Silver Wheaton’s Profits Plummet On Weak Precious Metal Prices

Silver Wheaton (NYSE:SLW) announced its fourth quarter results on March 20 and conducted its earnings conference call on March 21. The company reported increased production on a year-over-year basis but lower sales volumes. In addition to lower sales volumes, revenues also declined due to low precious metal prices this year. The combination of lower sales and lower prices caused profits to dip by 47% year-over-year. The company sold 8 million silver equivalent ounces in the fourth quarter, down 13% from Q4 2012. Sales volumes were lower mainly due to a significant increase in produced but not yet delivered ounces at the Penasquito and Minto Mines. We expect this unsold inventory to bolster revenues in future quarters.

Silver Wheaton also announced a fourth quarter dividend of $0.07 per common share, down from $0.09 per share in the previous quarter. The lower dividend reflects lower operating cash flows. ^[1]

Silver Wheaton is targeting a steep production increase by 2018. This growth is expected to come primarily from mines which have yet to begin production, but will contribute substantially once they do. The figure could rise further if the company is able to seal more deals using its significant cash reserves and credit facilities provided by banks.

We have a price estimate for Silver Wheaton of $19 which will be revised shortly now that the fourth quarter earnings results are out.

See our full analysis for Silver Wheaton

Performance In Q4

The company reported attributable silver equivalent production of 9.7 million ounces, an increase of 17% over Q4 2012. The figure includes 7.3 million ounces of silver and 40,700 ounces of gold. Sales of silver equivalent ounces decreased by 17% year-over-year to reach 8 million ounces. It also reported revenues of $167.4 million for the quarter, a decrease of 42% over Q4 2012 levels. Net earnings for the quarter stood at $93.9 million, representing a 47% decrease over the comparable 2012 levels of $177.7 million. The drop in profits came as a result of lower realized prices since the average realized price per ounce of silver equivalent declined by 33% from the Q4 2012 level to $21 in Q4 2013. Net profit also fell due to lower gold and silver prices. Cash costs stayed flat at $4.7 on a per silver equivalent ounce basis. ^[2]

Another Gold Stream Added

In November, Silver Wheaton entered into an Early Deposit Gold Stream Agreement with Sandspring Resources Limited for the Toroparu project located in the Republic of Guyana, South America. ^[3]

Under the agreement, Silver Wheaton paid $148.5 million in cash upfront and will have the right to buy 10% of the life-of-mine gold production from Toroparu for the lesser of $400 per ounce and the prevailing market price. This purchasing price is subject to a yearly inflation adjustment of 1% starting in the fourth year, after the completion test criteria is satisfied.

While this agreement will allow Silver Wheaton to gain a foothold in what is expected to be a high-quality project going forward, it is also beneficial to Sandspring Resources. The latter, a junior exploration and development company, needs funds to complete a feasibility study and Silver Wheaton’s capital will preclude the need to raise additional equity at the cost of excessive dilution.

The Toroparu gold and copper deposit has proven and probable gold reserves of 4.1 million ounces. The yearly gold output is expected to be around 246,000 ounces. Being entitled to 10% of this output, Silver Wheaton has the opportunity to generate around $30 million in revenues per year if we assume a price estimate of $1,200 per ounce.

Going Forward

In the short term, production is expected to rise only marginally in 2014. However, expansion at San Dimas, Salobo and Sudbury in mid-2014, and commencement of Constancia a few months later are expected to drive a rise in production thereafter.

In view of the deals sealed in the last few years, Silver Wheaton expects production of 48 million silver equivalent ounces in 2018. This will represent a growth of 35% compared to 2013 figures. The mines expected to drive this uptick in production are San Dimas, Salobo, Sudbury, Constancia and Rosemont. The figure of 48 million ounces does not include production from the Pascua Lama and Toroparu projects. Barrick Gold is the owner and operator of the Pascua Lama mine which is mired in legal tangles right now. Once Pascua Lama and Toroparu begin producing, they will add nearly 10.5 million silver equivalent ounces annually for the first five years to Silver Wheaton’s portfolio.

Additionally, any more acquisitions of silver or gold streams in the next couple of years will add to the expected production stream. The company is still looking to make deals as it believes that there are good opportunities available. Silver Wheaton may be right. With the cost of exploration and mining increasing and a generally negative sentiment about the mining sector, many companies with leveraged balance sheets are finding it difficult to get funds from traditional lending institutions. This creates opportunities for companies like Silver Wheaton which pay a substantial cash amount upfront in return for rights on future production. ^[4]

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1. Silver Wheaton Q4 2013 Earnings Report, SEC [↩]
2. Silver Wheaton Q4 2013 Press Release, SEC [↩]
3. Silver Wheaton Completes Early Deposit Gold Stream Agreement With Sandspring Resources, Silver Wheaton Press Release [↩]
4. Silver Wheaton Q4 2013 Earnings Conference Call, Seeking Alpha [↩]