Silver Wheaton Continues To Rally Despite Silver's Stagnation

Aug.15.12 | About: Silver Wheaton (SLW)

Silver Wheaton Corp. (NYSE:SLW) published its second quarter financial reports: the company's revenues increased by 3% compared with the second quarter of 2011. The main reason for the rise in revenues was the increase in production. The net earnings didn't rise compared with Q2 2011. The decline in silver prices during the quarter was the main factor that curbed the rise in earnings. Nonetheless, the growth in sales helped rally the company's stock in recent weeks. During August, the company's stock rose 10.5%. On the other hand, the price of silver edged down by 0.2%. iShares Silver Trust (NYSEARCA:SLV) also declined by 0.6%.

The chart below presents the normalized prices of Silver Wheaton's stock, silver price and S&P500 (prices are normalized to January 3rd 2012). It shows how Silver Wheaton's stock rose in the past several weeks but didn't do much on a yearly scale. S&P500 has out-performed both silver and Silver Wheaton. The weak performance of silver was one of the reasons for the little growth Silver Wheaton's stock has had during the year.

Click to enlarge

Silver Wheaton's stock is strongly correlated with the price of silver. Therefore, if silver price won't rise in the near future, Silver Wheaton's net earning might be adversely affected by it. So what is up ahead for the silver market?

The price of silver didn't perform well during the year. But there are some events that could help rally silver. The upcoming minutes of the FOMC, to be published on August 22nd, and the future FOMC meeting, to be held on September 13th, might affect bullion prices: If the FOMC will introduce another stimulus plan and if the strong and positive relation between precious metal prices and expansion of the U.S money base will hold up, then this news could stir up the bullion market and eventually help rally the price of silver.

Silver Wheaton's stock is strongly correlated with silver price: during August the linear correlation between Silver Wheaton and silver price was 0.6, which is a strong and positive correlation. This means, under certain assumptions (including linearity and normality) the movement of silver price could explain nearly 37% of Silver Wheaton's stock variance.

Another factor to consider is the effect the Euro has of silver and by extension Silver Wheaton.

During the year the Euro/USD fell by 5.6%. The decline in the Euro may have contributed to the weakness of silver. During 2012, the linear correlation between silver price and Euro/USD was 0.49. Further, the linear correlation between Silver Wheaton's stock and Euro/USD was 0.45. These correlations could suggest that if the Euro/USD won't rally in the near future, it could impede the recovery of silver prices and by extension Silver Wheaton's stock.

The weak Euro is due to the debt crisis in the Spain and Italy and the economic slowdown in Europe: The EU GDP for Q2 2012 contracted by 0.2% (Q-o-Q). There are some speculations that ECB will issue a stimulus plan to help Spain and Italy payoff their respective deb. In such a case it could lower the uncertainly in the financial markets, which could rally the Euro.

Silver Wheaton is expanding with new acquisitions and growth in sales. But the price of silver will continue to affect the company's performance. I remain skeptic as to the recovery of silver in following weeks. Perhaps if the ECB or FOMC will issue a stimulus plans it could rally bullion rates. This, in turn, will also help Silver Wheaton. Until then, as long as Silver Wheaton will continue to show strong growth and develop its business, its stock is likely to recover slowly.

For further reading: Gold and Silver Outlook for August 13-17

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.