How Silver Wheaton Earnings Can Bounce Back

Silver Wheaton (SLW 6.18%) will release its quarterly report on Wednesday, and with silver prices having fallen dramatically in the second quarter, investors have pummeled the stock. But even though low silver prices will hurt Silver Wheaton earnings in the short run, the opportunity to do new deals at more attractive terms could actually help the company in the long run.

Silver Wheaton's silver-streaming business model gives it some big advantages over traditional miners. Without having to worry directly about labor disputes, high capital costs for mine development, and other operational concerns, the silver streamer can simply focus on making the best deals possible. 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

Source: Yahoo! Finance.

Will Silver Wheaton earnings rebound soon?
In recent months, analysts have had to cut back on their views on Silver Wheaton earnings, cutting 30% from their June-quarter estimates and almost that much from their full-year 2013 projections. The stock has fallen another 5% since late May, although it has recovered from its most recent lows.

Many investors have traditionally looked at Silver Wheaton as a safer way to play the silver market. Yet the silver-streamer still responds unfavorably when silver prices fall, because its silver-streaming model involves buying silver at low prices in exchange for upfront financing and then selling that silver on the open market at higher prices. When market prices for silver fall, Silver Wheaton's profits go down.

Moreover, Silver Wheaton still has indirect exposure to problems with its partners' mining projects. For instance, last month, Barrick Gold (ABX 3.89%) had to delay its Pascua-Lama mine on the Chile-Argentina border, and with Silver Wheaton due to receive a portion of the mine's production, those delays mean that the silver-streamer won't get its share until the project moves forward. However, if the mine isn't completed by the end of 2016, Silver Wheaton has the right to demand its $625 million back, less credit for any silver delivered under the agreement.

Silver's price declines also led Silver Wheaton to change the way it calculates its dividend. In May, the company said it would start looking back four full quarters in determining operating cash generation, then multiplying that amount by 20% to come up with the quarter's dividend. The phase-in version of that method led to a dividend cut from $0.14 to $0.12 per share and could lead to further declines if silver prices remain low. In doing so, Silver Wheaton joined a number of other miners slashing their payouts, including Hecla Mining (HL 5.42%) having reduced its dividend by 80% in May to reflect silver's initial drop.

In the Silver Wheaton earnings report, watch for the company to discuss future deals it has planned. The best way for the silver streamer to thrive in this environment is to get cash-poor mining companies to give it lucrative deals that will yield it more silver in the future. That way, even if prices don't recover soon, Silver Wheaton will still have opportunities to boost revenue growth and get more profitable.

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