Is Silver Wheaton Worth Buying?
Silver Wheaton (SLW) announced its third quarter results on 3rd November. It reported revenues of $ 153.3 million for the quarter, down 8 % compared to $ 165.9 million of revenue generated in the third quarter of 2014. Although the silver equivalent sales was 10.2 million ounces (6.6 million ounces of silver and 48,100 ounces of gold) i.e. 17 % more than the same period last year, the average realized silver equivalent price ($ 15.03 in Q3 2015 compared with $ 18.98 in Q3 2014) came down by 21 % year on year.
On the production front, the company reported a record attributable silver equivalent production of 11.0 million ounces in Q3 2015 compared with 8.9 million ounces in Q3 2014, representing a 24 % increase. Production comprised of 6.9 million ounces of silver and 54,500 ounces of gold. The average realised prices of the two precious metals was $ 15.05 per ounce of silver and $ 1,130 per ounce of gold and averaged $ 15.03 per silver equivalent ounce sold in Q3 2015 compared with $18.98 in Q3 2014, a 21 % decline as already mentioned. Cash costs did not affect the margins much as there was only a 1 cent difference between the cash costs per silver equivalent ounce for this Q3 ($ 4.58) and that for Q3 2014 ($ 4.59).
Silver Wheaton is all set to meet the previous production guidance of 43.5 million silver equivalent ounces for 2015. Subsequent to the end of quarter three, the company has agreed to acquire 33.75 % of the silver production from a subsidiary of Glencore Plc ("Glencore") till the time it delivers 140 million ounces of silver. After that it will receive from the Antamina mine, 22.5 % of the silver production for an initial cash payment of $ 900 million followed by payments of 20 % of spot price per silver ounce delivered into the future.
Coming to the balance sheet, at the end of the previous quarter, the company had about $ 81 million of cash on hand. It has a total debt of $ 647 million outstanding under its $ 2 billion revolving credit facility. During the quarter, Silver Wheaton has generated near to $ 100 million of cash from operations out of which it used $ 68 million for debt payments and $ 17 million for paying dividends. The Antamina acquisition has also helped the company to seriously relax the covenants for the revolving credit facility. Earlier, the requirement was to maintain a net debt to tangible net worth ratio of less than 0.75. After paying for the Antamina deal, this covenant requires Silver Wheaton to maintain the ratio of only 0.34 on a pro forma basis. Similarly, the minimum interest coverage ratio (3 times at present) may also be waived by 2017.
The Antamina Acquisition:
The Antamina deal is expected to add another one million of silver equivalent ounces to this year’s production. As the CFO of Silver Wheaton said in the conference call, “this asset is an open pit”. It is an operating mine since 2001 and is expected to average over five million ounces initially and 4.7 million ounces per year of silver per year for Silver Wheaton for the next 20 years. As a result it is expected to generate an additional $ 65 million of operating cash flow annually and a production growth of 24% from 2015 to 2019.
Silver Wheaton has certainly had a very strong third quarter. Its high quality portfolio and low capital investment owing to the nature of business go a long way in reducing costs and ensuring positive cash flows from operations each quarter. Antamina would prove to be another such valuable, low cost asset. And it is much more relaxed on the debt front. Thus, even at the current average selling price of about $ 15 per equivalent silver ounce, Silver Wheaton has aligned all the internal factors to its favor and is expected to continue the good show in the subsequent quarters too.