Bullish On Silver Wheaton After Earnings Report

| About: Wheaton Precious (WPM)
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Silver Wheaton (SLW), the largest silver streaming company in the world, has recently released its first quarter earnings. I've been bullish on SLW for some time. This report gives a chance to see how the company is doing in the environment of falling silver prices. Silver prices are down 20% year-to-date. SLW was down 32% year-to-date before the earnings report, which came on Friday, 10, after the market close.

SLW has reported net earnings of $0.38 per share, compared with $0.42 per share for the same period of 2012. Analysts (analyst estimates sourced from Yahoo! Finance) were expecting company to report earnings of $0.40 per share. Analysts are expecting earnings to decrease further in the second quarter. They expect the company to report earnings of $0.36 per share. The estimate for the second quarter has been lowered by 23% in the last 90 days. SLW has missed current earnings estimates. It's possible that the estimates for the second quarter could be lowered further.

Attributable silver equivalent production rose 20% in comparison to the first quarter of 2012. However, it was down 6% in comparison with the fourth quarter of 2012. Silver equivalent sales increased 13% in comparison with the first quarter of 2012. It is obvious that the company is more powerful than it was a year ago. A year ago the stock has traded at the same levels where it is trading now. Silver prices were higher in May 2012. I think that the reason that SLW trades at the same levels as in 2012, although silver prices are lower, is the quality of the company. SLW has strengthened and diversified its portfolio with the Vale (NYSE:VALE) deal. It's unique business model presents a very good way to play silver.

Silver Wheaton has announced that it has amended its dividend policy. The quarterly dividend per common share would be equal to 20% of the average cash generated by operating activities in the previous four quarters divided by the number of outstanding common shares. However, there is a transition period. The second quarterly dividend has been calculated using the average cash generated by operating activities for the trailing two quarters. The third quarterly dividend would be calculated with the use of three quarters data. What does it mean for shareholders? Dividends become more stable. If one quarter is an outlier, the dividend would be less influenced. It also means that SLW is sure about its future. In the current environment of low silver prices this move means that the company would have to pay more money to shareholders. I think this is a positive signal for investors.

SLW has commented on the Pascua-Lama project. Pascua-Lama is Barrick's Gold (NYSE:ABX) big project in Argentina and Chile. SLW has signed a contract with ABX to purchase 25% of the silver production for the life of mine. The project has met difficulties on the Chilean side. The construction had to be suspended because of environmental issues. Silver Wheaton is dealing with three other ABX's mines: Lagunas Norte, Pierina and Veladero. The contract says that the production of these mines would be attributable to SLW if Pascua-Lama project does not start in time or does not deliver enough silver. Silver Wheaton's forecast production from these three mines is 1.7 mln ounces in 2013. The company states that these mines produced a combined 0.74 mln ounces just in the first quarter of 2013. This means that they would be ready to produce the necessary amount of silver if Pascua-Lama does not start in time, and SLW is counting on that.

In its report, SLW states that it could be searching for new projects to enhance its portfolio. I believe that this is a good time to find new deals. Silver prices are low, and the terms that SLW could possibly get would be comfortable.

I think that SLW is a buy at current levels. The company has a portfolio of good contracts and plans to expand this portfolio. SLW has changed its dividend policy in favor of investors. This is a sign that the management is confident in the company's future. The mean analyst target price for SLW is 42.23. I think that this target could be reached when the silver prices rebound.

Disclosure: I am long SLW, SLV. 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.