Can Silver Wheaton Corp’s Rally Continue?

Silver Wheaton's fourth-quarter earnings report will be released next month. What should investors expect?

Feb 10, 2014 at 3:53PM

Silver Wheaton (NYSE:SLW) will publish its fourth-quarter earnings report on March 20. In anticipation of its release, I'll examine the main factors that affect the company's quarterly revenue and profitability. Could the upcoming report curb the stock's recent rally? I'll also compare 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'll consider the changes in production and prices. Let's start with production: The table below shows 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 Production

Source: Silver Wheaton's 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. Now let's turn to the changes in prices.  

The company's increased gold production was a result 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 approximately 2.7 million ounces -- nearly 12% higher than in 2012. Therefore, Silver Wheaton's higher production level is in-line 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 pressured 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 more than $190 million during the last quarter of 2013.  

Silver Wheaton's profitability likely also declined during the fourth quarter of 2013. There are three main reasons for this potential 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 is 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 lower the company's future dividend payments. 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%, while Goldcorp pays an annual 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, profits shift from red to black. 

Final note
The plunge in the precious metals prices dragged Silver Wheaton's revenue lower in the fourth quarter. The company's lower silver production could also pressure its revenue. Moreover, the rise in gold production narrowed the company's profit margin. These developments could very well lead to reduced dividend payments in future quarters.

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