Silver Wheaton (NYSE:SLW) announced its first quarter results on May 10. The company reported increased production and sales on a year-over-year basis, but as expected, sequential results were weaker due to lower sales and prices. The year-over-year growth was achieved mainly due to an additional silver stream from the 777 mine and new gold streams from the Sudbury and Salobo mines.
The company sold 6.9 million silver equivalent ounces in the first quarter down from 9.1 million ounces in Q4 2012 and up from 6.1 million ounces in Q1 2012. Despite higher sales volumes as compared to last year, net earnings went down from $147.2 million to $133.4 million due to lower realized silver prices.
Silver Wheaton also announced a change to its dividend policy to reduce volatility associated with its quarterly distribution. While it will still pay out 20% of its operating cash flows, it will now use the average of the trailing four quarters’ operating cash flow with the first reference quarter being the fourth quarter of 2012. This measure should help dampen the volatility of dividend payouts as a result of variable timing of concentrate shipments and rapidly oscillating commodity prices. Earlier, dividends used to be linked to the previous quarter’s operating cash flow. 
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Silver Wheaton is targeting a steep production increase by 2017. This growth is expected to come primarily from mines which have yet to begin production but will contribute substantially once they do. Also, the figure could rise further if the company is able to seal more deals using its significant cash reserves and credit facilities provided by banks.
Performance In Q1
The company reported attributable silver equivalent production of 8 million ounces, an increase of 20% over 2012. The figure includes 6.3 million ounces of silver and 32,200 ounces of gold. Sales of silver equivalent ounces rose by 13% year-over-year to reach 6.9 million ounces. It also reported revenues of $205.8 million for the quarter, an increase of 3% over Q1 2012. Net earnings for the quarter stood at $133.4 million, a 9% decrease over the comparable 2012 levels of $147.2 million. The increase in revenues came as a result of higher production and sales since the average realized price per ounce of silver equivalent declined from $32.59 in Q1 2012 to $29.72 in Q1 2013. Net profit also fell due to higher costs and expenses. Cash costs rose from $4.08 to $4.39 on a per silver equivalent ounce basis due to increased gold sales associated with Hudbay’s 777 mine. 
With the recent additions of Hudbay and Vale, Silver Wheaton now has just over 850 million silver ounces and almost 5 million gold ounces, which when combined is more than 1.1 billion ounces of silver equivalent reserves.
Silver Wheaton is targeting production of 33.5 million silver equivalent ounces in 2013 and 53 million ounces in 2017. This increase is expected to be driven largely by contributions from Hudbay’s Constancia mine and Barrick Gold’s Pascua Lama mine. Further contributions will come from Vale’s newly added Salobo and Sudbury mines and Augusta’s Rosemont mine. This figure could rise further since the company has significant credit facilities at hand, and is actively looking for more good deals to add to its portfolio.
Impact From The Pascua Lama Ruling
Silver Wheaton entered into a silver purchase agreement with Barrick in September 2009 to acquire 25% of the life-of-mine silver production from Pascua-Lama. Under the agreement, Barrick provided a completion guarantee that requires it to complete work at Pascua-Lama to at least 75% of design capacity by December 31, 2015. If there is a production shortfall at Pascua Lama in 2014 and 2015, Silver Wheaton is entitled to compensatory silver production from Barrick’s Lagunas Norte, Pierina and Veladero mines until Barrick satisfies the completion guarantee. If Barrick does not satisfy the guarantee, Silver Wheaton has the option of terminating the agreement. In such a case, Silver Wheaton would be returned $625 million, the upfront cash consideration it has paid to Barrick. The amount payable to Silver Wheaton will be adjusted for silver delivered to it up to the date the contract is cancelled.
A court in Chile has ordered work suspension on the Chilean side of the Pascua Lama mine which straddles Argentina as well. Even if the project is not terminated, there may be a significant time delay before production commences. According to some analysts, the production is unlikely to commence until late 2015, and this will have a significant impact on Silver Wheaton’s projected silver stream beyond 2015. At 9 million ounces per year, the impact could be substantial. 
Given the weak outlook for commodity prices, including precious metals, we think that Silver Wheaton’s shareholders would oppose any attempts to make additional deals this year. The situation could change once the picture on Pascua Lama becomes clearer. If Barrick Gold, the owner of Pascua Lama, decides not to go ahead with the project or is not allowed to, Silver Wheaton will likely go scouting for deals to replace the loss of silver streams from here.
We have a price estimate for the company of $38 which will be revised shortly.Notes:
- Silver Wheaton reports a strong start to 2013 with first quarter revenues of US$205.8 million, Silver Wheaton Press Release [↩]
- Silver Wheaton Q1 2013 Report, Silver Wheaton Website [↩]
- Silver Wheaton suffers collateral damage from Pascua-Lama delay, The Northern Miner [↩]