The Year 2014 In Review: Lower Precious Metals Prices Weigh On Silver Wheaton’s Performance

SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW), the pioneer of the precious metals streaming business, had a fairly quiet year in 2014. There were no major acquisitions of new precious metal streams during the year, despite the subdued commodity pricing environment, which generally presents opportunities for consolidation. The company focused on honoring its commitments under existing streaming agreements. The company’s stock price mirrored the decline in precious metals prices during the year. Silver Wheaton’s stock is currently trading around 25% lower than the price levels of $27 achieved in July this year. [1] In this article, we will take a closer look at how Silver Wheaton fared in 2014.

See our complete analysis for Silver Wheaton

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Silver and Gold Prices

Average realized silver and gold prices for Silver Wheaton fell from $24.88 per ounce and $1,417 per ounce, respectively, in the first nine months of 2013, to $19.71 per ounce and $1,279 per ounce, respectively, in the first nine months of 2014. [2] This corresponds to an approximately 20% decline in realized prices on a silver equivalent ounce basis from $24.51 per ounce in the first nine months of 2013, to $19.70 per ounce in the first nine months of 2014. [2]

Precious metals prices fell over the course of the last year in response to the winding down of the Federal Reserve’s Quantitative Easing (QE) program. Investors considered the winding down of QE as an indicator of the strengthening of the U.S. economy. A strengthening U.S. Dollar and expectations of rising interest rates in 2015 dampened the investment demand for gold and silver. The Fed recently signaled its willingness to raise short-term interest rates in 2015. [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. Gold and silver prices are expected to average around $1,220 per ounce and $16.50 per ounce, respectively, in 2015. [4] Thus, next year is likely to present an even more challenging precious metals pricing environment for Silver Wheaton.

Operational Performance

The fall in precious metals prices in 2014 affected the company’s profitability. The company’s cash operating margin fell to $15.08 per silver equivalent ounce in the first nine months of 2014, from $19.88 per silver equivalent ounce in the corresponding period last year. [2]

The first nine months of 2014 saw a major ramp-up in gold output from Silver Wheaton’s streaming agreement with Vale (NYSE:VALE) for the Sudbury and Salobo mines. Due to the ramp-up of operations at these mines, gold shipments from Sudbury and Salobo stood at 19,162 ounces and and 29,642 ounces respectively, in the first nine months of the year, as compared to 10,829 and 10,003 ounces respectively, in the corresponding period last year. [2] The ramp-up of operations at these mines is expected to offset declines from some of the company’s other streams and boost its attributable production to 36 million silver equivalent ounces in 2014, including 155,000 ounces of gold. The company’s attributable production stood at 35.8 million silver equivalent ounces in 2013, including 151,000 ounces of gold. [5]

Silver Wheaton signed streaming agreements for the Sudbury and Salobo mines within Q1 2013. [4] However, since then the company has not signed any major precious metal streaming agreements.

New Streaming Deals

Silver Wheaton has not announced any streaming agreements since its agreements for the Sudbury and Salobo mines in 2013. This is quite surprising as the subdued pricing environment for commodities such as gold and copper seemingly presents adequate opportunities.

Over 70% of mined silver is produced as a by-product from base metal or gold mines. [6] Precious metal streaming deals are attractive sources of funding for mining companies, especially in subdued pricing environments, such as those persisting at the moment. Copper prices are low due to a persisting oversupply situation and weak demand. Gold prices are weak due to the strengthening of the U.S. and world economies, a strong U.S. Dollar  and expectations of an impending interest rate hike by the Fed. [7] Due to the subdued pricing environments, 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. 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. [8]

Outlook

Silver Wheaton’s attributable production is expected to rise to 48 million silver equivalent ounces in 2018 from 36 million silver equivalent ounces in 2014. This rise in production will be driven by the ramp-up of production from the Sudbury and Salobo mines and the Constancia project. Silver Wheaton made the remaining $260 million worth of payments due under its streaming agreement for the Constancia mine in 2014. [2] Production from Constancia is expected to commence in 2015.

With both gold and copper prices expected to remain subdued in 2015, next year should provide opportunities to Silver Wheaton for the acquisition of  more precious metal streams. With no new streaming agreements announced in the last year and a half, perhaps the company is waiting for the right opportunity.

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Notes:
  1. Silver Wheaton’s Stock Price, Google Finance []
  2. Silver Wheaton’s Q3 2014 Earnings Report, SEC [] [] [] [] []
  3. Fed Sets Stage for Rate Hikes in 2015, Wall Street Journal []
  4. Citi Forecasts Average 2015 Gold Price Of $1,220/Oz, Silver $16.50/Oz, Kitco News [] []
  5. Silver Wheaton’s 2013 40-F, SEC []
  6. Silver Wheaton’s September Corporate Presentation, Silver Wheaton Website []
  7. Federal Reserve to debate new language on interest rates, Financial Times []
  8. Silver Wheaton’s September Corporate Presentation, Silver Wheaton Website []