Silver Wheaton: an Investment for Huge Gains

Silver Wheaton (SLW) announced its fourth quarter and full year 2015 results recently. The company reported a record production for the fifth quarter in a row with 15.5 million of silver equivalent ounces for the quarter and 47.7 million of silver equivalent ounces for the year. The company also sold a record total amount of silver and gold in the fourth quarter (13.6 million silver equivalent ounces) with 41.6 million silver equivalent ounces sold during the last year.

The company reported revenues of $ 200.5 million for Q4 2015 while that of $ 648.7 million for the full year, up 43 % and 5 % respectively compared to the same periods a year ago.
Fourth quarter adjusted net earnings were $ 57.4 million compared to $ 52.0 million in Q4 2014, representing an increase of 10 %. Its fourth quarter earnings were $ 0.14 per share which beat the market estimates of $ 0.13 per share and equalled the EPS of the year-ago quarter.

Impressive performance

No doubt the quarterly results of Silver Wheaton were pleasing in the face of the price decline experienced by the precious metals. And the company’s cornerstone assets viz. San Dimas, Peñasquito, Salobo and Antamina had a big hand in achieving this. The Salobo, San Dimas, Sudbury, and Zinkgruvan mines registered record quarterly production and the Salobo and Peñasquito mines sold record volumes. Further, the start-up of Constancia and record production at one of SILVER WHEATON’s oldest streams, Zinkgruvan, also helped in the ramp up of production.

Now in 2016, the company is going to further increase attributable production by 13 % to 54 million silver equivalent ounces which will include 265,000 ounces of gold. Contributing toward this will be mostly the higher output from the Salobo mine following the expansion of the gold streaming agreement with Vale. Also the newly signed streaming agreements with Glencore Plc. and Panoro Minerals Ltd. will add to the ounces Silver Wheaton produced last year.

Cash flow and Liquidity:

The company has been able to increase production at controlled costs which has been instrumental in maintaining strong fundamentals internally. The company has as a result been able to keep the cash flows from operations intact at $ 431.4 million for 2015 which is virtually unchanged from $ 431.9 million for 2016. So despite having reported a substantial net loss, the operating cash flow remains at the same level as in 2014.

Silver Wheaton has approximately $ 100 million cash left on hand and more than $ 500 million left of the $ 2 billion credit facility. So in total, it has about $ 600 million of liquidity.

Market outlook:

Silver and gold have been on the rise in 2016. While silver has climbed more than $ 2 per ounce (15.3 %), gold has surged close to $ 200 per ounce (18 %) since the beginning of this year. Probably the prices have bottomed out. This has clearly reflected in the price of the stock which is up 43 % from the start of the year.

Silver Wheaton has a low-cost base since it does not own any mines. Being a streaming company, it gets silver or gold streams that are generated as a by-product at the mines owned by its mining partners like Vale and Barrick Gold. In all, Silver Wheaton has penned streaming agreements with 22 operating mines and has 7 development projects in the pipeline. Under these agreements, it has to pay a relatively low delivery payment per ounce when it receives the streams. This helps the company to keep its costs stable come rain, come shine. And that’s a huge competitive advantage over the mining companies. Thus, any little price improvement in the precious metals would mean that Silver Wheaton’s stock performance will vastly improve.

The CRA issue:

One thing that could spoil the party for Silver Wheaton other than prices is the CRA review. The Canadian Review Agency has charged Silver Wheaton with tax evasion for previous many years. Right now, CRA is reviewing the company’s income for the years 2005-10 which will attract penalties of about $ 207 million. Further, CRA has indicated that it will increase the ambit of investigation to later years too, adding $ 310 million more to the penalties and taxes payable. This risk is large enough to mar the cash profile of Silver Wheaton.


Silver Wheaton has shown great operational prowess through the last year. Of late, it has also got some solid support from the surge in precious metal prices. But doubts regarding the sustainability of this rally still loom large. However, the fundamentals of the gold and silver market look good as the US economy is in a sound state and the advanced industrial applications of silver are expected to drive enough demand. All in all, the CRA issue is the only hurdle that remains in the way of calling the prospects of Silver Wheaton bright.
Published on Apr 19, 2016
By Vinay Singh

Copyrighted 2016. Content published with author's permission.

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