Silver Wheaton's Golden Opportunity

On Friday, Silver Wheaton (NYSE: SLW  ) will release its latest quarterly results. The key to making smart investment decisions on stocks reporting earnings is to anticipate how they'll do before they announce results, leaving you fully prepared to respond quickly to whatever inevitable surprises arise. That way, you'll be less likely to make an uninformed knee-jerk reaction to news that turns out to be exactly the wrong move.

The recent plunge in gold and silver prices have hurt mining companies, which have already struggled under high operating costs and other headwinds. Silver Wheaton's streaming strategy shelters it from mining-operation challenges, but it still is sensitive to the price of precious metals. Let's take an early look at what's been happening with Silver Wheaton over the past quarter and what we're likely to see in its quarterly report.

Stats on Silver Wheaton

Analyst EPS Estimate

$0.40

Change From Year-Ago EPS

(2.4%)

Revenue Estimate

$252.46 million

Change From Year-Ago Revenue

27%

Earnings Beats in Past 4 Quarters

2

Source: Yahoo! Finance.

Can Silver Wheaton keep its earnings up?
Analysts have made substantial cuts to their earnings estimates for Silver Wheaton in recent months, with a $0.09 per share cut to their first-quarter calls and a 20% reduction for their full-year 2013 estimates. The stock has responded even more unfavorably, losing a third of its value since early February.

From an operational standpoint, Silver Wheaton has shown great success lately. In March, the company announced full-year 2012 figures that included a 16% boost in revenue due to a major new stream from HudBay Minerals, resulting in 17% growth in production and record earnings for the year. Slightly lower silver prices and somewhat higher average costs per ounce weren't enough to offset the gains.

Yet more recently, the recent plunge in silver and other precious metals has threatened margins a lot more. The iShares Silver ETF (NYSEMKT: SLV  ) has not only seen prices drop 15% in the last month but has also seen its overall holdings drop by 250 tons, reflecting weaker investor demand even in light of purchases of physical silver from dealers that have helped prices recover from their lowest levels.

The plunge has also created both challenges and opportunities for Silver Wheaton. On one hand, struggling miners facing lower prices will need financing and therefore be more willing to turn to the silver streamer for badly needed cash. On the other, existing streaming agreements could face trouble if counterparties have trouble staying operational. However, major partners Goldcorp (NYSE: GG  ) and Barrick Gold (NYSE: ABX  ) are both big enough that they should be able to avoid breaching their production agreements with Silver Wheaton, and the streamer typically builds in contractual protections to minimize its risk with counterparties.

Increasingly, Silver Wheaton has been willing to go beyond its silver focus to take on gold streams as well. The company's agreement with Vale (NYSE: VALE  ) in February retroactively applied back to the beginning of 2013 and will send gold from Vale's Salobo and Sudbury mines to Silver Wheaton, helping the streamer diversify its portfolio and allow it to consider broader opportunities in the mining industry.

In Silver Wheaton's report, watch for the latest figures on what the new deal with Vale brings to the company's bottom line. Unless you think silver prices are down for the count, the recent plunge makes Silver Wheaton's stock look a lot more promising for future growth.

Learn more about Silver Wheaton's a unique play on the future of silver by reading our premium research report on the company. Inside, you'll find out more about its competitive advantages over its limited peer group. Click here now to access your report today.

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Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 08, 2013, at 11:50 AM, dbtuner wrote:

    the VALE deal was done at $1675 gold and was giving a 7% return at that gold price. It was a bad deal and will hinder the company until gold rebounds

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