Update: Silver Wheaton Earnings - Alters My Thesis On The Stock

Aug.14.14 | About: Silver Wheaton (SLW)


Year-over-year production in Q2 fell to 8.4 million silver equivalent ounces (6.3 million ounces of silver and 31,400 ounces of gold), down from 8.7 million ounces in Q2 2013.

Silver equivalent sales volume of 7.5 million ounces (5.2 million ounces of silver and 34,800 ounces of gold) was 4% higher compared to 7.2 million ounces in Q2 2013.

Earnings missed top and bottom lines, as net earnings declined 11% to $63.5 million ($0.18 per share), compared with $71.1 million ($0.20 per share) last year.

Silver and gold prices are higher since my last article, so wait for a pullback, as I maintain a buy rating.

Silver Wheaton (NYSE:SLW) just reported its second-quarter earnings figures. It was not a good quarter, and shares are down 5% at the time of this writing. Revenues were down year-over-year. They came in at $148.6 million on silver equivalent sales of 7.5 million ounces (comprised of 5.2 million ounces of silver and 34,800 ounces of gold). Unfortunately, this represents an 11% decrease from the $166.9 million of revenue last year. This is mostly due to a lower year-over-year silver and gold price. The increase in production of 4% in the number of silver equivalent ounces sold was not nearly enough to offset the impact of the lower pricing. One positive piece of news is that the average cash costs for the company were $4.72 per silver equivalent ounce, which is a 1% decline compared to the $4.77 per silver equivalent ounce last year. But the margins were terrible. The average was $15.11 per silver equivalent ounce, a 17% decline from last year's average difference in production costs versus sale price. This decline was due largely to the lower silver price during the quarter, and ultimately led to net earnings of $63.5 million, or $0.18 per share, a decrease of 11% from the earnings of $0.20 last year.

In my December article, I argued that Silver Wheaton stock had likely found a floor, because silver prices were bouncing off of what I believed was a technical low around $18. My exact wording was:

"Given that silver has now bounced off of the $18 dollar range twice, I think we are establishing a floor in its price. That said, I believe now is the time to start buying silver equities once more. Essentially, the higher silver goes, the more it feeds the bottom line, because SLW has provided upfront financing for most projects in exchange for buying silver at fixed prices. Thus, with silver above its recent lows, it may be a good time to establish and build a long-term position."

Thus far, my call to get into the stock has been correct, and silver actually did ring in a bottom only a few cents lower than $18. At the time of my call, Silver Wheaton was trading at $19.76, almost near its 52-week low. Despite the present sell-off following this poor earnings report, shares currently trade at $25.76, which is a gain of 6 points, or 30%, since I last highlighted the company. However, given that silver prices are now languishing, I don't think you should jump right in here. I maintain my long-term buy rating, given that Silver Wheaton has access to the largest silver reserves in the world. I also like that it is upping its gold streaming. However, since the company relies on the margin difference between its costs and sale prices, the company needs support that can only come from a higher price of silver and gold. I think if you can get shares under $24.50, then it would be the time to add, even though I maintain my long-term buy rating at the present price point.

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. I sold my holdings in SLW to raise cash at $26.89, and look to re-establish a position under $25.