Coming off the news that its reserves had swelled by 38% in 2012, Silver Wheaton (SLW 0.07%) released strong earnings figures Thursday night after the close. The silver streaming company that arguably has the best business model in precious metals beat expectations for earnings per share and revenues but saw margins contract for the fourth quarter. The company’s average cost for silver rose significantly in the quarter, but the company expects 2013 to hold strong growth for production of both silver and gold. Ultimately, despite the weakness you've seen in the stock thus far this year, the company is well positioned and deserves a spot in your portfolio.
Quarterly operating results
Heading into earnings, consensus analyst estimates had been for EPS of $0.48 on revenues of $256.3 million. Reported earnings came in at $177.7 million or EPS of $0.50; a year ago, the company earned $144.7 million, or EPS of $0.41. This increase in earnings is largely attributable to an increase in attributable silver production for the quarter, which came in at 8.5 million ounces. This is a 10% consecutive quarter increase over the 7.7 million ounces in the third quarter and a 22% year-over-year increase over the 6.9 million ounces at the end of 2011. Silver sales rose from 6.0 million ounces a year ago to 9.1 million ounces for the quarter.
In terms of revenues, the company reported a 50% increase to $287.2 million, up from $191.9 million a year ago. Operating results were well ahead of expectations across the board and show the strength of the company’s streams in generating results. New streams added during the year helped to bolster results. CEO Randy Smallwood said: “With the addition of production from Hudbay's 777 mine midway through the year, plus growing production from Peñasquito, San Dimas, and Zinkgruvan, 2012 production exceeded our forecast by over one and a half million ounces."
The quarter was not totally free of negatives, seeing the average cost per ounce of silver jump from $4.06 to $4.70. The additional streams were largely responsible for the increase in cost. To put this increase in the proper perspective, while cost went up by about 15%, reserves went up by 38%. On a net basis, this is a good tradeoff that benefits investors and highlights the importance of understanding the significant of the various numbers in the report.
One other negative for the company was a decrease in the cash operating margin for the quarter. This margin fell from $28.06 per silver equivalent ounce a year ago to $26.76. This 5% decline is partially attributable to the higher cost the company had to pay for silver and partly to a decline in silver prices.
The company also announced its quarterly dividend of $0.14 per share based on its dividend policy. Under the policy, the company sets the quarterly dividend at 20% of the free cash generated from operations in the previous quarter. This means that shareholders of record as of April 2 will receive the dividend disbursement on April 12. Silver Wheaton’s dividend yield currently stands at 0.90% and is another selling point of the shares.
Full-year operating results
For 2012, Silver Wheaton saw production grow by 17% from 25.4 million ounces to 29.6 million ounces. Revenues jumped by 16%, rising from $730 in 2011 to $849.6 million for the entirety of 2012. Full-year earnings hit a record of $1.66 per share or $586 million, a 7% increase from the $1.56 per share or $550 million achieve a year ago. Finally, while the transaction didn't take effect until the beginning of 2013, the company added various gold streams from Vale (VALE +1.03%). Smallwood commented on this acquisition:
"With the recently announced acquisition of gold streams from Vale S.A.'s Salobo and Sudbury mines, we are confident that 2013 and beyond will bring further growth and many new records to Silver Wheaton. While our organic growth profile now forecasts roughly an 80% increase of silver equivalent production over the next five years, we firmly believe there are yet more accretive opportunities for us to further add to our world-class portfolio of precious metals streams."
As Silver Wheaton continues to expand its footprints across the precious metal space, it has demonstrated that management is firmly in control of future growth.
Looking ahead
In terms of guidance, the company expects to see a 13% increase in production for 2013, bringing production to 33.5 million ounces. By 2017, this number is expected to have swelled to 53 million ounces for the year. Overall, given the continued strength and solid growth that Silver Wheaton continues to deliver, it positioned to perform at current levels. While the stock has been weak thus far this year, I see this as an opportunity to include the stock in your portfolio at an attractive price.
