During 2013 shares of Silver Wheaton (NYSE: SLW) have lost more than 40% of their value. The plunge in the price of silver has also dragged down this precious metals streaming company’s stock. Looking forward, will Silver Wheaton do any better in 2014? What should its investors expect from this company?
Will 2014 be any better?
Last year wasn’t a good year for precious metals investors. The price of silver tumbled down by nearly 36% of its value. The Silver ETF iShares Silver Trust (NYSEMKT: SLV) has lost roughly 35.7% of its price. Moreover, the demand for this ETF has sharply diminished in recent months: The amount of silver (in ounces) in this trust has declined by more than 6% in the last quarter of 2013. Precious metals producers such as Barrick Gold (NYSE: ABX) has lost 48% of its value during 2013. Do Silver Wheaton investors have any reason to keep this investment?
The main factors that will affect the company’s performance in the future are the price of silver and the production levels.
The sharp drop in the price of silver dragged down Silver Wheaton’s stock. The chart below shows the linear correlation between iShares Silver Trust, which follows the price of silver, and the daily percent changes of Silver Wheaton’s stock.
As you can see, the linear correlation is, as expected, positive and very strong; it ranges between 0.7 and 0.9. This relation suggests that the price of silver will continue to play a significant role in the direction of Silver Wheaton’s price. Silver might make a modest comeback in 2014 or at least maintain its current price range. The progress of silver is likely to be affected by the demand for silver in India and China and the FOMC’s monetary policy. In any case, the drop in the prices precious metals has cut down Silver Wheaton’s profitability during 2013. The company’s operating profitability declined from 71% in 2012 to 54% in 2013. Other precious metal companies such as Barrick Gold have also experienced a drop in profitability from 39% to 35% (excluding goodwill and impairment provisions).
In 2013, the average price of silver was $23.5, while the current price of silver is roughly $20. Thus, even if the price of silver were to remain at its current level, this is likely to cut down the company’s revenue, assuming all things equal, by 15% during the year.
The price of silver isn’t the only factor that could affect Silver Wheaton’s stock. The company’s production level could also affect its revenue and profit margin.
Production on the rise
The company’s production is likely to keep rising in 2014. The company’s decision to acquire Sudbury and Salobo mines back in the first-quarter of 2013 will augment its gold production in the coming years. Salobo’s mill throughput capacity is expected to double by the end of 2016, which will increase the mine’s production rate. Silver Wheaton’s 777 and Sudbury mines’ annual production are also expected to be higher in 2014 than in 2013. These three mines have substantially increased the company’s gold production. This leads to the next point: the company’s shift towards gold. The company’s acquisition of Sudbury and Salobo has also increased the share of gold in Silver Wheaton’s total sales. Back in 2012 , gold accounted for only 9% of total silver equivalent ounces produced. In 2013 , this rate was 23%. In 2014, this share is likely to further rise. This shift could also adversely affect the company’s profit margin.
The table below shows the profitability of silver and gold in the first three quarters of 2013.
The profitability of silver was roughly 83%, while gold’s profit margin was 73%. Thus, since gold has a lower profit margin than silver has, this shift could also cut down the company’s profitability in 2014.
Silver Wheaton’s stock is likely to keep following the price of silver. Nonetheless, the sharp drop in shares of Silver Wheaton during last year may have been too severe considering the company’s advantages over silver including its dividend payment, and ongoing growth in sales (in ounces). If silver were to remain at its current level, and the company continues to augment its level of production, the company’s stock could slowly recovery in 2014.
For further reading:
- Will Gold Recover from its Recent Fall?
- What Could Impede This Gold Company?
- Will The Gold Market Continue to Cool Down?
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.