Silver Wheaton: Don't Overlook This Opportunity

| About: Wheaton Precious (WPM)
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41% of Silver Wheaton’s production comes from gold, which is good news for investors as the prospects of the yellow metal are getting better.

Silver Wheaton’s cash margins are set to increase to $900/ounce of gold due to an increase in prices this year, and this could rise further due to consistent costs.

In fact, if gold prices rise to $1,900 in the next couple of years as predicted, Silver Wheaton could enjoy margins of $1,500 on each gold ounce.

Silver Wheaton is actively engaged in enhancing its gold streams with recent agreements with Vale geared in this direction, and this will enhance its performance going forward.

Gold accounts for 41% of production at Silver Wheaton (SLW), and this has been one of the key reasons behind the surge in the company's shares on the market this year. In fact, Silver Wheaton has been increasingly focused on enhancing its gold streams, which looks like a good idea considering the rally in the price of the yellow metal in recent months.

More importantly, I believe that Silver Wheaton will continue to witness an improvement in its financial performance on account of higher gold production, which will also strengthen its prospects going forward. So, in this piece, we will take a closer look at how the gold segment of Silver Wheaton has been performing and why it will add to the company's financial growth.

Silver Wheaton is increasing gold production

Silver Wheaton is expected to produce approximately 54 million silver equivalent ounces this year, including 265,000 ounces of gold. This represents an increase of more than 13% as compared to 2015 levels. In fact, Silver Wheaton's estimated average annual attributable production for the next five years is forecasted to be around 52 million silver equivalent ounces annually, including 260,000 ounces of gold.

The good part is that Silver Wheaton has been actively engaged in enhancing its gold streams. For instance, it has entered into an agreement with Vale (NYSE:VALE) to acquire an additional amount of gold stream equal to 50% of production as compared to the prior 25%. With this amendment, Silver Wheaton is now in a position to enjoy a greater share of the proposed ramp up of Salobo's capacity to 24 million tons per annum from 12 million tonnes per annum until last year.

As a result of this higher throughput at Salobo, Silver Wheaton was able to increase its gold production by 40% in the first quarter of 2016 from last year. The important thing is that the company now anticipates the gold production to grow more than 10% at no additional costs in 2016.

More importantly, driven by the ramp up at Salobo, Silver Wheaton's gold production for the first quarter had increased 24% and sales volume rose 65% as compared to the same quarter last year. In all, the company sold 65,300 ounces of gold in the first quarter at an average price of $1,175 per ounce. This means that gold contributed almost $77 million to Silver Wheaton's top line of $188 million.

In fact, due to an increase in gold production, Silver Wheaton's revenue last quarter increased 44% year-over-year, despite a drop of 13% in the average realized silver equivalent price. This goes on to indicate the importance of gold to Silver Wheaton's financial performance.

Now, in the recently concluded second quarter, the contribution of gold to Silver Wheaton's revenue will increase further. This is because if Silver Wheaton holds on to gold production of 66,250 ounces in the second quarter, which can be arrived at by averaging the company's projected annual production of 265,000 ounces on a quarterly basis, then its gold production will rise over 31% year-over-year.

Additionally, gold prices have increased around 9% from last year to an average of $1,301 per ounce in the second quarter of 2016. As a result, Silver Wheaton's revenue from gold could come in at more than $86 million. Moreover, Silver Wheaton enjoys strong margins on each ounce of gold as its cash costs are more or less consistent at around $400 an ounce.

Therefore, Silver Wheaton's gold production in the second quarter will add close to $60 million to its operating earnings since cash margin on each gold ounce will be around $900 in light of the prevalent gold prices in the second quarter. More importantly, as Silver Wheaton is working to increase its reliance on gold going forward, the company's financial performance will continue to improve as gold prices are set to rise further.

How strong gold prices will impact Wheaton's performance

The rally in gold prices this year is a result of weak economic data from China and the recent exit of the United Kingdom from the European Union, which led investors to increase their investments in precious metals such as gold.

According to The Independent, global gold holdings have expanded by more than 500 metric tonnes since January. As per The Week, central banks across the world are adopting favorable monetary policies aimed at encouraging growth after the Brexit. For instance, The Bank of England Governor, Mark Carney, recently said that the government would cut the interest rates to a new record this summer to boost demand, while the Chinese Central bank may lower the interest rate as well to boost the economy. Elsewhere, the Bank of Japan is expected to lower its interest rates further this year, which are already in the negative.

These collective efforts across the world to keep interest rates low in order to enhance economic growth will help gold prices sustain their momentum. In fact, the chief investment officer of Swiss Asia Capital, Juerg Kiener, said that the gold price will continue to grow higher and will touch $1,900 an ounce over the next 18 months. This is a good sign for Silver Wheaton as it has been focusing on increasing its gold production as discussed above.

Now, is gold prices actually rise to levels of $1,900 an ounce and Silver Wheaton is able to keep its gold cash costs at projected levels of $405 an ounce over the 2016-2020, period, its margin on each gold ounce will eventually rise to just under $1,500 an ounce, which is way higher than the cash margin per ounce of $900 expected in the ongoing quarter. Thus, the gold market's strong prospects will continue to enhance Silver Wheaton's performance in the long run.


Gold accounts for a significant chunk of Silver Wheaton's top line and its contribution should continue to increase in the long run. Thus, investors should remain invested in this precious metals streaming company despite its impressive run in recent months as the improving gold market will enhance its financial performance in the long run.

Disclosure: I/we 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.