wheaton's website

In the past quarter, the attributed production in gold dropped by 13.8%, year over year. Its silver attributed output also slipped by 1.5%. The total output dropped by 2.9%. Although the output declined, the amount of precious metals produced and not yet delivered slipped by nearly 0.1 million ounces to roughly 6.3 million ounces. As long as this number keeps coming down, the company is able to sell higher volumes, which could translate to bigger sales.

Keep in mind, however, if the attributed output doesn't pick up in the next quarter, the chances of Silver Wheaton to reach its annual goals will rise, which could bring further down its stock.

2. Revenue fell again

Despite this lower attributed production, the company was able to increase its volume of precious metals sold, as indicated in the table below.

Source of data from Silver Wheaton's website

As you can see, Silver Wheaton's revenue fell by 11% most of this fall was due to lower gold and silver prices. The modest gain in the company's precious metals sales didn't offset the drop in prices.

3. Profit margin continues to fall

The ongoing weakness in the precious metals markets are dragging down the profit margins.

Source of data from Silver Wheaton's website

The operating profit margin fell from 55% in the second quarter in 2013 to 50% in the past quarter. Moreover, the ongoing rise in the share of gold out of total revenue is also likely to adversely impact the company's profitability because the profit margin per ounce of gold is lower than in silver.

As a result of the drop in earnings, the company's quarterly dividend fell to 6 cents a share compared to 7 cents in the previous quarter. In any case, the dividend payment is nice but isn't the main reason investors hold on this stock. It's mostly, in my opinion, due to its exposure to bullion and business model.

Silver Wheaton is a strong company with a solid business model and sizable profit margins despite the lower precious metals prices. But based on the above, it will need to start showing higher volume of precious metals sold. If the company doesn't reach its goals in the next quarter, this could have an adverse impact on the company's stock.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.