While Silver Wheaton (SLW 5.77%) is down nearly 26% on a year-to-date basis, the stock is up nearly 26% in the last month as the precious metals markets have stabilized to some extent. This most recent run includes the company's recent earnings announcement that was less than the stellar report investors have come to expect from the silver streaming company. In spite of earnings that fell by roughly 40% year over year, Silver Wheaton remains my favorite pick in the space and a solid choice as a core investment.
The numbers
For the second quarter, Silver Wheaton saw record production numbers of 8.6 million silver equivalent ounces, a 28% rise over a year ago. The increased production did not, however, translate into an equivalent jump in sales, which rose only 4% on a year-over-year basis to 7.2 million ounces. The company realized an average cost of $4.14 per ounce for silver, making it a leader in the industry and highlighting the attraction of the streaming model. Silver Wheaton maintains contractual relationships with other miners to buy their silver production at a pre-determined price. This largely mitigates operating risks and cost fluctuations.
Earnings and revenue numbers for the quarter were hit hard, driven primarily by lower silver prices and a 21% decline in the realized sales price Silver Wheaton was able to achieve. Revenue fell by 17% from a year ago to $167 million, and earnings dropped to $91 million. Finally, the lowered prices led to a decrease in the company's operating margin to 55%, a fall of 21%. Rather than focusing on the extent of the fall alone, I think it is important to recognize that even with such severe margin contraction, Silver Wheaton is still hitting more than 50% efficiency.
Pascua-Lame
During the earnings call, Silver Wheaton acknowledged the delays at Pascua-Lama with its partner Barrick Gold (ABX 5.51%). While the delays are a negative, the long-term future of the project remains sound. CEO Randy Smallwood reminded investors that "we have structured our contract with Barrick so that we are well compensated for delays and start-up and we will continue to receive silver three of Barrick's other operating mines until the end of 2015." Ultimately, the project continues to be one of Silver Wheaton's most significant gold investments and a key strategic asset going forward. Despite the protections, it is unlikely that the company will sever the relationship with Barrick.
There is still time
While shares of the silver streamer have risen sharply over the past month, I see additional upside in the stock over the medium and long term. Silver Wheaton continues to have the best business model in the industry and is maintaining its low cost structure. Demand for gold has been very strong in both India and China, and any bullish news for precious metals accrues to the benefit of silver as well. The extensive industrial applications of silver make it likely that expanded economic recovery will have a less severe impact on silver than gold -- although gold is not lacking in industrial applications.
Miners in general have a leveraged position relative to precious metals prices, and the low cost at which it is able to sell means that is even more critical. As the silver market continues to show signs of strength, this should help drive Silver Wheaton, making it not too late to invest.
