Silver Wheaton Q3 Earnings Review: Weak Silver And Gold Prices Weigh On Results

SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW) released its third quarter results on November 3 and conducted a conference call with analysts the next day. [1] As expected, the decline in precious metal prices over the past year negatively impacted the company’s results, with higher sales volumes partially offsetting the negative impact of lower precious metal prices. Silver Wheaton’s adjusted net income, which excludes the impact of one-time items on the company’s results, stood at $50 million in Q3 2015, around 31% lower year-over-year. [2] Important takeaways from the conference call included the announcement of the signing of a new streaming agreement, with the company benefiting from the ongoing downturn in commodity prices, which supports the signing of new streaming agreements. In addition, the company announced that it is contesting the Canada Revenue Agency’s (CRA) reassessment of its income tax for the years 2005-2010.

Precious Metal Prices

Silver Wheaton’s averaged realized price stood at $15.03 per silver equivalent ounce sold in Q3 2015, around 21% lower than in the corresponding period of last year. [2] Gold and silver prices have fallen over the course of the last twelve months, largely due to concerns over a potential interest rate hike by the Fed. From an investment standpoint, precious metals are generally considered safe haven assets and investments are primarily made with the purpose of hedging against economic uncertainty and inflation. Improving economic conditions and rising interest rates tend to lower the investment demand for precious metals. Since precious metals do not offer any returns besides capital gains, with an increase in interest rates investors tend to shift towards interest-bearing assets. The strengthening of the U.S. economy and fears over an interest rate hike reduced the investment demand for precious metals and led to a decline in their prices, which negatively impacted Silver Wheaton’s results. Precious metal prices have recovered somewhat (as illustrated by the chart shown below), with the Fed holding interest rates steady in its September meeting.

Silver Prices in 2015, Source: Kitco

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Rising Production Volumes

Silver Wheaton’s attributable production, or the share of the company’s production from its streaming agreements, rose to 11 million silver equivalent ounces in Q3 2015, which is around 24% higher than in the corresponding period a year ago. [2] The sharp increase in production was primarily driven by higher production from the Salobo mine, from which Silver Wheaton’s attributable production increased by roughly 216% on a year-over-year basis in Q3 2015. [2] The sharp increase in attributable production from the Salobo mine resulted from the signing of a streaming agreement between the company and Vale earlier on in the year for the acquisition of an additional 25% of the gold by-product stream produced at the Salobo copper mine in Brazil for a period that extends until the end of the mine’s life. [3] The new agreement is in addition to Silver Wheaton’s pre-existing streaming agreement with Vale for the Salobo mine. Besides the increase in production at Salobo, higher production from the Penasquito and San Dimas mines also boosted Q3 output.

Other Developments

Along with the declaration of Q3 results, Silver Wheaton announced the signing of a streaming agreement with a subsidiary of Glencore Plc. for the sale of silver produced from the Antamina mine, located in Peru. As per the terms of the agreement, Silver Wheaton will pay Glencore $900 million for the rights to purchase 33.75% of the silver produced at the Antamina copper mine until the delivery of 140 million ounces of silver to Silver Wheaton and 22.5% of silver production thereafter for the remainder of the life of the mine. [2] The prevailing subdued commodity pricing environment is conducive for the signing of precious metal streaming agreements. Due to the downturn in commodity prices, sentiment is negative regarding the mining sector in general, which makes raising capital difficult for mining companies. With equity valuations subdued, issuing stock is not the best way to raise capital. Moreover, 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, precious metal streaming deals are an attractive source of funding for mining companies, particularly for gold and base metal miners, or diversified mining companies that produce these metals, as these are the major counterparties for Silver Wheaton’s streaming deals. Over 70% of mined silver is produced as a by-product from base metal or gold mines. [4] At present, deals with Silver Wheaton account for around 4% of the silver produced by gold and base metal mines. Though this figure is expected to rise to 5% by 2019 through a rise in production from streaming deals already in place, there is clearly significant growth potential in the silver streaming space for Silver Wheaton, the world’s largest precious metal streaming company. [4]

The company management also provided an update during the conference call on the tax reassessment by the CRA for the income earned by Silver Wheaton’s international subsidiaries for the years 2005-2010. The company management has filed a notice of objection with the CRA pertaining to the reassessment and stated that it is confident of getting a favorable ruling. ((Silver Wheaton Q3 2015 Earnings Call Transcript, Seeking Alpha)) Though the company management remains confident that Silver Wheaton is in compliance with all relevant tax provisions, a favorable ruling which ends the uncertainty caused by the reassessment would bolster the company’s prospects going forward.

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Notes:
  1. Silver Wheaton Q3 2015 Earnings Call Transcript, Seeking Alpha []
  2. Silver Wheaton’s Q3 2015 Earnings Release, SEC [] [] [] [] []
  3. Silver Wheaton Acquires Additional Gold Stream From Vale’s Salobo Mine, Silver Wheaton News Release []
  4. Silver Wheaton’s October 2015 Corporate Presentation, Silver Wheaton Website [] []