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Only a Fool could get excited about declining sales volumes amid this most tumultuous of global financial environments. In this environment, companies need to be firing on all cylinders to survive. I've located a rare exception, though, where near-term production shortfalls could be a boon to the long-term investor.
Silver Wheaton (NYSE: SLW ) reported flat earnings in the third quarter of $0.09 per share. Although silver sales volumes declined only slightly from a year ago, they were well below results from the previous quarters of 2008 and fell short of internal projections. The realized silver price of $14.50 was well above present levels, suggesting a difficult fourth quarter as well unless silver rebounds substantially.
Bring it on
After watching shares of Silver Wheaton dip to their lowest levels ever -- they've shed 78% of their value since March -- I'd need much more than a temporary production shortfall and a fundamentally dislocated silver price to scare me away from this bargain. The great commodity sell-off of 2008 was equally brutal for gold miners such as Yamana Gold (NYSE: AUY ) , coal miners such as Peabody Energy (NYSE: BTU ) , and fellow silver miners such as Hecla Mining (NYSE: HL ) .
First, let's take a look at the production issue. Goldcorp's (NYSE: GG ) San Dimas mine in Mexico encountered lower grade ores in two veins for a 39% decline in silver production over 2007 results. Meanwhile, Goldcorp reports that recently completed enhancements to the mining facility have improved metal recovery rates. Volatility in ore grades encountered throughout a given deposit is par for the course, and Silver Wheaton still expects an average grade of 381 grams per ton over the 25-year life of the mine. Two new projects began delivering silver during the third quarter, including Goldcorp's massive Penasquito project. Without any further capital expenditures required, Silver Wheaton expects more than 150% in organic production growth through 2013.
I fully expect silver prices to reverse course as well. The counterintuitive rally in the U.S. dollar appears to be losing steam. Silver has completed a 50% price correction and helped miners such as Pan American Silver (NYSE: PAAS ) and Coeur d'Alene Mines (NYSE: CDE ) to find some support. As a long-term investor, I welcome the temporary shortfall in production for Silver Wheaton, since it leaves more silver in the ground to be mined once rationality returns to the market. With better days ahead for silver investors, Silver Wheaton remains my top pick within the sector.