Silver Wheaton (SLW) is a silver royalty streaming company generating its revenues and earnings by buying future metal production from miners for a fixed price in return for financing or cash payments. The miners are usually gold and copper companies that intend to produce silver as a by-product and are therefore not particularly reluctant in selling future production of the metal in order to obtain the financing.
The company announced third quarter results this morning indicating that the company reached a record quarterly attributable silver equivalent production of 7.7M ounces, or a 26 percent increase over Q3-2011.
As the chart below shows, the company's production has been flat until the third quarter of 2011, picking up in the fourth quarter and onwards, making the company a strong investment leveraged to the price of silver. However, the high growth rate this quarter is not sustainable going forward. The law of large numbers is likely to set-in going forward, while attributable silver production from Barrick Gold's (ABX) Pascua-Lama project has been postponed, yet again, to sometime in the second half of 2014, thereby pushing Silver Wheaton's growth prospects deeper into the future (the project was expected to come on-line in 2013).
Attributable Silver Equivalent Quarterly Production & Annual Growth Rates:
The company's record attributable production failed to compensate for the decline in silver prices since it only sold 5.1M ounces due to a delay in deliveries. This created a decrease in revenues of 13 percent to $161.3M. Although not material, the delay in deliveries and push forward in production in projects like Pascua-Lama contradicts the notion that royalty streaming companies are immune to production related issues.
Silver Wheaton Quarterly Revenues:
Silver Wheaton Earnings per Share:
The stock, which usually correlates to the price of silver to a very high degree, has been performing incredibly well since early August, outperforming the actual metal. This is an interesting occurrence since it is the price of the metal that drives the company's shares, which brings the question: is the performance sustainable?
Unless silver prices stabilize or turn higher, the answer is probably not.
As the chart below illustrates, the price of silver began to decline materially in early October, however, the stock remained remarkably stable. Given the strong correlation in the price of silver and Silver Wheaton's share price, it is reasonable to expect a correction in the stock in the coming weeks.
In fact, when taking a longer term view, one can clearly see that any past strong disconnection between the two variables does not last for a very long period of time and is usually corrected in a timely fashion.