Silver Wheaton (SLW, Financial) has demonstrated solid progress at two of its major expansion platforms Constancia and Salobo in the quarter. The Salobo mine recorded significant production with an expanding continued growth and the development of Constancia project is proceeding successfully with the mine on the right track to start its initial production soon.
Making the right moves
The sales volumes of silver equivalent for the quarter were 12% greater than the same period last year and recorded at 8.7 million ounces. However, the average realized sale price per silver equivalent ounce for the company averaged at 11% below the third quarter of 2013. Still, Wheaton maintained a solid level of operating cash margin with cash flows exceeding $120 million.
The improvement in the silver sales volume for the quarter despite global decline in the silver prices highlights the effectiveness of the company’s operating strategies.
Michael Jalonen an analyst with Merrill Lynch is hugely positive about the unique business strategy of Wheaton which is still working superbly since its introduction in the past 10 years despite poor metal prices. The investors have an excellent opportunity to realize the huge potential of this model coupled with the reduction of some conventional risks.
There’s rapid market evolution in Asia including China and India coupled with impressive technological advancements which has resulted in expanding consumption of silver industrial fabrications. CRU consulting seems to have a bullish sentiment on the excessive usage of silver in the industrial applications having significant potential use in solar power cells, anti-bacterial usages, automotive batteries, and expanded usage as a catalyst in the ethylene oxide (EO) industry for manufacturing daily products like detergents, soaps, lubricants, pharmaceuticals, cosmetics and many more. Moreover, the consulting group forecasts the industrial sector of silver (excluding photography) to witness a 21% growth to 677 Moz in the next 4 years from 535 Moz in 2013.
Positive sentiment
The solid analyst sentiments regarding the Wheaton’s key business strategy and booming silver demand in the major Asian markets of China and India is estimated to significantly expand the company’s top line and bottom line, going forward.
The current consensus estimate amongst 16 polled investment analysts covering Silver Wheaton Corp. is to Buy the stock with the company expected to outperform the market. This rating is held constant since March, when it again had a Buy rating.
Wheaton’s precious metal demands allowed 8.4 million silver equivalent ounces of production during the third quarter of 2014 which is 7% below the production level during the same period last year, mainly due to reduced production from San Dimas and 777. However, this decline in production was partially offset by production growth from the mines of Minto, Salobo and Yauliyacu. The total company production comprised nearly 28% of gold with the rest being silver.
Wheaton looks well positioned to better counter the sharp decline in the metal prices compared to its peers. The lowering of the key metals production at some of the company’s major mines is slightly balanced by the production growth in the rest of its mines.
Payable silver equivalent ounces produced but still not delivered by its partners totalled approximately 4.7 million ounces on September 30, 2014, a decline of nearly 1.3 million ounces compared to last quarter with a significant fall linked to Yauliyacu.
Wheaton reported 12% increase in silver equivalent sales volumes to 8.7 million ounces during third quarter of 2014 compared to the same period last year owing to enhanced silver deliveries linked with Minto, Peñasquito and Yauliyacu mines.
This major growth in the company’s backup for the silver production for the quarter is forecasted to drive healthy revenue growth for Wheaton in the current price declining environment.
Recently, Wheaton declared to acquire a supply of gold from Vale’s Salobo mine which is planned to be financed from the financial proceeds achieved through a major sell out of the company’s shares of worth $800 million.
The new acquisition Vale’s Salobo mine is expected to further enhance the company’s already robust mine portfolio and support Wheaton in emerging from the current global poor pricing trend.
Conclusion
Finally, the investors are advised to hold their position in Wheaton looking at the satisfactory valuation with trailing P/E and forward P/E ratios of 29.88 and 25.67 respectively. The PEG ratio of 1.32 indicates slower company growth compared to solid industry’s average of 0.04. The profit margin of 37.34% is appealing to investors. But, Wheaton needs to optimize its balance sheet to lower the debt levels and successfully finance its potential growth plans.
