Silver Wheaton’s Earnings Will Show Global Weakness

Silver Wheaton (NYSE:SLW) will report its earnings for the second quarter on Thursday this week. The company had reported a 25% increase in revenues and a 20% rise in net income in the first quarter. Silver Wheaton, the world’s largest silver streaming company, purchases silver from mining companies that produce silver as a by-product.

Its main competitors are Silver Standard Resources (NASDAQ:SSRI), Pan American Silver (NASDAQ:PAAS), Bear Creek Mining Corporation (CVE:BCM) and Endeavor Silver (NYSE:EXK).

See our full analysis for Silver Wheaton

Business model gives an advantage over traditional mining companies…

Silver Wheaton signs long term purchase agreement with mining companies that produce silver as a by-product, typically gold and copper mining companies. It has positioned itself as the world’s largest silver streaming company in a very short time. The company has purchase agreements for precious metals like gold and has the right to purchase all or a portion of the silver production attributable at a low fixed price for an upfront payment. However, the fixed price is subject to inflation-related adjustments. On the other hand, the good news is that contracts obligate the miner to supply the quantity agreed to, regardless of circumstances or production figures. This lends an element of predictability to Silver Wheaton’s balance sheet.

This gives it an edge over the conventional mining companies as it does not incur any kind of operational losses in volatile market conditions. Since the company does not own any of the mines, it does not incur any operational and capital costs associated with the production. Moreover, it is not as much as exposed to political risks as conventional miners.

…But doesn’t insulate it completely from global market conditions

Europe’s problems continue unabated, and any proposed remedy that finds broad acceptance is unlikely to solve problems in the short or the medium term. This, combined with muted demand from China could depress prices if the contagion were to spread. Industrial use is a key demand driver for silver so weak economic conditions equate to muted demand and lower prices. The price movement in the previous quarter has been confined to a relatively narrow zone, albeit lower than last quarter on an average, reflective of the watchful mode in the market. We believe that prices will receive an upward push if QE3 materializes and investors start chasing commodities across the board.

We will be interested in any plans Silver Wheaton might have regarding new deals, given its cash war-chest of $1 billion. We will also be closely watching its reaction to the recent news that production from Barrick Gold’s Pascua-Lama has been pushed back by one year to mid-2014. We would like to know its impact on the company’s business in 2013-14 given that the contracts with Barrick Gold for Lagunas Norte, Pierina and Veladero mines ends in 2013.

We will be updating our estimates once the earnings numbers are out.

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