Silver Wheaton Earnings Preview: Lower Silver And Gold Prices To Weigh On Q3 Results

SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW) will release its third quarter results and conduct a conference call with analysts on Wednesday, November 12. We expect lower silver and gold prices in the third quarter, as compared to the corresponding period last year, to negatively impact the company’s results. The company will report higher volumes on a year-over-year basis, particularly from its gold streams from the Sudbury and Salobo mines, where production has ramped up over the course of the last year.

See our complete analysis for Silver Wheaton

Silver and Gold Prices

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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.

London Fix silver spot prices averaged roughly $21.50 per ounce in Q3 2013, as compared to slightly less than $20 per ounce in the third quarter this year. [2] Similarly, London PM Fix gold spot prices averaged roughly $1,330 per ounce in Q3 2013, compared to roughly $1,280 per ounce in the third quarter this year. ((Gold Price Charts, Kitco)) Lower silver and gold prices are expected to negatively impact the company’s results in the third quarter, as compared to the corresponding period a year ago.

Volumes

We expect shipments to rise in the third 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 was completed in Q2 2014. [3] This expansion in milling capacity should boost gold shipments from the Salobo mine. The Sudbury mining complex underwent planned maintenance activity at some surface facilities in Q2. However, during this time period the mines themselves kept producing and bulding up an inventory of ore and concentrates. These will be smelted and refined in the second half of the year, which will boost output during the same period. [3] The Totten mine, which is a part of the Sudbury mines, commenced production in Q1 2014. [4] The additional output from the Totten mine will further boost shipment volumes on a year-over-year basis.

Production rose at the Peñasquito mine in the second quarter due to the mining of higher grade ores and higher mill throughput. [3] We expect higher year-over-year production and shipments from the Peñasquito mine in the third quarter as well. Production volumes are also expected to rise sequentially at 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)) However, Primero Mining Corporation, the mine operator, conducted a nine-day shutdown at the mine’s hydro-power facility in Q2, in order to expand its capacity. [3] With milling rates expected to rise towards full capacity in Q3, we expect production volumes to rise.

Other Developments

The prevailing subdued commodity pricing environment presents an opportunity to Silver Wheaton for the acquisition of more precious metal streams. The company’s management was bullish in this regard in its Q2 earnings conference call. [5] 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. [6] Currently, Silver Wheaton accounts for only around 4% of the silver produced by its potential target market of gold and base metal mines. Though this is expected to rise to 6% by 2018 through a rise in production from streaming deals already in place, there is clearly significant growth potential in the silver streaming space for the market leader, Silver Wheaton. [7]

Expectations from Conference Call

Considering the favorable conditions for the acquisition of more precious metal streams, it is rather surprising that Silver Wheaton has struck only one streaming deal since the announcement of its deals with Vale in February 2013. We would like to know if any additional streaming deals are around the corner. 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 Q2 2014 Earnings Release, SEC [] [] [] []
  4. Silver Wheaton’s Q1 2014 Earnings Release, SEC []
  5. Silver Wheaton’s Q2 2014 Earnings Conference Call Transcript, Seeking Alpha []
  6. Silver Wheaton’s Q1 2014 Earnings Presentation, SEC []
  7. Silver Wheaton’s September Corporate Presentation, Silver Wheaton Website []