Lower Silver And Gold Prices Weigh On Silver Wheaton’s Q2 Results

SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW) released its second quarter results on August 13. As expected, lower precious metal prices negatively impacted the company’s results, with higher volumes offsetting some of the impact of lower prices. A 14% year-over-year decline in realized prices per silver equivalent ounce was partially offset  by a 4% rise in shipment volumes. [1] As a result, revenues for the second quarter stood at $148.6 million, 11% lower than in the corresponding period last year. [1] Net income for the second quarter stood at $63.5 million, around 11% lower than than in the corresponding period a year ago.

The company declared a dividend of $0.06 per common share, which was much lower as compared to $0.10 per common share in Q2 2013. [2] According to the company’s dividend policy, quarterly dividends are equal to 20% of the average of the previous four quarters’ operating cash flows. [1] Lower dividend payout reflects lower operating cash flows, primarily due to the prevailing environment of lower precious metal prices. The company maintained its production outlook for 2014.

See our complete analysis for Silver Wheaton

Relevant Articles
  1. Beating S&P500 BY 11% YTD, What To Expect From Travelers Stock?
  2. Up 50% Over The Last 12 Months, Is Hyatt Stock Still Attractive?
  3. Capital One Stock Gained 44% In The Last 6 Months, What’s Next?
  4. Up 8% Year To Date As 5G Gains Traction, What’s Next For Verizon Stock?
  5. Up 32% In The Last 12 Months, Where Is BNY Mellon Stock Headed?
  6. Rallying 30% YTD, What’s Spurring The Rally In Applied Materials’ Stock?

Silver and Gold Prices

Average realized silver and gold prices for Silver Wheaton fell from $23.12 per ounce and $1,417 per ounce in Q2 2013 to $19.81 and $1,295 per ounce respectively in Q2 2014. This corresponds to a 14% decline in realized prices per silver equivalent ounce from $23.05 in Q2 2013 to $19.83 in Q2 2014. ((Silver Wheaton’s Q2 2014 Earnings Release, SEC))

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. London PM Fix silver prices averaged roughly $23 per ounce in Q2 2013, as compared to less than $20 per ounce in the second quarter this year. [3] 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)) 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. [4] 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.

Operational Performance in Q2

Attributable silver equivalent production for Q2 2014 was 8.4 million ounces (6.3 million ounces of silver and 31,400 ounces of gold), which represents a decrease of 4% over the comparable period of 2013. ((Silver Wheaton’s Q2 2014 Quarterly Report, SEC)) However, shipment volumes were 4% higher year-over-year due to a favorable timing of shipments.

Production volumes were 16% lower year-over-year for the Other Silver Mines segment, primarily due to lower production at the Zinkgruvan mine and the temporary closure of the Keno Hill mine. [5] Production volumes fell 28% at the 777 gold mine due to  mining of lower grade ores and lower recoveries. [5] Production fell 46% at the Barrick Gold mines due to mining of lower grade ores at Veladero and the closure of the Pierina mine. [5] Mining of lower grade ores and planned maintenance activity accounted for the 30% decrease in gold production at the Sudbury mines. [5] These declines in production volumes were partially offset by a 43% increase in production at the Peñasquito mine due to the mining of higher grade ores at the ongoing to Phase 4 mining operations. ((Silver Wheaton’s Q2 2014 Quarterly Report, SEC))

Shipment volumes were 4% higher year-over-year in the second quarter due to the favorable timing of shipments primarily at the Yauliyacu, Sudbury and Salobo mines, offset by lower shipments at the San Dimas and the Peñasquito mine. [5] Shipments at the Yauliyacu mine rose roughly 70% as the mine continues to have an inconsistent delivery schedule after the closure of the Doe Run Playa smelter in 2009. [5] The Doe Run Playa smelter was the largest facility processing silver concentrate from the Yauliyacu mine, and since its closure shipments from the mine have been erratic.

Average cash costs for the company stood at $4.72 per silver equivalent ounce in Q2 2014, virtually flat as compared to cash costs of $4.77 per silver equivalent ounce in Q2 2013. As a result, the company’s cash operating margin stood at $15.11 per silver equivalent ounce, down from $18.28 per silver equivalent ounce in the corresponding period last year, mainly due to a fall in the average realized price. ((Silver Wheaton’s Q2 2014 Quarterly Report, SEC))

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. The growth in production volumes will be driven by ramp up of output from Salobo and the Sudbury mines, in addition to the commencement of production from the Constancia and Rosemont mines. ((Silver Wheaton’s Q2 2014 Quarterly Report, SEC))

We think that the company is well placed to add more precious metal streams to its portfolio. The prevailing subdued commodity price environment presents an opportunity to Silver Wheaton for acquisition of more precious metal streams. 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, especially 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. [6] Thus, there is significant growth potential in the silver streaming space.

See More at TrefisView Interactive Institutional Research (Powered by Trefis)| Get Trefis Technology

 

 

Notes:
  1. Silver Wheaton’s Q2 2014 Earnings Release, SEC [] [] []
  2. Silver Wheaton’s Q2 2013 Earnings Release, SEC []
  3. Silver Price Chart, Kitco []
  4. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times []
  5. Silver Wheaton’s Q2 2014 Quarterly Report, SEC [] [] [] [] [] []
  6. Silver Wheaton’s Q1 2014 Earnings Presentation, SEC []