SA article: "Here Is What I Think About Silver Wheaton
Aug. 12, 2015 2:49 PM ET | About: Silver Wheaton Corp. (SLW)
Disclosure: I am/we are long SLW. (More...)
Summary
Considering that silver prices have been crushed, the most recent quarter was pretty strong.
Higher silver prices would be great but the fact that earnings are positive in this low silver environment is strong and the dividend is sustainable.
At $14 a share the risk/reward is looking mighty favorable.
It has been a tough time to be in the precious metals sector. As a shareholder, I have watched my holdings in Silver Wheaton (NYSE:SLW) get sliced by 40% in value. Ouch. I have yet to add, because I have not seen signs of a recovery in silver just yet. That said, should SLW hit $11.00 I have decided to average down. And again under $10. This is because I truly do not see much downside in silver left and think that when prices revert back toward the mean, SLW will move tremendously higher. It is however a question of time. 6 months, 6 years, 60 years? I doubt the latter, although 6 years could be realistic. So could 6 months. We simply cannot predict it, but we can acquire holdings in quality companies that stand to benefit from a rebound in prices. As know, the first quarter of 2015 led to SLW seeing some pain and most of the issues stemmed from yet another quarter of low silver prices as well as production attributable to the company declining year-over-year. Fast forward here to the second quarter and I can tell you that silver prices were no better. So just how did the company perform?
Well before I answer this question let me just say that you can legitimately take issue with silver prices. It hurts having owned this company on the way down for many of you and although I have maintained that you should be taking advantage of the decline for the long-term, I am cognizant that the pain is real. In Q1 2015, silver prices at sale declined 17% year-over-year to $16.95 an ounce. However, once again in Q2 2015 average prices were $16.42 per ounce of silver sold, compared with $19.83 in Q2 2014, representing a decrease of 17% year over-year, and a 3% decrease quarter-over-quarter. Being under $17 an ounce essentially crushed every financial metric you can think of. As such, the dividend is still at $0.05 per share or 1.5% annually, but could come down again if earnings remain pressured. Sadly silver has been weak in Q3 2015 too.
So just how did the company perform financially? Well I will tell you that the company missed once again on the top line but reported an in line bottom line. Revenue came in at $165.4 million, which missed estimates by $2.3 million. This is barely a miss. These revenues were also up 10.7% year-over-year. The net earnings per share came in at $53.7 million or $0.13 per share versus $63.5 million or $0.18 per share last year, which is a 38% decline year-over-year. Ouch. The good news is the company did cover with ease its $0.05 dividend. So it is more than safe for now. What was interesting in Q1, was that prices and sales volumes were down. Volumes reversed course in Q2.
While lower prices weighed, more ounces were sold year-over-year. Record silver equivalent sales volume in Q2 2015 of 10.0 million ounces (5.6 million ounces of silver and 61,000 ounces of gold), compared with 7.5 million ounces in Q2 2014, representing an increase of 34%. This is the reason revenues were up 10.7% year-over-year. I like it. It reversed course from Q1 which saw silver equivalent ounces sold at 7.7 million in the quarter, consisting of 5.7 million ounces of silver and 28,400 ounces of gold. This was down 5% year-over-year. I thought it might be due to a reluctance to sell at these levels, but that idea clearly has little merit as sales were up 34% in a lower priced environment here in Q2. How about production? Well, production was a record. Silver equivalent production in Q2 2015 was 10.9 million ounces (7.2 million ounces of silver and 50,500 ounces of gold), compared with 8.5 million ounces in Q2 2014, representing an increase of 29%. This is a major plus.
I was also pleased to see rising revenues (due to higher volume sales) in conjunction with lowered expenses. Average cash costs were $4.76 per silver equivalent ounce as compared with $4.72 during the comparable period of 2014. This resulted in a cash operating margin¹ of $11.62 per silver equivalent ounce, a reduction of 23% as compared with Q2 2014. Of course this is due to the 17% decrease in the average realized silver equivalent price in Q2 2015 compared with Q2 2014. Still, production, revenues and expenses moved in the right direction. Finally, cash flows were up as well. Operating cash flows were $109.3 million compared with $102.5 million last year, representing an increase of 7%.
Looking ahead however there is reason to think risk is to the upside. It is unclear what the Fed will do but raising of interest rates be the spark for inflation needed. Issues with the Chinese Yuan devaluation help the metals too. But with a dollar that has been so strong gold and silver have been crushed. That said, Silver Wheaton is biding time and is preparing for the future. Production in 2015 is still expected to rise a solid 20% over 2014 to 43.5 million silver equivalent ounces. Of this, a record 230,000 ounces of gold will be produced. The company has made some serious moves over the last year, and at $14.00 a share, we have a decent risk/reward entry point. I think if SLW moves lower, you almost have to pick up shares as a long-term option on metals.
http://seekingalpha.com/article/3433626-here-is-what-i-think-about-silver-wheaton?auth_param=2jtbj:1asn5b3:4d9c43cee9b9079f48c4a198f98a9a73&uprof=51
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