The price of silver rallied by over 13% during June, and it's up by 9% since the beginning of year. The recovery of silver provided some backwind support to silver-related investments, including Silver Wheaton (SLW 1.96%). Shares of this company have jumped by 30% so far in 2014. Besides the recovery of silver, what has driven the stock higher this year?
1. Lower risk
Silver Wheaton has streaming contracts with leading gold and silver producers such as Barrick Gold (NYSE: ABX) so that it receives precious metals for a low and nearly unchanged price; it receives silver for a cash cost of around $4 per ounce, and receives gold for nearly $400 per ounce. This means the company's cash costs aren't likely to change, which brings its operational risk down. This puts the company's operations at a smaller risk than silver producers, which have to face growing production costs.
2. Stable margins
Because of the steady and relatively flat cash costs, the company's profit margins are mostly affected by changes in the price of silver. Current silver prices are still well below their level in 2012-2013. But the prevailing prices of silver have remained around the $18-$22 price range for the past year. Therefore, Silver Wheaton's operating margin remained stable around 50%, as indicated in the chart below.
Data source: Google finance and CME.
The steady profitability is likely to translate to a stable dividend payment, which is currently set at an annual yield of 1.07%.
3. Steady growth in sales in 2014
The company estimates its sales to reach around 36 million silver equivalent ounces, which is slightly higher than its sales back in 2013.
Nonetheless, the company faces challenges from gold and silver producers: Goldcorp (GG +0.00%) had to delay the construction of 25 wells in its Penasquito mine. Back in 2013, the attributed silver production from this mine was 6.2 million ounces of silver -- nearly 17% of its total attributed silver equivalent ounces produced. The current expectations are that construction will start in mid-2014, and completion is expected by the middle of next year. This delay could reduce next year's sales.
The same goes for its share in the Pascua-Lama mine, which is developed by Barrick. The construction was suspended back in 2013 and has yet to reopen. Barrick allocated $300 million toward obligations related to this mine, but it's unclear when the company will resume construction of it. For Silver Wheaton, this delay won't have a strong negative impact on its sales because it revised its contract with Barrick to receive silver from Barrick's other mines during 2014 and 2015. But this delay in production in the Pascua-Lama mine could, further down the line, put Silver Wheaton's silver steam at risk.
Despite these delays, they aren't likely to impact Silver Wheaton's volume of silver sold this year. Therefore, the company is likely to keep slowly increasing its volume of silver equivalent sold in 2014.
4. Not just silver
The decision by Silver Wheaton's management to expand its operations toward gold has benefited the company. Last year, the company's attributed gold production was over 151,000 ounces, which accounted for 75% of its total operations. By 2018, gold will account for 67% of its total operations. The rise in its gold operations has reduced the risk of exposure to only one precious metal; the company also benefited from the recovery of gold, which has outperformed silver in recent years. The additional exposure to gold may have also contributed to the steeper rise in Silver Wheaton's stock compared to the price of silver.
Takeaway
Silver Wheaton has outperformed silver and is likely to keep doing so as long as the company continues to expand its operations.
