Lower Precious Metals Prices Weigh On Silver Wheaton’s Q1 Results

Silver Wheaton (NYSE:SLW) announced its first quarter results on May 8 and conducted a conference call with analysts on May 9. As expected, lower prices for precious metals as compared to the corresponding period a year ago negatively impacted results. Revenues for Q1 2014 stood at $165.4 million compared with $205.8 million in Q1 2013, representing a decline of 20%. The impact of lower prices was partially offset by higher sales volumes. Net income stood at $79.8 million compared to $133.4 million in Q1 2013, representing a decline of 40%. The impact of lower prices was compounded by higher costs. ^[1]

The company declared a dividend of $0.07 per common share, which was much lower compared to $0.12 per common share in Q1 2013. According to the company’s dividend policy, quarterly dividends are equal to 20% of the average of the previous four quarters’ operating cash flows. Lower dividend payout reflects lower operating cash flows, primarily due to the prevailing environment of lower precious metals prices.

Silver Wheaton maintained its production outlook for 2014. The company management was bullish on the prospects of acquisition of more precious metals streams.

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Silver And Gold Prices

Average realized silver and gold prices for Silver Wheaton fell from $29.89 per ounce and $1,645 per ounce in Q1 2013 to $20.36 and $1,283 per ounce respectively in Q1 2013. This corresponds to 31% decline from $29.72 per silver equivalent ounce in Q1 2013 to $20.38 per silver equivalent ounce in Q1 2014.

Silver and gold prices have corrected significantly over the course of last year. The prices of these precious metals have been reacting to cues regarding Quantitative Easing (QE) tapering by the Federal Reserve. Silver London Fix prices have fallen from average levels of $30 per ounce in Q1 2013 to levels of around $21 per ounce in Q1 2014. Similarly, London PM Fix gold prices have fallen from average levels of $1,650 per ounce in Q1 2013 to $1,300 per ounce in Q1 2014. Going forward, the expected strengthening of the U.S. economy is likely to result in further QE tapering and continued pressure on gold and silver prices. ^[2]

Operational Performance In Q1

Attributable silver equivalent production for Q1 2014 was 9 million ounces (6.9 million ounces of silver and 33,800 ounces of gold), which represents an increase of 8% over the comparable period of 2013. Attributable silver equivalent sales volume for Q1 2014 was 8.1 million ounces (6.2 million ounces of silver and 30,100 ounces of gold), which represents an increase of 17% over the comparable period of 2013. ^[3]

Production volumes rose due to higher production at the Peñasquito, Yauliyacu and Salobo mines, offset by lower production from the Barrick Gold owned mines and the Sudbury mines. Production increased 88% at Peñasquito primarily due to the mining of higher grade ore. Production increased 15% at Yauliyacu due to higher throughput and 114% at the Salobo gold mines due to higher throughput and improved recovery. Production at the Barrick Gold owned mines fell 59% primarily due to lower grade ore at Veladero and the closure of Pierina. Production at Sudbury decreased 31%, primarily due to lower grade ore.

Sales volumes increased more than production mainly due to favorable timing of shipments, resulting in sales of concentrate produced in previous periods mainly from Yauliyacu and Peñasquito. ^[4]

Average cash costs rose from $4.39 per silver equivalent ounce in Q1 2013 to $4.57 per silver equivalent ounce in Q1 2014. This was primarily due to a higher proportion of gold ounces sold. Gold sales accounted for 30,100 ounces out of 8.1 million silver equivalent ounces sold in Q1 2014 as compared to 16,900 ounces out of 6.9 million silver equivalent ounces sold in Q1 2013. Cash costs of production for gold are higher than those for silver. The average cash costs in Q1 2014 were $4.12 per ounce for silver and $381 per ounce or $6.06 per silver equivalent ounce for gold.

Outlook

The company maintained its previous guidance for production of 36 million silver equivalent ounces including 155,000 ounces of gold in 2014. Production is expected to rise to 48 million silver equivalent ounces by 2018, an increase of nearly 35% over the expected 2014 attributable production. Production is expected to rise due to expansions at the San Dimas, Sudbury, Salobo operations mid-year and the start-up of the Constancia project later in the year. The expected commissioning of the Rosemont project in Arizona is expected to add to production volumes.

The expected production figure of 48 million silver equivalent ounces does not include production from the Toroparu and Pascua Lama projects. The company recently entered into a gold stream agreement with Sandspring Resources Limited for the Toroparu project located in the Republic of Guyana. The mine is still in the construction stage. The Pascua Lama mine is involved in legal disputes. Barrick Gold, the owner and operator of the Pascua Lama mine, decided to suspended construction activities except those required for environmental production and regulatory compliance. Once Pascua Lama and Toroparu begin producing, they will contribute nearly 10.5 million silver equivalent ounces annually for the first five years of operations. ^[5]

We think the company is well placed to add more precious metal streams to its portfolio. More than 70% of the world’s mined silver is produced as a by-product from base metal and gold mines. This will provide ample opportunities for Silver Wheaton, which enters into long-term purchase agreements with mining companies for silver and gold produced as by-products of mining operations. This is especially true in the current low commodity price environment. Low commodity prices have created an overall negative sentiment for mining companies. With highly leveraged balance sheets, many mining companies may find capital from their traditional sources of funding difficult to come by. This will create an opportunity for Silver Wheaton, which typically provides an upfront payment for capital expenditure for rights to purchase silver and gold from mine production. ^[6]

1. Silver Price Chart, Kitco [↩]
2. Gold Price Chart, Kitco [↩]
3. Silver Wheaton Q1 2014 Earnings Press Release, SEC [↩]
4. Silver Wheaton Q1 2014 Report, SEC [↩]
5. Silver Wheaton’s Q1 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]
6. Silver Wheaton’s Q1 2014 Earnings Presentation, Silver Wheaton Website [↩]