Management of streaming company Silver Wheaton (SWL-T, SLW-N) were ready to focus investors’ attention on record quarterly silver-equivalent production, but it was a drop in sales volumes and subsequent rollback in dividend payments that dogged the company’s third-quarter report.
Silver Wheaton produced 7.7 million oz. silver equivalent during the past three months, though the company experienced a bit of a quarter-on-quarter earnings shortfall on the back of material-handling problems that delayed silver deliveries.
Sales fell to roughly 5.1 million oz. silver equivalent — a 26% decline, compared with the second quarter — which resulted in a 15% drop in quarterly net earnings to US$120 million, or US34¢ per share. The company reported around 2 million payable oz. silver equivalent it expects to recognize in future sales.
According to president and CEO Randy Smallwood, the deferment on sales should contribute to what he predicts will be a “strong fourth quarter.” He describes the company as having had one of its best months in October, in terms of silver deliveries.
“People need to remember this is a volatile industry, and not every quarter is necessarily going to maintain the status quo or demonstrate that growth,” Smallwood explains during a phone interview.
He cites the leveraged structure of Silver Wheaton’s dividend policy and how that appeals to certain shareholders. “Now it is likely that carries over, and we see it move the other way to end the year. I’d suggest that maybe this could be looked at as a buying opportunity, because all we really have here is a delay.”
The earnings drop triggered a rollback that reduced Silver Wheaton’s fourth-quarter dividend to C7¢ per share, compared to a C10¢ dividend during the third quarter. The company pays back 20% of cash generated from operating activities to its shareholders. Operating cash flows fell roughly 25%, or US$44 million quarter-on-quarter to US$129 million.
Three streams contributed to the quarterly shortfall, including: Glencore International’s (GLEN-L) Yauliyacu zinc-lead-silver mine near Lima, Peru; Goldcorp’s (G-T, GG-N) Penasquito gold-silver-lead-zinc mine in Mexico’s Zacatecas state; and a newly acquired stream from Hudbay Minerals’ (HBM-T, HBM-N) zinc-copper-gold-silver 777 mine in Flin Flon, Manitoba.
“Now with 777, it has a lot to do with the fact that we’re just starting up that stream,” Smallwood says, explaining that concentrate mines typically have a lag time on sales ranging from one to two months. “Since they produce so much concentrate at Penasquito and send it all over the world, there is no one smelter that can handle all the stuff they are producing. So sometimes it takes a little bit longer there, and other times it is quite rapid. It is a bit hard to forecast on our end.”
At Yauliyacu, Glencore has had problems placing its concentrate production and has switched back to bulk-concentrate processing as opposed to working with separate copper and lead concentrates. Smallwood says that move should benefit Silver Wheaton, which enjoys a bump in payable silver rates under the bulk-processing model.
“What I can say is that since we’ve come into existence, we’ve always seen all our partner companies ‘squeeze up’ that inventory in the fourth quarter,” he says. “And I can assure you we’ve since received a lot of silver and gold from 777. So we’re fully expecting that to carry through later this year, plus we have that overflow during the third quarter that should give us a great end to the year.”
And markets seem to share Smallwood’s optimism. Silver Wheaton experienced no selling pressure after announcing its results. Indeed, the company climbed 1.2%, or 46¢ following the announcement, before closing out Nov. 6 near a 52-week high at $39.25 per share.
With silver prices sitting at US$31 per oz. at the moment, Smallwood says it’s a good time for Silver Wheaton to grow by buying more silver streams.
The company felt a pinch in terms of new stream acquisition opportunities in early 2011, when silver prices shot up to nearly US$50 per oz., and producers were less willing to sell forward their in-ground ounces.
The company inked the US$750-million deal with Hudbay in August, and hopes to add more streams heading into 2013.
“I’ve always said we have sort of two bookend-type vectors that influence where our company goes,” Smallwood says, describing a sweet-spot in silver pricing where his company thrives. “I’m still bullish on silver through the next year and a half, so we’re hoping to close up some transactions pretty quickly here. We want to get a few more ‘in the house’ before we see silver move again.”
With US$555 million in cash and a US$400-million revolving debt facility at the company’s disposal, it looks like Silver Wheaton might be one to watch in the fourth quarter.
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