Volatile price activity in the precious metals markets has been one of the most important investment stories of the year, and recent rebounds in both gold and silver are starting to stabilize after a period of broad selling pressure. Similar moves were seen in Silver Wheaton (SLW), and the stock is still showing losses of nearly 30% year-to-date. But while recent weakness in earnings and revenues justify some of these moves lower, the fundamental picture is supported by some clear positives that suggest the sell-off has reached its end. As the global economy continues to show clear signs of recovery, the outlook for Silver Wheaton is strong and this year's bear moves have created some excellent buying opportunities for long term investors.
Initially, it is important to look at what was driving the declines in the first place. In the early parts of this year, Silver Wheaton saw 20% declines in the prices it was able to charge its customers and this put major pressure on earnings and revenues. Earnings dropped to $91 million operating margins dropped by 21% and revenues fell to $167 million (17% lower than what was seen last year).
During the second quarter, production at Silver Wheaton rose by 30% on an annual basis, to reach a new record at 8.6 million silver-equivalent ounces. Unfortunately, this progress did not filter into sales at the same rate. Second quarter sales rose by only 4% (at 7.2 million ounces), and this created a broader picture for the company that failed to live up to its long term reputation within the industry. But now that this weakness has been priced-in there is growing reason to believe the stock could see significant gains in the coming quarters.
Valuations, Demand, Operational Efficiency
One of the areas where Silver Wheaton's streaming model firmly holds its position as an industry leader can be seen in its low silver costs, which come in at $4.14 per ounce, on average. And even with the revenue and earnings weakness, the company is still showing margins above 50% which is evidence of a well-managed, highly-efficient operational framework. Silver Wheaton's impressive cost structure and peerless business model is now supported by rising demand in emerging markets, and this has been one of the main catalysts for the rallies that have been seen since the summer. As the global economy continues to recover, so will demand for silver with all of its applications in industrial settings. This will help and limitations in silver buying that might otherwise be reserved for more risk-averse settings.
With the stock now trading at 17.2 times earnings and the broader rebounds in precious metals suggesting a price floor is now in place, prospects for additional bull runs in Silver Wheaton look increasingly likely. It will continue to be important to watch for potential delays in the Pascua-Lama mining project (one of the company's central gold investments) but, on the whole, the project should drive the company's earnings outlook rather than detract from it. Low valuations, emerging market demand, and a consistently efficient business model point to an excellent scenario for investors with longer term time horizons. Watch for the stock to continue making gains well into next year.
SLW Chart Perspective
(click to enlarge)
Declines in SLW since last October look to be bottoming out in the 18.10 region, with prices making a strong advance to overcome Fibonacci resistance at 26.90. This sets the next target at the 61.8% retracement of the drop from 41.50, which comes in near 32. This outlook makes the stock a buy on dips as long as support in the 23.60 area remains valid.
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