Will Silver And Silver Wheaton Continue To Fall?

| About: Wheaton Precious (WPM)
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Next month Silver Wheaton Corp. (SLW) will publish its fourth quarter financial report. In anticipation for the publication of the report, let's analyze the recent developments in the silver market and try and figure what's next for this company and the price of silver.

During December, the prices of silver and Silver Wheaton decreased: shares of Silver Wheaton declined by 2%. In comparison, the price of silver decreased by 4.8%. iShares Silver Trust (NYSEARCA:SLV) decreased by 5.3%. The chart below shows the monthly percent changes in the price of silver and Silver Wheaton in recent months. As seen below, the company's stock and the price of silver haven't performed well in recent months.

In order to examine what is up ahead for Silver Wheaton we will need to determine two factors that could affect the company's revenues and earnings: the price of silver and the amount of silver sold. Let's examine these issues:

Silver Isn't Rising

The price of silver hasn't done well in recent months. The recent decision of the FOMC to expand QE3 didn't help rally the price of silver. The table below shows the decisions of the FOMC during the year and the reaction of the silver market on the day of the FOMC announcement and the next day. As seen, the price of silver rose on the day of the announcement only to tumble down the next day.

Why silver isn't rising?

One factor could be the slow growth in inflation pressures. During the year the U.S money base remained nearly unchanged. Even the launch of QE3 didn't seem to result in a sharp increase in the U.S money base in recent months. The price of silver tends to be correlated with changes in the U.S money base because silver serves, among other functions, as a safe haven investment for the potential devaluation of the USD.

The chart above shows the average monthly price of silver and the U.S money base. As seen, both figures have moved during the year with an unclear trend. Moreover, the U.S CPI is still low as the annual rate is around 1.8% - below the FOMC's 2% annual rate target. This is another indication the U.S dollar is keeping its value. The USD has slightly depreciated against major risk currencies such as the Euro, Aussie dollar and Canadian dollar but sharply appreciated against safe haven currencies such as the yen. This means, even compared with major currencies the USD didn't substantially lose its value - another factor that could have curbed the rise in the price of silver during the year.

The slow recovery of the U.S economy may have also helped keeping the value of the USD and thus pulled down the demand for silver as a safe haven investment.

Nonetheless, the average quarterly price of silver is at $33 - nearly 10% higher than the third quarter average price and nearly 4% higher than the same quarter last year. This could suggest the company's revenues will rise in the fourth quarter, when controlling for the change in the company's amount of silver sold.

Silver Produced and Sold

According to the third quarter financial report, Silver Wheaton produced a record high of nearly 7.7 million ounces of silver and silver equivalent, alas the company's sales declined mainly due to delivery delays, according to the company. Silver Wheaton is likely to continue expanding its production mainly due to the expected growth in production from its 777 mine. By the end of the third quarter, the 777 mine produced nearly 0.7 million ounces of silver equivalent. This means the company's production may rise again in the last quarter of the year.

Two uncertainties around the amount of silver sold will be the amount of silver equivalent produced and sold from the 777 mine. The other is whether the company will have another delay in delivery - the company has 5.2 million of payable silver equivalent ounces unsold.

The table below shows the revenues of the company, ounces of silver equivalent sold and the average price of silver during recent quarters. The last quarter is based on my crude estimate.

The fourth quarter estimate is based on the amount of silver equivalent produced in the third quarter (7.7 million ounces), the average ratio of ounces sold/produced of 90% (this is the average of the past two years for the company), and assuming the company will sell 367 ounces of silver equivalent from its 777 mine (nearly half the amount produced in the previous quarter). This estimate should be taken with a grain of salt because there are certain factors that could bring this figure down: If the company won't be able to sell the delayed silver it produced in the previous quarter, if the company will have another delay in deliveries, if the 777 mine will not augment its production and sales.

The upcoming quarterly report of Silver Wheaton could help rally the company's stock, but the main factors that will help rally the company's stock is the recovery in the price of silver. If the U.S economy will continue to recover, if the money base will remain stable, then the price of silver might remain in its current range.

For further reading see" Gold and Silver Outlook for December."

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.