Silver Wheaton (SLW, Financial) continues to reel under the pressure of weak commodity prices, which marred its financials in the recently reported first quarter. In spite of record silver equivalent production during the quarter, its top line fell considerably with a subsequent drop in its bottom line. Silver Wheaton’s tepid results do not come as a surprise since its EPS consistently lagged behind the consensus estimate in the past four quarters. But there is more to this story than what just meets the eye. Starting with its numbers, let us see if the management is able to turn around its present situation in the days ahead.
Catalysts to watch
During the quarter, the company got a significant boost from contributions of gold and silver from the Constancia mine in Peru, along with the acquisition of an additional 25% of gold from the expanding Salobo mine in Brazil. Additionally, the Constancia mine reached commercial production recently, while the latter is currently ramping up production after expanding in mid-2014. In the current fiscal both these streams are expected to see further gains and could reach its full capacity by the end of the year, which will benefit the company in the coming years as well.
In the light of this depressing commodity market the company is focused on finding high-quality and well-managed assets producing in the lowest half of their respective cost curves. In this direction, the company recently acquired an additional 25% of the life of mine gold production from Vale's Salobo mine. This new acquisition will set the company well on its path to produce 43.5 million silver equivalent ounces in 2015.
In addition, we could expect some positive results from the Peñasquito mine as well, where silver sales volume decreased 15% during the quarter. Goldcorp, which owns and operates the mine, is conducting a feasibility study in the region.
Silver Wheaton, which has an agreement with Goldcorp to purchase 25% of the silver produced from the Peñasquito mine over its entire mine life will benefit significantly from these initiatives as it will increase its sales volume in the coming years.
Although these are good initiatives but it has to be backed by macroeconomic factors as well. There are mixed cues coming from the market with no sign of immediate recovery for silver prices in the foreseeable future. According to an EIU forecast silver prices could dip further as shown in the figure below. If so be the case; then the probability of a stock turnaround is further minimised.
Conclusion
Not only this, Silver Wheaton’s current stock price seems to be overvalued since its P/S multiple of 12.9 is extremely high compared to the industry average of 2.89. Its forward P/E however looks impressive at 24.57 compared to a trailing P/E of 42.1, indicating future earnings growth. It will be a matter of time to see how things go with the miner. But until then it seems prudent for investors to watch this stock from sidelines, perhaps it could provide a better entry point in the future.
