What Could Curb Down Silver Wheaton's Recovery?

| About: Wheaton Precious (WPM)


Silver Wheaton will release tomorrow its earnings report and annual guidance for 2014.

The company’s rise in gold production is also bringing down its profitability, which will reduce its dividend payment.

In 2014, Silver Wheaton is likely to sharply increase its gold production mainly due to its Sudbury and Salobo mines.

Silver Wheaton Corp. (SLW) will release its fourth-quarter earnings report and its annual guidance on March 20. In anticipation of this release, let's review the company's performance in the fourth quarter, the potential changes in 2014, and how will the market may react to the release of this earnings report.

Fourth-quarter earnings report

The company's fourth quarter report will reveal whether Silver Wheaton met its 2013 guidance, which included producing 33.5 million of silver equivalent ounces. This amount also included 145 thousand ounces of gold. Based on the company's guidance and its sales in the first nine months of 2013, its silver production dropped in the last quarter of 2013, while its gold production rose. The table below summarizes my rough estimates of the company's changes in production in its leading mines in the fourth quarter of 2013.

Source: Silver Wheaton's website

Keep in mind, that there could also be a delay in delivery of precious metals, which could also reduce the company's revenue. But assuming there won't be a huge delay in precious metals productions, the company's silver revenue tumbled down by nearly 42%. This decline is not only because of the drop in production but also due to the sharp fall in the price of silver. The table below shows the changes in the company's silver revenue, ounces sold and price of silver.

Source: Silver Wheaton's website

As you can see, the price effect is the main factor that slashed the company's revenue in recent quarters.

On the other hand, the company's gold production rose mainly because it had acquired earlier last year the rights of two mines: Sudbury and Salobo. Conversely, the production from the Minto mine declined compared to last year.

The table below shows the changes in the company's gold revenue, ounces sold and price of silver.

Source: Silver Wheaton's website

Based on the above, Silver Wheaton's total revenue declined by over 33%, year over year, in the fourth quarter of 2013.

The table below presents a summary of the changes in the company's total revenue in recent quarters.

Source: Silver Wheaton's website

How will the release of this earning report affect the company's stock? Let's turn to examine the market's reaction to Silver Wheaton's past earnings report releases.

The table below summarizes the main changes in the company's revenue growth rate, profitability and diluted earnings per share. The last metric is also highlighted with respect to the average estimate of leading analysts. When it's the EPS is red, the actual EPS didn't reach the analysts' average estimate and vice versa. Finally, the table also shows the changes in the stock price of Silver Wheaton the day of the release of the quarterly report and the next business day.

Source: Silver Wheaton's website and Google Finance

As you can see, even when the company didn't meet the analysts expectations, Silver Wheaton's stock didn't always declined. In order to complete this picture, we will need to consider the changes in the silver market around these dates. After all, the correlation between the daily percent changes in the price of silver and Silver Wheaton's stock is, as expected, very strong and positive at 0.77.

Source: Google Finance

The table above shows the changes in Silver Wheaton's stock and the price of silver the day of the release of the earnings report and the following day. On two occasions Silver Wheaton's stock didn't move in the same direction as the price of silver did. When the third quarter earnings report of 2012 and the first quarter earnings report of 2013 were published, the company's stock declined. In those two occasions, the company didn't reach the target diluted EPS. One of the reasons for not reaching the target EPS is the rise in amount of silver produced and not yet delivered. Other factors include lower realized prices of precious metals, and higher production costs.

Therefore, even though the changes in the price of silver tend to crowed out the potential effect in the publication of the earnings report could have on the company's stock, when the volatility of silver is low, the earnings report could have a short term effect on Silver Wheaton's stock.

Alas, today the FOMC will conclude its second monetary policy meeting. In the past couple of meetings the FOMC tapered down its asset purchase program. This move resulted in a plunge in the price of silver the next day. Therefore, if the FOMC decides to taper again QE3, this news could crowd out, to a certain degree, the potential effect the release of Silver Wheaton's earnings report may have.

Besides the earnings report, the company is expected to update its annual guidance for 2014. This news could have some positive effect on the company's valuation especially, if the company decides to augment further its production. Keep in mind that the company's Sudbury and Salobo mines are likely to produce more gold in 2014 than they did in 2013. But the company's decision to steer towards gold is likely to cut down its profit margins.

The operational profitability of silver in the last quarter of 2013 was around 80%, while gold's profitability was only 70%. Therefore, Silver Wheaton's rise in gold sales and relative modest growth in silver sales are likely to cut down its profitability. This, in turn, could lead to a decline in the company's dividend payment, which is based on 20% of the average cash generated by operating activities in the last four quarters.


Besides the obvious relation between precious metals prices and Silver Wheaton's stock, the upcoming earnings report and full year guidance press release could also affect the company's valuation. If the company's earnings report fails to meet the current expectations for the fourth quarter earnings, this could have a modest adverse effect on the company's stock. Keep a look out for the changes in production, delays in delivery and realized prices of precious metals. Finally, the guidance for 2014 is likely to show a sharp rise in gold production and only a modest rise in silver production. If the guidance shows a higher than expected rise in silver production (more than single digit growth rate), this could also have a short term positive effect on Silver Wheaton's stock. For further reading:"Is Silver Wheaton Still a Buy?"

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.

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