Lower Prices Of Precious Metals To Impact Silver Wheaton’s Q1 Results

Silver Wheaton (NYSE:SLW) will announce its first quarter results on May 8 and conduct a conference call with analysts on May 9. Lower silver and gold prices this quarter as compared to the corresponding period a year ago will result in drop in year-over-year profits. Revenues are also likely to be lower because of lower prices, despite marginally higher production and shipments.((Silver Price Chart, Kitco))

You can check out our complete analysis for Silver Wheaton here:

Business Model

Silver Wheaton is a precious metal streaming company. It enters into long-term purchase agreements with mining companies for silver and gold produced as a by-products of mining operations. The company pays an upfront amount for the right to purchase a portion or all of the silver and gold produced for a per ounce cash payment, which is at or below the prevailing market price. This per ounce cash payment is generally significantly below market prices. As the company does not actually operate mines of its own, it avoids the costs and risks of running mining operations. The company does not hedge itself against precious metals prices. Thus, its business model is exposed to volatility in gold and silver prices.((Silver Wheaton 2013 40-F, SEC))

Silver And Gold Prices

Silver and gold prices have corrected significantly over the course of last year. The prices of these precious metals have been reacting to cues regarding Quantitative Easing tapering by the Federal Reserve. Silver London Fix prices have fallen from average levels $30 per ounce in Q1 2013 to levels of around $21 per ounce in Q1 2014. Similarly, London PM Fix gold prices have fallen from average levels of $1,650 per ounce in Q1 2013 to $1,300 per ounce in Q1 2014. Thus, lower realized gold and silver prices will impact Silver Wheaton’s results in the first quarter. Going forward, the expected strengthening of the U.S. economy is likely to result in further QE tapering and result in continued pressure on gold and silver prices. ^[1]

Volumes

Attributable production volumes for 2014 are expected to be 36 million silver equivalent ounces, only marginally higher than the 35.8 million silver equivalent ounces produced in 2013. Attributable production is expected to rise to 48 million silver equivalent ounces by 2018, an increase of nearly 35% over the expected 2014 attributable production. Production is expected to rise due to expansions at the San Dimas, Sudbury, Salobo operations mid-year and the start-up of the Constancia project later in the year. The expected commissioning of the Rosemont project in Arizona is expected to add to production volumes.

The expected production figure of 48 million silver equivalent ounces does not include production from the Toroparu and Pascua Lama projects. The company recently entered into a gold stream agreement with Sandspring Resources Limited for the Toroparu project located in the Republic of Guyana. The mine is still in the construction stage. The Pascua Lama mine is involved in legal disputes. Barrick Gold, the owner and operator of the Pascua Lama mine, decided to suspended construction activities except those required for environmental production and regulatory compliance. Once Pascua Lama and Toroparu begin producing, they will contribute nearly 10.5 million silver equivalent ounces annually for the first five years of operations. ^[2]

Other Developments

The current low commodity price environment presents an opportunity to Silver Wheaton for acquisition of more precious metal streams. The company’s management is bullish in this regard after a strong year of precious metal stream acquisitions in 2013. Low commodity prices have created an overall negative sentiment for mining companies. With highly leveraged balance sheets, many such companies may find capital from their traditional sources of funding difficult to come by. This will create an opportunity for Silver Wheaton, which typically provides an upfront payment for capital expenditure for rights to purchase silver and gold from mine production.

The company’s dividend policy provides for quarterly dividends equal to 20% of the average of the previous four quarters’ operating cash flows. Low precious metal prices are expected to result in lower operating cash flows and consequently lower quarterly dividends year-over-year.

What To Look Out For

We will be interested to know whether the company management maintains its forecast for gold and silver prices for 2014. Further, any more information about potential streaming deals as indicated by the management in its Q4 2013 conference call will also be of interest to us.

We currently have a Trefis price estimate of $19.19 for Silver Wheaton. We will revise this in light of the earnings announcement.

See More at Trefis | View Interactive Institutional Research (Powered by Trefis)| Get Trefis Technology

1. Gold Price Chart, Kitco [↩]
2. Silver Wheaton Q4 2013 Earnings Conference Call Transcript, Seeking Alpha [↩]