Will Silver And Silver Wheaton Continue To Tumble?

Includes: SLV, WPM
by: Lior Cohen

Shares of Silver Wheaton Corp. (SLW) continue to fall with no clear end in sight. The recent release of the company's fourth-quarter financial reports didn't help pull up the company's stock that lost more approximately 18% of its value since the beginning of the year. The price of silver also hasn't done well in 2013. Will silver and Silver Wheaton pull up from their current slump? Let's analyze the recent developments related to the silver market.

During 2013, shares of Silver Wheaton decreased by 18%. In comparison, the price of silver decreased by 7.4%. iShares Silver Trust (NYSEARCA:SLV) fell by 5%. On the other hand, the stock market started the year on a positive note as the S&P 500 index rose by 10%.

So what's ahead for silver and Silver Wheaton?

Fourth-Quarter and Annual Reports

The recent financial reports of Silver Wheaton were published and, as many had anticipated, the quarterly reports showed a sharp rise in revenues. The company's revenues in the fourth quarter grew by nearly 50% compared to the same quarter in 2011. Moreover, the company's operating profit also increased by 28%. On the other hand, Silver Wheaton's operating profit margin tumbled down from 75% in the third quarter to 65% in the fourth quarter of 2012. The chart below shows the developments of the company's operating profitability and the changes in the average quarterly price of silver. The price of silver was much lower than a year ago, but it was slightly higher than the average price in the third quarter.

Click to enlarge images.

So what could have caused the sharp fall in the company's profit margin in the fourth quarter? According to the company (see page three of the fourth-quarter financial reports), the average cash costs grew by more than 15% in the fourth quarter (compared to Q4 2011) due to "higher production payments associated with the precious metals stream on Hudbay's 777 mine."

During 2012, the company's sales from silver increased by nearly 10%. The table below presents the changes in silver production, price, and the effect of each of them on the total revenues.

As indicated, the decline in the price of silver curbed the growth in revenues. For 2013, the company expects its silver production will rise by 13% compared to 2012. Assuming the company's silver sales (in ounces) will increase by a similar rate, Silver Wheaton is likely to present even lower growth in revenues (assuming, of course, the price of silver doesn't rise). On the other hand, the company's gold production grew sharply in 2012 and is likely to keep growing in 2013.

But if the price of silver continues to dwindle as it did in recent months, the company's revenues might even decline in 2013. So what's new for silver?

Silver Continues to Fall

The price of silver fell by 7.4% since the beginning of the year. The FOMC's ongoing QE3 program, in which the Fed purchases $85 billion worth of long-term securities (including mortgage-backed securities) every month, may have contributed to the rise in the U.S money base (as shown in the chart below).

But the increase in the U.S. money base doesn't seem to help rally the price of silver. In previous years, when the Fed launched QE1 and QE2, both the money base and the price of silver increased. In recent months, however, the rise in the money base didn't raise the demand for safe haven investments such as silver. Moreover, the U.S. dollar remains strong against leading currencies, including the euro, Japanese yen, British pound, and Canadian dollar. U.S. inflation is stable around 2% and the stock market has rallied. These factors may have also pulled investors out of gold and silver and pushed them into the stock market.

Based on the current progress of the U.S. economy, if this trend continues the prices of precious metals are likely to keep falling. This will also pull down other related investments, such as Silver Wheaton and iShares Silver Trust.

I still think that Silver Wheaton is a stable and profitable company. But its stock is strongly correlated to the price of silver. Based on all the above, both silver and Silver Wheaton are likely to decline further.

For further reading, see "Gold And Silver Outlook For April."

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.