Silver Wheaton: Still Waiting For The Growth

Silver Wheaton (SLW) has released their 2nd quarter results and they look a lot like the first quarter, flat earnings! When I wrote about the Q1 results I noted the company had been level at 9¢ to 11¢ per share earnings for several quarters and this quarter they made a field goal at 10¢ per share.

Listening to the conference call gave me a little more of a warm fuzzy about SLW. A non-cash charge reduced the net income by $5 million or about 5¢ per share. This charge, as I understand it, is against future income tax benefits and will never affect the actual cash flow of the company. Actual silver sales were also flat from 2007 and Q1 at 2.9 million oz. As silver sales so far this year have totaled 5.7 million oz. company management has reduced their guidance for 2008 sales from 15 million oz. down to 13 million oz. This is still 7.3 million oz. for the remaining two quarters of 2008, a 28% improvement on the first half of the year. From what I read and hear, I am a little skeptical they will hit the new lower number.

There are some positives for the slightly more distant future. Silver Wheaton inked 8 new contracts for future silver streams durning the second quarter, a couple of which will start shipping silver immediately. Also, Goldcorp’s (GG) Peñasquito mine is just starting to ship silver. This mine is expected to reach 8.5 million oz. of annual sales for SLW (someday!). SLW management is projecting 25 million oz. of silver sales in 2010.

My conclusion is: Silver Wheaton has a unique business model that should yield tremendous cash flow at some point in the future. The prospects for higher silver prices is just a silver lining to their model. At this time I am looking for the quarterly silver sales to bust out of the 3 million oz. per quarter range they have been in for the last 6 quarters. Until then this will be a trading range stock based on silver prices and market rumors. I would be very interested in the stock if it settles down to around $12 or lower, LEAP options could be an aggressive option.

Note: I currently have no position in SLW.

Posted in Categories: Commodities, Contributor, External Research, Stocks.

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