The price of silver rallied by over 13% during June and it’s up by 9% since the beginning of year. The recovery of silver provided some backwind support to silver related investments including Silver Wheaton (NYSE: SLW). Shares of this company jumped by 30% during 2014 (up to date). Besides the recovery of silver, what has driven the stock so high this year?
1. Lower risk
Silver Wheaton has streaming contracts with leading gold and silver producers such as Barrick Gold (NYSE: ABX) so that it receives precious metals for a low and nearly unchanged price: It receives silver for a cash cost of around $4 per ounce, and receives gold for nearly $400 per ounce. This means, the company’s cash costs aren’t likely to change, which brings its operational risk down. This puts the company’s operations at a smaller risk than silver producers, which have to face growing production costs.
2. Stable margins
Due to the steady and relatively flat cash costs, the company’s profit margins are mostly affected by the changes in the price of silver. The current prices of silver are still well below their level in 2012-2013. But the prevailing prices of silver have remained around the $18-$22 price range for the past year. Therefore, Silver Wheaton’s operating margin remained stable around 50%, as indicated in the chart below.
Source of Data: Google finance and CME
The steady profitability is likely to translate to stable dividend payment, which is currently set at an annual yield of 1.07%.
3. Steady growth in sales in 2014
The company estimates its sales to reach around 36 million silver equivalent ounces, which is slightly higher than its sales back in 2013.
Nonetheless, the company faces challenges from the gold and silver producers: Goldcorp (NYSE: GG) had to delay the construction of 25 wells in its Peñasquito mine. Back in 2013, the attributed silver production from this mine was 6.2 million of ounces of silver — nearly 17% of its total attributed silver equivalent ounces produced. The current expectations are that construction will start in mid-2014 and the completion is expected by the middle of next year. This delay could reduce next year’s sales of Silver Wheaton.
The same goes for its share in the Pascua-Lama mine, which is developed by Barrick. The construction was suspended back in last 2013 and has yet to reopen. Barrick allocated $300 million towards obligation related to this mine. But it’s unclear when the company will resume the construction of this mine. For Silver Wheaton this delay won’t have a strong negative impact on its sales, because it revised its contract with Barrick to receive silver from Barrick’s other mines during 2014 and 2015. But this delay in production in the Pascua-Lama mine could, further down the line, put Silver Wheaton’s silver steam at risk.
Despite these delays, they aren’t likely to impact Silver Wheaton’s volume of silver sold this year. Therefore, the company is likely to keep slowly increasing its volume of silver equivalent sold in 2014.
4. Not just silver
The decision of Silver Wheaton’s management to expand its operations towards gold has benefited the company. Last year, the company’s attributed gold production was over 151 thousand ounces, which accounted for 75% of its total operations. By 2018, gold will account for 67% of its total operations. The rise in its gold operations has reduced the risk of exposure to only one precious metal; the company also benefited from the recovery of gold, which has outperformed silver in recent years. The additional exposure to gold may have also contributed to the steeper rise in Silver Wheaton’s stock compared to the price of silver.
Silver Wheaton has outperformed silver and is likely to keep doing so as long as the company continues to expand its operations.
For further reading:
- Will Gold Recover from its Recent Fall?
- What Could Impede This Gold Company?
- Will The Gold Market Continue to Cool Down?
- Will Gold Continue to Dwindle?
Disclaimer: The author holds no positions in stocks mentioned and does not plan to initiate positions within 120 hours of the posting of this article. This article is to be used for educational, research and informational purposes only and does not constitute investment advice. There are no guarantees, expressed or implied, of future positive returns in regards to the subject matter contained herein. Understand the risks inherent in investing before making the decision to invest or consult an investment professional for more information. Reasonable due diligence has been performed in regards to the information in this article. However, the author expressly disclaims any liability for accidental omissions of information or errors in fact.