Silver Wheaton (NYSE:SLW) witnessed its stock falling more than 7% following its earnings announcement on Monday. The company reported a 25% increase in revenues, whereas net income rose by 20% f0r the first quarter. In the past month, the stock has been heavily battered as rising concerns about euro zone sent precious metal prices south. Silver Wheaton, the world’s largest silver streaming company, purchases silver from mining companies that produce silver as a by-product. Competitors like Silver Standard Resources (NASDAQ:SSRI), Pan American Silver (NASDAQ:PAAS), Bear Creek Mining Corporation (CVE:BCM) and Endeavor Silver (NYSE:EXK) have also seen huge selling in their stocks.
Earnings at a Glance
Revenue jumped to $199 million mainly due to higher shipments of silver at 6.1 million silver equivalent ounces compared with 5.9 million ounces in year ago quarter. Overall average realized price also increased marginally to $32.58 from $32 last year. The aforementioned factors translated into an increase in net income, which jumped by 20% to $147 million.
Business Model: Its Strength is the Weakness
Silver Wheaton signs long term purchase agreement with mining companies that produce silver as a by-product, typically gold and copper mining companies. The company has the right to purchase all or a portion of the silver production attributable at a low fixed price for an upfront payment pursuant to any agreement. This gives it an edge over the conventional mining companies as it does not incur any kind of operational losses in volatile market conditions. Moreover, since the company does not own any of the mines, it does not incur any operational and capital costs associated with the production.
However, the same business model makes is hugely dependent on silver prices for earnings growth. Even a slight change in silver price translates into a major variance in EBITDA.
Euro Zone Fuels Concerns Yet Again
Global economic conditions have led to increased volatility in commodity prices thus making it difficult to forecast commodity prices in short term. We have lowered our estimate for average price for silver to $32 per ounce in 2012. However, we still believe that silver prices will top $39 levels by the end of our forecast period with many people predicting it to even touch $50.
We believe rising industrial utility of silver and investment demand from India and China will keep driving the silver demand. We still maintain attributable production of silver to top 27 million silver equivalent ounces in 2012 with steady growth.
Owing to its business model, the margins are largely dependent on silver prices than volumes. Therefore, we have also cut margin expectations to 2012 leading to lower stock price estimate of the company.
We are structurally bullish on Silver Wheaton on a long term basis and recently discussed in detail the fundamentals affecting the company’s value.