Lower Precious Metal Prices Weigh On Silver Wheaton’s Q4 Results

March 20th, 2015 by Trefis Team
SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW) released its fourth quarter results on November 18 and conducted a conference call with analysts the next day. As expected, lower precious metal prices negatively impacted the company’s results, with higher sales volumes offsetting some of the impact of lower prices. A 22% year-over-year decline in realized prices per silver equivalent ounce was partially offset by a 7% increase in shipment volumes in Q4. [1] Shipments were higher in Q4 despite a year-over-year decrease in production volumes due to the favorable timing of shipments of stockpiled ore.  As a result, revenues for the fourth quarter stood at $140.4 million, around 16% lower as compared to the corresponding period of 2013. [1] Net earnings for the fourth quarter stood at $52 million in Q4 2014, around 45% lower than in Q4 2013, primarily due to the fall in precious metal prices. [1]

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Silver and Gold Prices

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Average realized silver and gold prices for Silver Wheaton fell from $21.03 per ounce and $1,277 per ounce in Q4 2013, to $16.46 and $1,213 per ounce, respectively, in Q4 2014. This corresponds to a 22% decline in realized prices on a silver equivalent ounce basis from $21 in Q4 2013 to $16.43  in Q4 2014. [1]

Precious metal prices have fallen over the course of 2014, reacting to cues regarding tapering of the Federal Reserve’s Quantitative Easing (QE) program. London Fix silver spot prices averaged $20-21 per ounce in Q4 2013, as compared to $16-17 per ounce in Q4 2014. [2]  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. [3] 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 Q4

Silver equivalent production for Q4 2014 stood at 9 million ounces (6.4 million ounces of silver and 34,500 ounces of gold), which represents a decrease of 8% over the comparable period of 2013. [1] However, shipment volumes were 7% higher year-over-year due to the favorable timing of shipments.

Production volumes at the Peñasquito mine were 23% lower year-over-year due to the mining of lower grade ore material at the mine. Production volumes were 20% 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. [1] Production volumes fell 31% at the 777 gold mine due to  mining of lower grade ores and lower throughput. [1] Production volumes pertaining to the the streaming agreement for the San Dimas mine were 12% lower in Q4, 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. [5] These declines in production volumes were partially offset by a 46% year-over-year increase in volumes from the Salobo mine, where production is being ramped up post the completion of an expansion in milling capacity in Q2. [1] Production pertaining to the company’s streaming agreements with Barrick Gold rose 63% year-over-year, due to the mining of higher grade ores at the Veladero mine. [1]

Despite lower production figures, shipment volumes were 7% higher year-over-year in the fourth quarter primarily due to the favorable timing of shipments of stockpiled ore from the Yauliyacu and Peñasquito mines. [1]

Average cash costs for the company stood at $4.51 per silver equivalent ounce in Q4 2014, around 4% lower as compared to cash costs of $4.70 per silver equivalent ounce in Q4 2013. [1] The company’s cash operating margin stood at $11.92 per silver equivalent ounce, around 27% lower as compared to the margin reported in the corresponding period of 2013, mainly due to a fall in the average realized price. [1]

Outlook

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. [6] This agreement is in addition to Silver Wheaton’s existing agreement  with Vale for the sale of 25% of the gold by-products produced at the Salobo mine. [7]

As a result of the acquisition of the additional gold stream, the company has updated its production profile over the next few years. Production is expected to rise to 51 million silver equivalent ounces by 2019, as compared to production of around 43.5 million silver equivalent ounces in 2015. [5]

We think that the company is well placed to add more precious metal streams to its portfolio. 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 Q4 earnings conference call. [5] Due to the subdued pricing environment, sentiment is negative regarding the mining sector in general, which makes raising capital difficult for mining companies. 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. [8] 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]

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Notes:
  1. Silver Wheaton’s Q4 2014 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
  2. Silver Price Chart, Kitco [↩]
  3. Gold Price Charts, Kitco [↩]
  4. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times [↩]
  5. Silver Wheaton’s Q4 2014 Earnings Call Transcript, Seeking Alpha [↩] [↩] [↩]
  6. Silver Wheaton Acquires Additional Gold Stream From Vale’s Salobo Mine, Silver Wheaton News Release [↩]
  7. Silver Wheaton’s 2013 40-F, SEC [↩]
  8. Silver Wheaton’s January Corporate Presentation, Silver Wheaton Website [↩] [↩]