Source: Silver Wheaton.
In 2013, Silver Wheaton (SLW +5.55%) suffered its worst year since the financial crisis, plunging 43%, and reflecting the massive decline in silver and gold prices that brought down the entire precious-metals sector. Yet, even though neither silver nor gold bullion has seen a huge amount of improvement from where they began the year, they've at least shown signs of hitting a bottom. Silver Wheaton has responded in kind with a 23% gain so far in 2014 that has easily eclipsed the more modest rises in precious metals prices.
Even with 2014's bounce, though, Silver Wheaton still has lost about half its value from the highs it set just three years ago. The question long-term investors have is whether interest in gold and silver will ever return to the levels that dominated the bull market in precious metals that lasted more than a decade. If so, Silver Wheaton could be poised to take maximum advantage. Let's take a quick look at Silver Wheaton's recent performance and its future prospects for the rest of 2014 and beyond.
Stats on Silver Wheaton
|
2014 YTD Return |
23.4% |
|
Expected 2014 Revenue Growth |
(2.1%) |
|
Expected 2014 EPS Growth |
(16.7%) |
|
Dividend Yield |
1% |
Source: Yahoo! Finance. Yield based on most recent quarterly distribution.
Source: Silver Wheaton.
Why has Silver Wheaton bounced back?
One big reason for Silver Wheaton's strong gains so far in 2014 is that bullion prices finally stopped falling this year after their 2013 crash. On the silver side, prices have remained volatile, and gains from earlier in the year have largely petered out and left the white metal flat for 2014 year to date. But the gold market has held onto a small portion of its gains, and that, in turn, has proven the value of Silver Wheaton's moves during the past few years to diversify beyond silver streaming to include gold production agreements, as well.
Yet, the tepid performance in precious metals can't explain the return of confidence for Silver Wheaton shareholders. Throughout the mining industry, the realization that most companies can remain viable at current price levels has replaced last year's initial shock of lower prices, and mining stocks generally have jumped substantially in response. That, in turn, is good news for Silver Wheaton, which takes its share of production from those mining companies and then resells it at prevailing market prices, booking large profits compared to the discounted contract prices that Silver Wheaton pays its mining company partners. Silver Wheaton has a wide array of partners, ranging from giants like Goldcorp and its Penasquito mine to much smaller mining operations. As long as the mining industry can survive, Silver Wheaton will keep having opportunities to meet its financing needs, and take its cut as an intermediary in the process.
Projects like the Goldcorp Penasquito mine provide streaming revenue for Silver Wheaton. Image source: Silver Wheaton.
What challenges does Silver Wheaton still have to overcome?
One of Silver Wheaton's biggest advantages, though, is also a potential obstacle. In order to succeed, Silver Wheaton needs its production partners to move forward with projects, and ensure a steady stream of mined products to provide income and cash flow for the streaming specialist. Silver Wheaton doesn't have massive capital budgets itself; but if its partners get overwhelmed by financial difficulties, the silver streamer faces the unattractive choice of potentially throwing good money after bad to keep a project alive.
That's a big problem for mining companies that are dealing with major challenges of their own. In some cases, low prices by themselves are enough to lead miners to mothball possible projects. While Silver Wheaton typically protects itself with contingency clauses to get its initial investment back in those circumstances, it still represents a lost opportunity for profit. Moreover, even financially viable projects sometimes hit snags, such as the long delays that Barrick Gold's (ABX +2.12%) South American Pascua-Lama project has encountered due to environmental concerns.
Source: Silver Wheaton.
At the same time, Silver Wheaton also needs to seek out new projects. The current time of financial stress for many mining companies represents a golden opportunity for Silver Wheaton to get favorable terms for providing cold hard cash for project development. But again, Silver Wheaton can't take advantage of these conditions if it can't get partners to come to the table.
The big picture for Silver Wheaton
As long as silver and gold prices remain low, Silver Wheaton won't be able to maximize its profit potential and return to the strong earnings it enjoyed during the boom times in precious metals. But by making smart deals now, Silver Wheaton can lay the groundwork for future prosperity once silver and gold do regain some of their lost luster.
