Will Silver Wheaton’s Rally Slow Down?

Silver Wheaton (NYSE: SLW) will publish its fourth quarter earnings report on March 20th . In anticipation for its release, let’s examine the main factors that affected the company’s quarterly revenue and profitability. Will its quarterly earnings report curb its recent rally in the stock market? Let’s also compared Silver Wheaton’s performance to other precious metals companies such as Goldcorp (NYSE: GG) and Barrick Gold (NYSE: ABX).

Will revenue rise in the fourth quarter?

In order to estimate the company’s revenue in the fourth quarter, I will consider the changes in production and prices. Let’s start with production. The table below shows the production and sales in the first three quarters , the guidance  for 2013 and the percent change in production and sales during the fourth quarter of 2013 compared to the parallel quarter in 2012 (I assumed a 90% delivery rate (the ratio of sales to production) for silver and gold).

slw productionSource: Silver Wheaton website

Keep in mind, however, the gap between production and sales could play a role in the company’s revenue: In previous quarters there were delivery delays that resulted in lower sales (in tons) than production. If there were additional delivery delays during the past quarter, the amount of silver and gold sold (in tons) could be much lower. In such a case, the company’s revenue could be lower than estimated. Let’s turn to the changes in prices.

The company’s higher gold production was because of its Sudbury and Salobo mines, which were acquired at the beginning of 2013. Its silver production slightly declined due to higher production in its Peñasquito and Barrick mines . Nonetheless, for 2013, the company’s silver equivalent ounces rose by 13%, year over year. In comparison, Barrick’s gold production was around 7.2 million ounces in 2013 – roughly a 3%  drop compared to 2012 . Conversely, Goldcorp’s  gold production was 2.68 million ounces – nearly 12% higher than in 2012. Therefore, Silver Wheaton’s higher production level is inline with Goldcorp’s gain and much higher than Barrick’s.

During the fourth quarter, the average price of silver was 34% lower than the same quarter in 2012.  The average price of gold was 25% lower than in 2012. The plunge in the average quarterly prices of gold and silver offset the rise in gold production and bring down the company’s quarterly revenue.

Based on the expected level of production and average quarterly prices of gold and silver, the company’s revenue fell by nearly 33.5% and reached over $190 million during the last quarter of 2013. Let’s turn to examine Silver Wheaton profit margin.


Silver Wheaton’s profitability may have also declined during the fourth quarter of 2013. There are three main reasons for this drop in profitability:

  1. A rise in gold sales as a share of total sales: Since gold is less profitable than silver, the ongoing rise in gold sales compared to silver are likely to also reduce the company’s profitability;
  2. The drop in precious metals prices;
  3. The moderate rise in production costs; 

If Silver Wheaton’s profitability falls, this could cut down the company’s future dividend payment. Silver Wheaton’s dividend declined in the past three quarters. Its dividend is based on 20% of its operating cash flow of the past four quarters. Despite the potential decline in profitability, Silver Wheaton still offers a reasonable dividend paycheck for the precious metals industry. Its current dividend yield is around 1.6%. In comparison, Barrick Gold offers an annual yield of 1%; Goldcorp pays a yearly yield of 2.4%. Even though, both companies continue to pay dividends, their respective operating earnings were in the red during the first three quarters of 2013: Barrick’s operating loss was nearly $6 billion; Goldcorp’s loss was $1.8 billion. But most of these losses were due to impairment charges for the decline in precious metals prices. After controlling these impairment provisions these companies’ profits shift from red to black.

Final note

The plunge in the prices of precious metals dragged down Silver Wheaton’s revenue in the fourth quarter. The company’s lower silver production could also bring down its revenue. Moreover, the rise in gold production narrowed the company’s profit margin. Finally, these developments are likely to reduce its dividend payments in future quarters.

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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.