Think Silver Is Headed Higher? That Means Good Things for Silver Wheaton
Joseph is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Many investors, myself included, believe silver is headed upwards. Rising prices may occur as a result of the fiscal cliff, and they might go even higher on European worries. Silver, as a less expensive alternative to gold, will rise as investors seek to hedge against inflation from out of control Federal Reserve printing presses. Either way, if an investor is bullish on silver they should consider Silver Wheaton (NYSE: SLW).
Falling revenue, lower prices, and record production.
Silver Wheaton saw a record production of 7.7 million ounces at the end of their last quarter. Revenue, however, fell 13%, mostly due to a corresponding drop in the price of silver. This also led to higher expenses, as average cash cost rose $0.04 an ounce to $4.16. Due to timing of deliveries, silver equivalent sales totaled 5.1 million ounces, creating a difference of 2 million ounces from the quarter that will be recognized in future sales. This is key, because if silver shoots up higher, these future sales will be recognized at a higher profit- turning lemons from this quarter into next quarter's lemonade. Silver Wheaton's CEO Randy Smallwood commented on the situation:
"Our diversified asset base once again achieved strong production, with notable contributions from Yauliyacu, Zinkgruvan, and Minto. While overall production was strong, payable silver equivalent ounces produced but not shipped during the quarter increased by 2 million ounces due to the timing of concentrate shipments, negatively affecting silver equivalent sales volume. This increase included the new precious metals contained in base metal concentrates produced at the 777 mine as the concentrate storage and transportation system was being filled with materials mined after August 1st. It is very important to remember that these ounces will inevitably be sold, it is simply a matter of timing."
A dividend cut- Should you be worried?
When I see a dividend cut, I usually run for the hills. However, the recent 30% haircut from Silver Wheaton's dividend yield doesn't concern me as much as it would with most other companies. This is because the company's dividend is somewhat unique- relying heavily on cash flows generated from silver sales. 20% of cash generated from operating activities is paid out in dividends. The company's CEO also spoke recently about their dividend, stating:
"The reason it's down is the same reason it was up in the last quarter... We're pretty confident that the dividend will be very, very nice at the end of the fourth quarter."
If the price of silver shoots up, there is no doubt the dividend will be nice- but investors should also keep in mind that it may get cut further if silver shrinks back down or fails to rise in price. If an investor is confident that silver is headed higher, however, there is less reason to worry about the dividend cut, and an increased dividend is more than likely in the future. Higher silver prices equals higher profits for Silver Wheaton, resulting in greater shareholder value as well.
Silver Wheaton tends to follow the price of silver quite closely. Unlike traditional ETFs, such as the iShares Silver Trust (NYSEMKT: SLV) or the Sprott Physical Silver Trust (NYSEMKT: PSLV) that seek to simply track the price of silver, however, Silver Wheaton offers a dividend to go with capital appreciation. The company rises above mining competitors such as PanAmerican Silver (NASDAQ: PAAS) as well, because their unique silver streaming business model allows them to lock in cheap silver prices ($4-$5 an ounce average agreement price). Unlike competitors, Silver Wheaton doesn't actually have to mine any silver- they simply purchase cheap byproduct silver from mines (that are primarily mining for base metals or another precious metal other than silver and are willing to take the money as a quick capital injection) and flip it for very high profit. This is how the company can maintain a relatively fixed operating cost of only $4 per ounce produced, as opposed to the variable and recently increasing operating costs associated with primary silver mining operations such as PanAmerican Silver. This is why Silver Wheaton is such a good play for those who believe silver prices will rise and continue to shoot up.
The company cut its dividend, but investors must also keep in mind that the dividend is not static and relies more on the price of silver- which means higher or lower dividend payments will correspond with higher or lower silver prices. The company has inventory on hand that will also benefit from rising prices of the white metal, because they will book higher profits when they go to sell it for more. They have an advantage over other silver mining stocks because they are a streaming company with extremely low costs. As long as they have new silver streams coming in, they will be booking solid profits. If you are bullish on silver, be bullish on Silver Wheaton as well- especially as an alternative to traditional physical silver ETFs and/or primary silver mining stocks.
Jharry1 owns shares of Silver Wheaton (USA). The Motley Fool has no positions in the stocks mentioned above. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!