Silver Wheaton (NYSE:SLW) will announce its fourth quarter results on March 20 after close of markets and conduct the earnings conference call on March 21. Although Silver Wheaton is not a mining company, its business model makes it very vulnerable to volatility in the prices of precious metals. Silver prices in the fourth quarter were lower on year-over-year and sequential bases. This is likely to have a significant negative impact on its year-over-year and sequential revenue figures because the company doesn’t hedge itself against market prices of silver. On the other hand, Silver Wheaton’s exposure to gold has been increasing. Gold generates higher revenues but lower profit margins for the company as compared to silver. 
Silver Wheaton links its dividend payment to cash generated by operating activities in the previous quarter. Low silver prices imply lower cash flows and hence lower dividends, which may put pressure on the company’s share price.
We have a price estimate for Silver Wheaton of $20 which we will revise once the fourth quarter earnings results are out.
Silver Wheaton is a silver and gold streaming company. It signs long-term purchase agreements with mining companies that produce silver and gold as by-products. The company has the right to purchase all or a portion of the silver or gold production at a low fixed price for an upfront payment pursuant to any agreement. This gives it an edge over conventional mining companies as it does not incur any 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 production. However, Silver Wheaton doesn’t hedge itself against precious metal price movements which leaves it vulnerable to significant adverse price movements. Since gold and metal prices were quite volatile in 2013, this had negative consequences for Silver Wheaton’s profits.
Weak Precious Metal Prices Will Impact Margins
The prices of gold and silver this year have been reacting largely to the Federal Reserve Bank’s various pronouncements and hints about continuing or tapering down monetary stimulus measures, better known as Quantitative Easing (QE). The first steep fall in price came in April when the minutes from the Federal Open Market Committee (FOMC) meetings suggested that the bank may stop its bond purchasing program well before the end of 2013. 
A second steep fall in prices occurred in June when the Federal Reserve Bank chairman Ben Bernanke announced his intention to reduce the quantitative easing program or possibly withdraw it later in the year, if the U.S. economy and job market were to improve. 
However, gold and silver prices again started inching upwards in July when a second announcement from Mr. Bernanke suggested that economic data continued to remain weak and the Federal Reserve may continue with monetary easing for the time being. In the wake of some positive economic data ahead of the monetary policy review meeting of the Federal Reserve in mid-September, the market largely expected the bank to begin a gradual QE tapering process. Accordingly, the prices of gold and silver began falling in September. After a brief rally following events in Syria, precious metals resumed their downward slide and kept going down downhill till the end of 2013.
On the whole, the average prices of gold and silver for the fourth quarter this year have been much lower than in the fourth quarter last year.
Another Gold Stream Added
In November, Silver Wheaton entered into an Early Deposit Gold Stream Agreement with Sandspring Resources Limited for the Toroparu project located in the Republic of Guyana, South America. 
Under the agreement, Silver Wheaton paid $148.5 million in cash upfront and will have the right to buy 10% of the life-of-mine gold production from Toroparu for the lesser of $400 per ounce and the prevailing market price. This purchasing price is subject to a yearly inflation adjustment of 1% starting in the fourth year after the completion test criteria is satisfied.
While this agreement will allow Silver Wheaton to gain a foothold in what is expected to be a high-quality project going forward, it is also beneficial to Sandspring Resources. The latter, a junior exploration and development company, needs funds to complete a feasibility study and Silver Wheaton’s capital will preclude the need to raise additional equity at the cost of excessive dilution.
The Toroparu gold and copper deposit has proven and probable gold reserves of 4.1 million ounces. The yearly gold output is expected to be around 246,000 ounces. Being entitled to 10% of this output, Silver Wheaton has the opportunity to generate around $30 million in revenues per year if we assume a price estimate of $1,200 per ounce.
What We Will Be Watching
Since precious metal prices are a big driver of Silver Wheaton’s earnings, we would like to hear the company management’s view on gold and silver prices for 2014. We are also interested in knowing if the company sees low prices as an opportunity to do further deals at this time. Finally, we will pay attention to the company’s production forecast for 2014.Notes:
- Silver Price Chart, Kitco [↩]
- Falling Gold Prices Take Shine Off Mining Majors, Trefis [↩]
- Weak Gold Prices And Impairment Will Dull Barrick Gold’s Results, Trefis [↩]
- Silver Wheaton Completes Early Deposit Gold Stream Agreement With Sandspring Resources, Silver Wheaton Press Release [↩]