What To Expect From Silver Wheaton's Earnings

| About: Silver Wheaton (SLW)

Summary

Silver Wheaton is set to release its earnings results today.

Here's what to expect from the gold and silver streaming company.

The company also reached a new streaming deal with Vale's subsidiary; will it yield a positive return for SLW?

Silver Wheaton (NYSE:SLW) is set to release its earnings results for the second quarter later today. How is the market expected to react to this news, and what's next for this precious metals streaming company? Also, we'll take a closer look at its recent streaming contract.

Q2 Earnings and Recent Deal

The market estimates that EPS will reach $0.14 for the quarter. In terms of market reaction, as I pointed out in a previous article, the market could react to this news. If EPS comes up short of market expectations -- as was the case in two of the past three quarterly earnings results -- this news could bring down SLW's price tomorrow, even if the price of silver were to slightly rise.

Click to enlarge

Source: Google Finance and author's calculations.

The table above shows the market's reaction in the days following SLW earnings releases over the past four quarters and the percent change in silver price. The reaction isn't always consistent, but at least in the past quarter SLW fell by 2.1% while silver only inched down by 0.1%, as EPS was short of market estimates.

Aside from the headline figures, investors should pay attention to the company's changes in its balance sheet and attributed production. Following Silver Wheaton's share offering to a syndicate of underwriters at the end of March, the company's debt burden should decline and its equity should rise. Moreover, this should boost its cash on hand. In terms of attributed production, the company will need to show whether it's still on course to meet its annual goals. Based on the operating cash flow over the past four quarters, SLW will also decide on the dividend it will pay its shareholders.

The other big news that was recently announced relates to an expansion to an existing streaming contract with a subsidiary of Vale (NYSE:VALE) for an additional 25% of the gold output throughout the life of the Salobo mine in Brazil. This deal will also include an upfront payment of $800 million in cash and a reduction in the strike price of SLW's common share purchase warrants from $65 to $43.75.

As I have noted in the past, this amended deal isn't much different from the original streaming contract with Vale for this mine. The main difference is that the payment will be $100 million less than before. Setting aside the revisions to the share purchase warrants strike prices, this deal is on course to yield a higher return for SLW. After all, the first deal -- also for 25% of the gold output of the Salobo mine -- was expected to turn a positive NPV if gold prices rise above $1,300 (assuming a discount rate of 5%).

Currently, the price of gold is at $1,330 and faces much better market sentiment; this suggests the recent deal could yield a positive return for Silver Wheaton. The only issue is the payment for this streaming contract. Considering the company doesn't generate a lot of cash -- during 2015 the company's operating cash flow was $431 million and as of the end of Q1 SLW had $87 million in cash -- it will be important to see how this contract will impact SLW. The company plans to finance this deal with its cash on hand and use the $2 billion revolving credit facility.

But keep in mind that the company tends to keep its debt burden low and mostly finance its deals through share offerings. So it will be important to see if the company drops any hints of such considerations in the earnings report. This deal raised SLW's output guidance for gold for the year, but the company also revised its silver output down for 2016. In its earnings report, the company could provide further details about the changes in the production of silver -- mainly San Dimas and Peñasquito, which recorded lower silver production.

Takeaway

The company's recent rally was mostly driven by the recovery of gold and silver prices. The upcoming earnings report could impede its progress if the company were to fall short of market expectations. Silver Wheaton's earnings report will also shed some light on some important issues, including the causes behind annual production revisions and changes in the balance sheet. (For more, please see "Will Higher Physical Demand for Silver Drive up Its Price?")

Disclosure: I/we 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.