What Is Driving Down Shares of Silver Wheaton Corp?

Besides the recent fall of silver, what else has pressured shares of Silver Wheaton in recent weeks?

Apr 12, 2014 at 11:08AM

Despite the recent tumble in shares of Silver Wheaton (NYSE:SLW) during the past month, they are still up by almost 13% since the beginning of the year. The decline in silver and gold prices was the main driving force behind Silver Wheaton's fall in the past several weeks. But besides the developments in the precious metals market, what were the main changes related to the company that could have affected its stock in recent weeks? Specifically, let's examine the company's quarterly earnings report, updates to its dividend payment, and 2014 guidance. 

Fourth-quarter earnings report
The company's recent fourth-quarter report met the expectations of leading analysts in terms of production and realized prices of gold and silver. Moreover, the company's earnings per share was $0.26, slightly above the consensus among analysts. Silver Wheaton's gold and silver production quota was also in line with its 2013 guidance as indicated in the table below. 

Slw Q

Silver Wheaton's website 

Nonetheless, its revenue came short and reached only $167 million, nearly 42% lower than the same quarter in 2012. The quarterly revenue was below the market's expectations mainly because of the 1.1 million of silver equivalent ounces, which were delayed in delivery. In total, the amount of precious metals produced and not yet delivered was 6.4 million ounces. The table below presents the difference between precious metals produced and sold during the fourth quarters of 2013 and 2012. 

Slw Guide

Silver Wheaton's website. 

As indicated above, even though the company increased its precious metals production in the past quarter, the amount of gold and silver actually sold declined. The sharp rise in gold sold also affected its profit margin.  

Silver Wheaton's profitability slightly improved in the past quarter and reached nearly 49.7%. Back in the third quarter of 2013, its operating profit was 48.8%. Nonetheless, a year ago, the company's profitability was around 65%. The drop in gold and silver prices and the rise in the share of gold out of total revenue contributed to the lower profitability. Despite this fall, Silver Wheaton is still leading the way among streaming and royalty companies in terms of profitability: Royal Gold (NASDAQ:RGLD), a leading precious metals royalty company, recorded a profit margin of only 43.4% in the past quarter of 2013. The annual operating profit of Franco-Nevada (NYSE:FNV) was around 48% (after excluding one-time investments and royalty impairments). Therefore, even though Silver Wheaton didn't improve its profit margin in the past quarter, it's still higher than those of its leading competitors'.  

Silver Wheaton reached its goals in production and earning per share, but the rise in delivery delays reduced its quarterly revenue. These delays could raise the company's risk related to operations a bit, but this isn't likely to have long-term negative impact on its valuation. The other major news was the company's outlook for the year and dividend payment. 

2014 guidance and dividend
As I pointed out in an earlier post, Silver Wheaton's annual guidance showed little growth in production: The silver production is expected to remain nearly unchanged; gold production will increase by less than 3% year over year. This modest growth in operations didn't impress Silver Wheaton's investors and reduced its valuation. 

Besides the 2014 outlook, the company's quarterly dividend payment declined from $0.09 per share to $0.07 per share. Looking forward, if gold and silver prices don't resume their rally, the company's dividend paycheck, which is based on 20% of its average cash flow from operations for the preceding four quarters, is likely to remain around $0.07 per share -- lower than it was back at the beginning of 2013.

Conversely, other royalties and streaming companies improved their dividend paychecks: Royal Gold increased its quarterly dividend to $0.21 per share; Franco-Nevada also raised its quarterly dividend by 11% to $0.20 per share from the second quarter of 2014. These developments reduce the appeal of Silver Wheaton compared to its peers. 

Bottom line
The direction of gold and silver will continue to be the main factors affecting Silver Wheaton's stock. But besides that, the company's decisions will also play an important role in determining its value. If the company doesn't improve its operations and purchase new mines, this could keep its stock from recovering. 

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