Silver Wheaton Corporation (TSX: SLW) (NYSE: SLW) has announced that its Board of Directors has declared its fourth quarterly cash dividend payment for 2012 of US$0.07 per common share. The quarterly dividend will be paid to holders of record of its common shares as of the close of business on November 21, 2012, and will be distributed on or about December 5, 2012. It should be noted that this is down from the August dividend payment of $0.10 and will no doubt be disappointing for investors.
The consensus estimate of $0.40 was missed by $0.06 as earnings were reported at $0.34 per share, which will not please the analysts and may result in some near term selling pressure.
Third Quarter Highlights are as follows:
· Record attributable silver equivalent production of 7.7 million ounces compared to 6.1 million ounces in Q3 2011, representing an increase of 26%.
· While production was at record levels, silver equivalent sales amounted to 5.1 million ounces due to the timing of deliveries, with the difference attributable to an increase of 2.0 million payable silver equivalent ounces being produced in the quarter that will be recognized in future sales.
· Revenues were US$161.3 million compared to US$185.2 million in Q3 2011, representing a decrease of 13%, attributable to a 14% decrease in silver prices from a year earlier with silver equivalent sales being consistent year over year at 5.1 million ounces.
· Net earnings were US$119.7 million (US$0.34 per share) compared to US$135.0 million (US$0.38 per share) in Q3 2011, representing a decrease of 11%.
· Operating cash flows were US$128.7 million (US$0.36 per share) compared to US$167.2 million (US$0.47 per share) in Q3 2011, representing a decrease of 23%.
· Cash operating margin was US$27.20 per silver equivalent ounce, compared to US$32.11 in Q3 2011, representing a decrease of 15%.
· Average cash costs rose slightly to US$4.16 per silver equivalent ounce, compared to US$4.12 in Q3 2011.
· As at September 30, 2012, approximately 5.2 million payable silver equivalent ounces attributable to the Company have been produced at the various mines and will be recognized in future sales as they are delivered to the Company under the terms of their contracts. This represented an increase of 2 million payable silver equivalent ounces during the three months ended September 30, 2012.
· At September 30, 2012, the Company had approximately $555 million of cash on hand and $400 million of available credit under its revolving bank debt facility. This cash and available credit, together with strong operating cash flows, positions the Company well to execute on its growth strategy of acquiring additional accretive silver and precious metal stream interests.
· Declared quarterly dividend of US$0.07 per common share, representing 20% of the cash generated by operating activities during the three months ended September 30, 2012.
· On September 28, 2012, the Company announced that it had closed the previously announced purchase from Hudbay Minerals Inc. (“Hudbay”) of a precious metals stream from its currently producing flagship 777 mine (“777″), as well as a silver stream from their cornerstone development project, Constancia. Initial production covering the period August 1, 2012, through September 30, 2012, from 777 totaled 733,000 silver equivalent ounces (139,000 ounces of silver and 11,500 ounces of gold).
Randy Smallwood, President and Chief Executive Officer of Silver Wheaton commented as follows:
“With the addition of production from Hudbay’s 777 mine in the quarter, we produced a record 7.7 million silver equivalent ounces, putting us on track to reach our 2012 annual production forecast of 28 million ounces. Our diversified asset base once again achieved strong production, with notable contributions from Yauliyacu, Zinkgruvan, and Minto. While overall production was strong, payable silver equivalent ounces produced but not shipped during the quarter increased by 2 million ounces due to the timing of concentrate shipments, negatively affecting silver equivalent sales volume. This increase included the new precious metals contained in base metal concentrates produced at the 777 mine as the concentrate storage and transportation system was being filled with materials mined after August 1st. It is very important to remember that these ounces will inevitably be sold, it is simply a matter of timing.”
“During the quarter we paid out over $630 million dollars, including our first payment to Hudbay and our last payment to Barrick, and yet, we finished the quarter with $550 million of cash on hand. With this cash, a fully undrawn revolving credit facility of $US400 million, and strong forecast annual operating cash flow, we remain very focussed, capable and excited about our potential to continue adding additional accretive ounces to our portfolio.”
Average cash costs in the third quarter of 2012 were US$4.16 per silver equivalent ounce, compared with US$4.12 during the comparable period of 2011. This resulted in cash operating margins of US$27.20 per silver equivalent ounce, a 15% decrease compared to the third quarter of 2011, primarily a result of a 13% decrease in the realized price per silver equivalent ounce.
Background to Silver Wheaton
Silver stream or silver purchase agreements allow Silver Wheaton to purchase, in exchange for an up-front payment, the by-product silver production of a mine that it does not own or operate. Since approximately 70% of all silver production occurs as a by-product of base or precious metals production, there are numerous potential opportunities for further growth with this business model.
The operating costs that Silver Wheaton pays for future silver production are pre-determined in the agreements, at approximately $4 per ounce, with a small inflationary adjustment. This amount offsets our partners’ typical cost to produce an ounce of silver. Fixed costs reduce our shareholders’ downside risk while at the same time providing the upside of leverage to increases in the price of silver. As well, other than the initial upfront cash payment, Silver Wheaton does not contribute to future capital expenditures or exploration costs invested by the mine; yet we benefit from the production and exploration growth that result from these expenditures. This business model often translates into significant value creation for Silver Wheaton shareholders.
Silver Wheaton Corporation has a market capitalization of $13.79Bln, an EPS of $1.60, a 52 week low of $22.94 and a high of $41.30; average volume of shares traded is between 4.00Mln and 5.00Mln, so the liquidity is good, with 353.87 million shares outstanding. Current stock price is $38.98.
Taking a quick peek at the chart below, we can see that the upswing of the 50dma, crossing the 200DMA, forming a golden crossover, has been positive for SLW, in that the price of silver has fallen but the stock price has held its ground consolidating around the above the $38.00 level.
To conclude, the fortunes of SLW are of course predicated on silver prices where the volatility remains on steroids. Silver traded at $27.00 in August, $35.00 in October and back down to $31.00 today, a white knuckle ride and definitely not one for the faint hearted. We also note that silver prices have returned to their 200dma of $31.00 which we see as a positive sign for silver with the expectation that silver will rally from here. On a seasonal basis this quarter is usually a good one for both silver and gold prices, so if silver can find the traction and rally back to say $40.00/oz, then SLW could be trading at $50.00 in the near future.
As this stock forms the largest element of our silver stock holdings we are not looking to increase our exposure any further at the moment, as we are a tad reluctant to place more eggs in the same basket. Alternatively, we may look to increase our exposure via the selection of a few well thought out optionplays. However, we do believe that SLW should be given full consideration when building a portfolio in the precious metals sector, especially if you are new to this tiny sector of the market.
Our target price remains unchanged at $100.00 and we take heart in that this stock has come from a low of $23.00 in May to trade close to $40.00 recently.
For disclosure purposes SLW is our largest single holding in the silver space.
Have a good one.
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