Silver Wheaton (SLW +5.29%) recently released its quarterly earnings report and updated its guidance for 2014. Let's consider five points worth noting related to Silver Wheaton's outlook for 2014:
- Modest increase in production in 2014: The company will augment the amount of precious metals produced, but at a slower pace than in previous years. Silver Wheaton expects to increase its volume of silver equivalent ounces by only 0.5%. In comparison, back in 2013, the company expanded its production by 22%, mainly due to the Sudbury and Salobo mines, which were acquired in early 2013, and the rise in production from the 777 mine. This year, however, Silver Wheaton doesn't expect to introduce many new projects except the HudBay's Constancia Project, which is projected to start producing at the end of this year. One of the possible reasons the company expects to slow down its growth rate is because of the relatively low prices of gold and silver in the past year and a half. Nonetheless, it's still possible for the company to come up with new streaming contracts during 2014 -- especially if precious metals prices recover. The table below shows the projected changes in the company's silver and gold production in 2014 compared to recent years.
Source: Silver Wheaton
- Higher delay in delivery: In the past year, the drop in prices of gold and silver may have partly been responsible for the rise in delay of precious metals delivery. The new projects that were implemented also resulted in delays in deliveries. As of the last quarter of 2013, the amount of precious metals produced and not yet delivered reached 6.4 million silver equivalent ounces -- the highest level in recent years. If the price of silver remains low, the amount of bullion produced and not yet delivered is likely to remain high. The table below shows the ratio of silver and gold sold vs. produced in the past several years. As you can see the ratios of both gold and silver declined in the past year. If the ratios continue to fall, the company's revenue will decline in the following quarters.
Source: Silver Wheaton
- More gold, lower profitability: Silver Wheaton will increase its gold production again by roughly 2.5% to 155,000 ounces in 2014. On the other hand, silver production is projected to inch down by 0.2% to 26.7 million ounces. As a result, gold operations will account for 26% of the company's total revenue. Back in 2013, this ratio was slightly lower at 25%. In 2012, the ratio was only 9%. The higher gold production is likely to further reduce the company's profit margin, because gold tends to have a lower profit margin than silver. In the past year, Silver Wheaton's operating profit reached 53%. In comparison, Franco-Nevada (FNV +1.65%) and Royal Gold (RGLD +2.29%), leading royalties companies that mostly sell gold, recorded operating profit of 48% and 50%, respectively -- lower than Silver Wheaton's. This year, Silver Wheaton's profitability is likely to come closer to these royalties companies.
- Expect lower dividends: In the current low price environment of bullion, the company's operating cash flow is likely to grow at a slower pace. This, in turn, could reduce Silver Wheaton's dividend payment. In the last quarter of 2013, the company's dividend was $0.07 per share, which comes to an annual dividend yield of 1.15%. Back at the beginning of 2013, the company's quarterly dividend was $0.14 per share. Despite the expected decline in the dividend payment, the current annual yield is still close to other royalty and streaming companies' yields: Franco-Nevada yields around 1.58% and Royal Gold's annual yield is 1.3%.
- Silver and gold prices: The progress of precious metals prices will (obviously) play a significant role in determining Silver Wheaton's revenue and profitability. In the past couple of months both gold and silver rallied, but they are still well below the levels recorded before 2013. Investors of silver and gold are still better off investing in a company such as Silver Wheaton over directly purchasing silver options or silver ETFs for two reasons: First, Silver Wheaton provides income. The second reason (which could also be, at times, a double-edged sword) is that the company's stock is not only determined by the direction of precious metals but also by its operations (e.g., new projects, acquisitions, etc.). If the company purchases new mines and enters into new streaming contracts, this could appreciate its valuation.
Final note
Silver Wheaton doesn't expect to increase its production by much in 2014. Moreover, the current low prices of precious metals are likely to keep the company's profit margin lower than in previous years. This is also likely to bring down its dividend payment. Finally, the company is still capable of surprising investors and acquiring new steam contacts during the year, which could augment its valuation.
