What's Up Ahead For Silver And Silver Wheaton?

| About: Silver Wheaton (SLW)

Next week Silver Wheaton Corp. (NYSE:SLW) will publish its third quarter financial reports (on November 5th). In anticipation for the publication of the report, let's examine the expected company performance in the third quarter. Let's also see if the price of silver is expected to rally any time soon.

During October, the prices of silver and Silver Wheaton declined: shares of Silver Wheaton slipped by 1.1%. In comparison, the price of silver decreased by 8%. iShares Silver Trust (NYSEARCA:SLV) decreased by 7.2%. The chart below presents the changes in the price of silver, Silver Wheaton and the S&P500 index normalized to the beginning of the year. As seen below, the company's stock has outperformed not only the price of silver but also S&P500.

My guess, the recent stagnation in the price of silver is likely to continue in the weeks to follow. Perhaps after the U.S elections the bullion market will wake up again in relation to the concerns over the fiscal cliff. The decision of the FOMC to launch QE3 didn't have much of an effect on the price of silver and if you believe the cause for the rise in silver is due to Hotelling's rule - the rule states the low real interest rates (long term) are the main cause for the sharp hike in the price of silver and gold (and other resources) - and not the fear of a devaluation of the US dollar, then this also suggests the price of silver won't sharply rise again in the near future, as it did in previous years. Paul Krugman wrote about this issue on the price of gold, which is applicable to silver. I have some problems completely accepting this theory (I will refer to this issue in a future post). But in any case, for now, the price of silver doesn't seem to go anywhere. If the situation in Europe will stabilize - Greece will receive the next rescue package, Spain will make the formal request for a bailout - then the Euro might rally which could pull up bullion prices.

According to the second quarter financial report Silver Wheaton's operating profitability declined to 72%. The company's total revenues rose by 0.9% compared to the first quarter of 2012 and by 3.4% compared to the parallel quarter in 2011. Silver Wheaton's revenues from Silver rose by 6.2% compared to the second quarter of 2011. The growth in sales was solely due to the rise in the silver (in ounces) the company had sold: during the second quarter the company's silver sales (in ounces) rose by 40% compared to the second quarter in 2011, while the realized price of silver declined by nearly 24%.

The chart below shows the changes in the company's operating profitability and the quarterly changes in the average silver price. As seen below, the company's operating profitability has declined in recent quarters along with the drop in the price of silver.

During the third quarter of 2012 the average price of silver reached nearly $30. Since the realized price tends to be very close to the average quarterly price (see bellow) then means there was, at best, a 2% gain in the realized price of silver compared to second quarter but a 23% drop compared to the parallel quarter in 2011. These figures suggest the operating profitability will remain around the low 70s.

In order for the company to maintain a growth in revenues from selling silver of 6.2% in the third quarter (as in the second quarter of 2012), base on an estimated realized price of $30, the company should have sold 6,184 thousand ounces of silver. In comparison, the company sold in the second quarter 6,789 thousand ounces of silver.

Alternatively, if the company maintained in the third quarter the amount of silver it had sold in the second quarter, i.e. 6,789 thousand ounces of silver, then based of an estimated realized price of $30, the company's revenues from silver would have grown by 17% in the third quarter of 2012 compared to the parallel quarter of 2011.

The bottom line, based on the above, the company's revenues are likely to rise again in the third quarter compared to the same quarter in 2011. The price effect is expected to be less harmful on revenues in the third quarter than in second quarter. Finally, the profitability is likely to remain in the low 70s.

For further reading see" Gold and Silver Outlook for November"

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.