Lower Precious Metal Prices Weigh On Silver Wheaton’s Q1 Results

Silver Wheaton (NYSE:SLW) released its first quarter results on May 7 and conducted a conference call with analysts the next day. As expected, lower precious metal prices negatively impacted the company’s results, with lower sales volumes compounding the negative impact of lower prices. The company reported a 5% decline in shipment volumes in Q1, despite a 15% increase in production volumes. ^[1] This was largely due to the adverse timing of shipments, with a significant proportion of the precious metal produced at some of the counterparties to Silver Wheaton’s streaming agreements not delivered to the company in Q1. This is likely to result in an increase in shipments in the coming quarters, once the production attributable to Silver Wheaton is actually delivered to the company.

As a result of a 17% year-over-year decline in realized prices per silver equivalent ounce and a 5% decrease in shipments, the company’s net earnings stood a $49 million in Q1 2015, around 38% lower year-over-year. ^[1] Revenues for the quarter declined 21% year-over-year to $131 million. ^[2]

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Silver and Gold Prices

Average realized silver and gold prices for Silver Wheaton fell from $20.36 per ounce and $1,283 per ounce, respectively, in Q1 2014, to $16.95 per ounce and $1,214 per ounce, respectively, in Q1 2015. ^[1] This corresponds to a 17% decline in realized prices, on a silver equivalent ounce basis, from $20.38 per ounce in Q1 2014 to $16.90 per ounce  in Q1 2015. ^[1]

Precious metal prices fell, 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 Q1 2014, as compared to $16-17 per ounce in Q1 2015. ^[3] Similarly, London PM Fix gold spot prices averaged roughly $1,300 per ounce in Q1 2014, compared to roughly $1,220 per ounce in Q1 2015. ^[4] 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. ^[5] 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 Q1

Silver equivalent production for Q1 2015 stood at 10.4 million ounces (6.3 million ounces of silver and 55,100 ounces of gold), which represents an increase of 15% over the comparable period of 2014. ^[1] However, the increase in production volumes did not translate into higher shipment volumes in Q1, with a portion of the precious metal produced expected to be delivered to Silver Wheaton at a later date, primarily from Vale’s Salobo mine.

Production at the Salobo mine stood at 27,185 ounces of gold, which represents an increase of 205% over the corresponding period of last year. ^[1] The increase in production was primarily due to the signing of an additional streaming deal with Vale, in addition to the continuing ramp-up of production from the Salobo mine. Silver Wheaton recently signed an agreement with Vale which entitles the company to 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] The company already had a streaming agreement in place with Vale for the sale of 25% of the gold by-products produced at the Salobo mine. ^[7] Production volumes were also boosted by the expansion in mill throughput capacity at the Salobo mine from 12 million tons per annum (Mtpa) to 24 Mtpa, which was completed in Q2 2014. ^[8]

In addition, production volumes pertaining to the company’s streaming agreement with Barrcik Gold rose 112% to 640,000 ounces, primarily due to the mining of higher grade ores at the Veladero mine. ^[9] Production from Vale’s Sudbury mines rose 57% to 10,112 ounces of gold, due to the mining of higher grade ores and the commencement of operations at the Totten mine. ^[9] Production rose 20% to 1.93 million ounces of silver at the San Dimas mine, primarily due to the expansion in mill throughput capacity last year. ^[9] These increases were partially offset by a 29% year-over-year decline in production to 1.45 million ounces of silver at the Peñasquito mine, due to the mining of lower grade material. ^[9] Additionally, production volumes from Silver Wheaton’s Other Silver Mines segment declined 20% to 1.75 million ounces, due to the mining of lower grade ores at the Cozamin mine and the termination of the streaming agreement for the Campo Morado mine. ^[9]

Average cash costs for the company stood at $4.46 per silver equivalent ounce in Q1 2015, around 2% lower as compared to cash costs of $4.70 per silver equivalent ounce in Q1 2014. ^[1] The company’s cash operating margin stood at $12.44 per silver equivalent ounce in Q1 2015, around 21% lower as compared to the margin reported in the corresponding period of 2014, mainly due to a fall in the average realized price. ^[1]

Outlook

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

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1. Silver Wheaton’s Q1 2o15 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩] [↩] [↩] [↩]
2. Silver Wheaton’s Q1 2015 Earnings Release, SEC [↩]
3. Silver Price Chart, Kitco [↩]
4. Gold Price Charts, Kitco [↩]
5. Janet Yellen Warns of Uncertain U.S. Economic Outlook, Financial Times [↩]
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 Q2 2014 Earnings Release, SEC [↩]
9. Silver Wheaton’s Q1 2o15 Earnings Release, SEC [↩] [↩] [↩] [↩] [↩]
10. Silver Wheaton’s Q1 2015 Earnings Call Transcript, Seeking Alpha [↩]
11. Silver Wheaton’s April Corporate Presentation, Silver Wheaton Website [↩] [↩]