Silver Wheaton’s Smallwood foresees a ‘great end to the year’

VANCOUVER —Vancouver-based streaming company Silver Wheaton (SWL-T, SWL-N) was ready to focus on record quarterly silver equivalent production, but it was a drop in sales volumes and subsequent rollback in dividend payments that highlighted the company’s third quarter report.

Silver Wheaton set a new benchmark with 7.7 million oz. in silver equivalent production over the past three months, though the company experienced a bit of a quarter-on-quarter earnings shortfall on the back of material-handling issues that resulted in a delay on silver deliveries.

Sales fell to roughly 5.1 million silver equivalent oz. — a 26% decline compared to 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 oz. in payable 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 “very strong fourth quarter.” He points out that the company has had one of the best Octobers ever 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, citing the strength of Silver Wheaton’s dividend policy and how it connects with 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 drop in earnings triggered a roll back that pegged Silver Wheaton’s fourth quarter dividend at 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.

According to Smallwood three main 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 operation in Mexico’s Zacatecas state; and a newly-acquired stream from HudBay Minerals‘ (HBM-T, HBM-N) zinc-copper-gold-silver 777 mine on Manitoba’s Flin-Flon greenstone belt.

“Now with 777 it has a lot to do with the fact we’re just starting up that stream,” Smallwood points out, 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 subsequently decided to switch back to bulk concentrate processing as opposed to working with separate copper and lead concentrates. According to Smallwood 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,” Smallwood explains. “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 virtually no investor blowback following the announcement of its results, as 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 roughly US$31 per oz. at time of writing, Smallwood says it is a prime time for Silver Wheaton to add to its growth profile through the acquisition of additional silver streams.

The company felt the pinch back in early 2011 when silver prices shot up to a high of nearly $50 per oz. and producers were less willing to capitalize in-ground ounces — though Smallwood points out Silver Wheaton also enjoyed big growth from its project pipeline as a result. The company inked the US$750-million deal with HudBay in August, and hopes to add additional 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.”

And 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 over the fourth quarter.