Silver Wheaton Earnings Preview: Lower Precious Metal Prices To Weigh On Q4 Results

Silver Wheaton (NYSE:SLW) will release its fourth quarter results on March 18 and conduct a conference call with analysts the next day. We expect lower silver and gold prices in the fourth quarter, as compared to the corresponding period of 2013, to negatively impact the company’s results.

Silver Wheaton’s silver production volumes are expected to fall in Q4 on a year-over-year basis due to the mining of lower grade ores from the Campo Morado mine, the temporary closure of the Keno Hill mine and lower production attributable to Silver Wheaton from the San Dimas mine after August 2014, as per the terms of the streaming agreement for the mine. ^[1] However, this will be partially offset by higher gold production volumes from the Salobo mine, where production has ramped up over the course of the last year after the completion of an expansion in milling capacity in Q2 2014. In this article, we will take a look at what to expect from Silver Wheaton’s Q4 2014 results.

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Silver and Gold Prices

Precious metal prices have fallen over the course of 2014, 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. ^[2] 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 $20-21 per ounce in Q4 2013, as compared to $16-17 per ounce in the Q4 2014. ^[3] Similarly, London PM Fix gold spot prices averaged roughly $1,270 per ounce in Q4 2013, compared to roughly $1,200 per ounce in Q4 2014. ^[4] Lower silver and gold prices are expected to negatively impact the company’s results in the fourth quarter, as compared to the corresponding period a year ago.

Volumes

We expect the company’s silver production to fall in the fourth quarter, on a year-over-year basis. Production from the Campo Morado mine is expected to be lower due to the mining of lower grade ores, as the mine has reached the end of its useful life. Silver Wheaton announced the termination of its streaming agreement with Nyrstar Mining for the Campo Morado mine in January due to the depletion of ore grades at the mine. ^[5] In addition, the temporary closure of the Keno Hill mine will further lower silver production volumes in Q4. Production volumes were 22% lower year-over-year in Q3 for the company’s Other Silver Mines segment, primarily due to lower production at the Campo Morado mine and the temporary closure of the Keno Hill mine. ^[1] In addition silver production volumes from the San Dimas mine will decline in Q4, as per the terms of Silver Wheaton’s streaming agreement for the mine with Goldcorp, the operator of the mine. As per the terms of this streaming agreement, Silver Wheaton stopped receiving an additional 1.5 million ounces of silver per annum from Goldcorp with effect from on August 6 , 2014. ^[6] Production volumes pertaining to the San Dimas mine were 22% lower in Q3, as compared to the corresponding period a year ago. ^[1]

The impact of lower silver production volumes on Silver Wheaton’s results will partially be offset by higher gold production volumes from the Salobo mine. 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. ^[7] Production from the Salobo mine was 29% higher year-over-year in Q3. ^[1]

Other Developments

Silver Wheaton recently announced the signing of an agreement with Vale for the acquisition of an additional 25% of the gold by-product stream produced at Vale’s Salobo copper mine in Brazil for a period that extends until the end of the mine’s life. ^[8] Silver Wheaton already had a streaming agreement in place with Vale for the sale of 25% of the gold by-products produced at the Salobo mine. ^[9] With the signing of the new agreement, Silver Wheaton will make an additional upfront payment of $900 million to Vale. ^[8] In addition, Silver Wheaton will pay Vale the lesser of $400 per ounce (plus a 1% annual inflation adjustment from 2017) or the prevailing market price for gold delivered to it, which is the same as the terms of the previous agreement. ^[8]

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 Q3 earnings conference call. ^[10] 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. ^[11] 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. ^[11]

The addition of the new deal with Vale will boost the company’s results in the coming quarters. However, the combination of a poor pricing environment and lower production volumes is likely to negatively impact the company’s revenues and profitability in Q4.

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1. Silver Wheaton’s Q3 2014 Earnings Report, SEC [↩] [↩] [↩] [↩]
2. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times [↩]
3. Silver Price Chart, Kitco [↩]
4. Gold Price Charts, Kitco [↩]
5. Silver Wheaton Provides Updates To Barrick And Campo Morado Silver Stream Agreements, Silver Wheaton Press Release [↩]
6. Silver Wheaton’s Q3 2014 Earnings Call Transcript, Seeking Alpha [↩]
7. Silver Wheaton’s Q2 2014 Earnings Release, SEC [↩]
8. Silver Wheaton Acquires Additional Gold Stream From Vale’s Salobo Mine, Silver Wheaton News Release [↩] [↩] [↩]
9. Silver Wheaton’s 2013 40-F, SEC [↩]
10. Silver Wheaton’s Q3 2014 Earnings Conference Call Transcript, Seeking Alpha [↩]
11. Silver Wheaton’s January Corporate Presentation, Silver Wheaton Website [↩] [↩]