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Silver Wheaton Ahead of Earnings: Is Silver the Place to Be?

Silver Wheaton (NYSE: SLW  ) is set to release earnings on Aug. 14, and given the roller coaster the stock's price has been on this year, you may be wondering what to expect. While shares are up nearly 15% over the past month, they're down nearly 40% year to date. The company's profitability is closely tied to the price of precious metals, and thus to global macroeconomic events. Looking below the numbers suggests that while profit margins may contract in the quarter, the company remains well positioned and one of the best plays in silver available.

SLW Chart

SLW data by YCharts

Driving forces
Looking at some of the factors likely to affect the upcoming release, the top three factors are Silver Wheaton's enhanced exposure to gold, the price of precious metals, and the relative strength of the global economy. One of the company's most important gold investments was with Barrick Gold (NYSE: ABX  ) in the Pascua-Lama mine -- the gold mine that is set to become the largest on the planet once it's completed. Pascua-Lama has hit a series of delays on both environmental and profitability concerns. Barrick has been hit hard over the course of 2013, down over 50% this year, but appears to be stabilizing.

SLW Chart

SLW data by YCharts

Under the terms of the original agreement, Silver Wheaton received a guarantee that the mine would be complete by the end of 2015. Rather than cancel the contract and immediately require the return of the initial $625 million cash outlay, the completion date has been extended; Silver Wheaton may still receive the return of a portion of the cash outlay. Randy Smallwood, president and CEO, said: "We are in regular contact with Barrick, and are confident that all the right measures are being taken to achieve production at this mine. Pascua-Lama is a world class gold and silver deposit and will be a world class mine once it begins production."

The larger takeaway for Silver Wheaton in the immediate term is that despite these delays, the company is still expected to report increased gold production for the year. This is likely to have a positive impact on revenues and a negative impact on margins -- gold obviously commands a much higher price but sells at a smaller margin, particularly for Silver Wheaton, which has a cost of silver just above $4 per ounce. When the company reports numbers, you need to keep each of these metrics in context when evaluating the success the company has achieved.

Falling prices
It's no secret that as the global economy has stabilized, the prices of precious metals have been under considerable pressure. Silver is down by roughly a third in 2013 alone. This is certain to have a negative impact on Silver Wheaton's margins and overall profitability. Still, it's important to remember that with an average cost of its silver streams just above $4, the company will remain profitable for the fathomable future. Lower silver prices will have an impact, but the stock has already been punished considerably.

Other economic drivers
Also having an influence on the prices of precious metals, and thus Silver Wheaton's stock price, are various global economic factors. Historically, when the U.S. dollar has been strong, gold and silver prices have fallen. In recent weeks, however, this relationship has been weaker than usual.

Additionally, last Friday's U.S. jobs report missed estimates, suggesting that the economic recovery may be moving slower than hoped. This will directly affect the timing of the Federal Reserve's decision to slow the rate of quantitative easing throughout the course of the year. The report signaled that the "tapering" that has been speculated about in recent months may be put off; these altered expectations are bullish for precious metals.

Silver Wheaton ahead of earnings
Ultimately, heading into Silver Wheaton's earnings report, you can expect that the company will report increased revenue, lower margins, and continued pressure on silver production. While the short-term picture for the stock is mixed, Silver Wheaton remains strongly positioned for the medium and longer term. Buying the stock ahead of the earnings release has an element of speculative risk, but if you're looking to get exposure to silver, the stock is a solid bet.

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5/26/2016 12:48 PM
SLW $18.77 Down -0.01 -0.05%
Silver Wheaton Cor… CAPS Rating: ****
ABX $17.08 Down -0.18 -1.04%
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