Silver Wheaton Earnings Preview: Lower Silver And Gold Prices To Weigh On Results

SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW) will release its second quarter results on August 13 and conduct a conference call with analysts the next day. We expect lower silver and gold prices in the second quarter, as compared to the corresponding period last year, to negatively impact the company’s results. The effect of lower prices will be offset to some extent by higher volumes, particularly from the company’s gold streams from the Sudbury and Salobo mines, where production has ramped up over the course of last year.

See our complete analysis for Silver Wheaton

Silver and Gold Prices

Precious metal prices have fallen over the course of the last year, reacting to cues regarding tapering of the Federal Reserve’s Quantitative Easing (QE) program. Going forward, the Fed’s outlook on the U.S. economy is important as far as silver and gold prices are concerned. With the economy strengthening, the Fed is expected to raise interest rates some time in 2015. However, the timing of an interest rate hike is contingent upon the pace of economic and jobs growth in the U.S. [1] An interest rate hike is likely to lead to a decline in the price of silver and gold, as investors shift towards higher yielding assets.

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Silver prices averaged roughly $23 per ounce in Q2 2013, as compared to less than $20 per ounce in the second quarter this year. [2] Similarly, gold prices averaged roughly $1,400 per ounce in Q2 2013, as compared to roughly $1,300 per ounce in the second quarter this year.  ((Gold Price Charts, Kitco)) Lower silver and gold prices are expected to negatively impact the company’s results in the second quarter, as compared to the corresponding period a year ago.

Volumes

We expect shipments to rise in the second quarter as compared to the corresponding period last year. This will primarily be driven by higher gold shipments from the company’s streaming agreements for Vale’s Salobo mine and the Sudbury mining complex. Silver shipments from the San Dimas and Peñasquito mines are expected to rise as well.

A project to expand mill throughput capacity at the Salobo mine from 12 million tons per annum (Mtpa) to 24 Mtpa reached 97% physical completion in Q1 2014. [3] The expanded mill throughput capacity was expected to come on stream in the second quarter. This expansion in milling capacity should boost gold shipments from the Salobo mine. The Totten mine, which is part of the Sudbury mines, commenced production in the first quarter of 2014. ((Silver Wheaton’s Q1 2014 Earnings Release, SEC)) The additional output from the Totten mine should boost gold shipment volumes from the Sudbury mines.

Shipment volumes are also expected to rise sequentially from the San Dimas mine. The expansion of throughput capacity from 2,150 tons per day (tpd) to 2,500 tpd was completed in the first quarter. ((Silver Wheaton’s Q1 2014 Earnings Release, SEC)) Recoveries are expected to improve in the second quarter with the completion of an additional leaching tank and an additional thickener. Production rose at the Peñasquito mine in the first quarter due to mining of higher grade ores and operational improvements in the efficiency of the flotation cell operation. ((Silver Wheaton’s Q1 2014 Earnings Release, SEC)) We expect higher year-over-year production and shipments from the Peñasquito mine in the second quarter as well.

Other Developments

The current subdued commodity price environment presents an opportunity to Silver Wheaton for acquisition of more precious metal streams. The company’s management is bullish in this regard after a strong year of precious metal stream acquisitions in 2013.((Silver Wheaton’s Q1 2014 Earnings Conference Call Transcript, Seeking Alpha)) Due to the subdued pricing environment, sentiment is negative regarding the mining sector in general. Equity valuations are subdued, which makes issuing stock less desirable. Debt is hard to come by for mining companies, most of which have highly leveraged balance sheets and are looking to deleverage.

Under such conditions, streaming deals are an attractive source of funding for mining companies. This is especially the case for gold and copper producers, or diversified mining companies that produce these metals, as these are the major counterparties for Silver Wheaton’s precious metal streaming deals. Over 70% of mined silver is produced as a by-product from base metal or gold mines. [4] Thus, there is significant growth potential in the silver streaming space.

Expectations from Conference Call

We are interested to know the company management’s outlook on gold and silver prices for the current year and beyond. Further, any information about potential precious metal streaming deals will also be noted. This will shed some light on the road ahead for Silver Wheaton.

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Notes:
  1. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times []
  2. Silver Price Chart, Kitco []
  3. Silver Wheaton’s Q1 2014 Earnings Release, SEC []
  4. Silver Wheaton’s Q1 2014 Earnings Presentation, SEC []