Lower Precious Metal Prices Weigh On Silver Wheaton’s Q3 Results

Silver Wheaton (NYSE:SLW) released its third quarter results and conducted a conference call with analysts on November 12th. As expected, lower precious metal prices negatively impacted the company’s results, with higher volumes offsetting some of the impact of lower prices. An 11% year-over-year decline in realized prices per silver equivalent ounce was partially offset by a 12% rise in shipment volumes. ^[1] As a result, revenues for the third quarter stood at $165.9 million, virtually flat as compared to the corresponding period last year. ((Silver Wheaton’s Q3 2014 Earnings Report, SEC)) However,  adjusted net earnings, which exclude the impact of a $68.2 million impairment charge related to the Mineral Park and Campo Morado silver interests, stood at $72.6 million, around 6% lower than in the corresponding period a year ago. ^[1]

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Silver and Gold Prices

Average realized silver and gold prices for Silver Wheaton fell from $21.22 per ounce and $1,308 per ounce in Q3 2013, to $18.98 and $1,261 per ounce, respectively, in Q3 2014. This corresponds to an 11% decline in realized prices on a silver equivalent ounce basis from $21.26 in Q3 2013 to $18.98 in Q3 2014. ^[1]

Precious metal prices have fallen over the course of the last year, as the US dollar with tapering of the Federal Reserve’s Quantitative Easing (QE) program. 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)) 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. ^[3] 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 Q3

Attributable silver equivalent production for Q3 2014 was 8.4 million ounces (6.1 million ounces of silver and 35,400 ounces of gold), which represents a decrease of 7% over the comparable period of 2013. ((Silver Wheaton’s Q3 2014 Earnings Report, SEC)) However, shipment volumes were 12% higher year over year due to a favorable timing of shipments.

Production volumes were 22% lower year over year for the Other Silver Mines segment, primarily due to lower production at the Campo Morado mine and the temporary closure of the Keno Hill mine. ((Silver Wheaton’s Q3 2014 Earnings Report, SEC)) Production volumes fell 29% at the 777 gold mine due to  mining of lower grade ores and lower throughput. ((Silver Wheaton’s Q3 2014 Earnings Report, SEC)) Production volumes pertaining to the the streaming agreement for the San Dimas mine were 22% lower in Q3, as compared to the corresponding period a year ago. ^[1] As per the terms of this streaming agreement, Silver Wheaton stopped receiving an additional 1.5 million ounces of silver per annum from Goldcorp on August 6 , 2014. ^[4] These declines in production volumes were partially offset by a 42% year-over-year increase in production from the Salobo mine, where production is being ramped up post the completion of an expansion in milling capacity in Q2. ((Silver Wheaton’s Q3 2014 Earnings Report, SEC)) Production rose 37% year over year at the Yauliyacu mine, due to the mining of higher grade ores. ^[1]

Shipment volumes were 12% higher year over year in the second quarter due to the favorable timing of shipments at the Yauliyacu and Peñasquito mines. ^[4] Shipments at the Yauliyacu mine stood at 1.37 million ounces in Q3 2014, as compared to only 13,000 ounces in the corresponding period last year. ^[1] The Yauliyacu mine continues to have an inconsistent delivery schedule after the closure of the Doe Run Playa smelter in 2009. 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. ^[4]

Average cash costs for the company stood at $4.59 per silver equivalent ounce in Q3 2014, around 3% lower as compared to cash costs of $4.73 per silver equivalent ounce in Q3 2013. As a result, the company’s cash operating margin stood at $14.39 per silver equivalent ounce, down from $16.53 per silver equivalent ounce in the corresponding period last year, mainly due to a fall in the average realized price. ^[1]

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. ^[4]

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 the 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. 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. ((Silver Wheaton’s September Corporate Presentation, Silver Wheaton Website)) 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. ^[5]

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1. Silver Wheaton’s Q3 2014 Earnings Report, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. Silver Price Chart, Kitco [↩]
3. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times [↩]
4. Silver Wheaton’s Q3 2014 Earnings Call Transcript, Seeking Alpha [↩] [↩] [↩] [↩]
5. Silver Wheaton’s September Corporate Presentation, Silver Wheaton Website [↩]