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Lower Pricing Hurts Silver Wheaton

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Silver Wheaton Corp.’s third-quarter 2012 earnings of 34 cents a share missed the Zacks Consensus Estimate by 6 cents and trailed the year-ago quarter’s earnings of 48 cents. The Canada-based silver mining company’s profit slipped 11% year over year to $119.7 million, hurt by a decline in silver prices.

Revenues dipped 13% year over year to a $161.3 million and came in well below the Zacks Consensus Estimate of $191 million. A 13% decline in silver prices more than offset a 1% rise in the number of silver equivalent ounces sold.

Silver equivalent ounces sold were 5.1 million in the quarter including 4.8 million ounces of silver and 6,900 ounces of gold. Attributable silver equivalent production jumped 26% year over year to a record 7.7 million including 6.8 million ounces of silver and 18,000 ounces of gold. The addition of HudBay Minerals Inc.’s (HBM - Free Report) 777 mine boosted production in the quarter.

Average cash costs per silver equivalent ounce rose modestly to $4.16 in the third quarter from $4.12 a year ago. Cash operating margins declined 15% year over year to $27.20 per silver equivalent ounce due to lower realized price per silver equivalent ounce.

Silver Wheaton exited the quarter with cash and cash equivalents of $555 million, down roughly 22% year over year. Total debt declined 33% year over year to $57.2 million. Operating cash flows fell 23% year over year to $128.7 million.

Silver Wheaton, in September 2012, wrapped up the acquisition of silver and gold production from two of HudBay’s mines. Under the deal, the company bought 100% of the silver produced from HudBay’s 777 Mine in Canada and Constancia Project in southern Peru as well as 100% of the gold produced from the 777 Mine (until Constancia satisfies a completion test or the end of 2016, whichever is later).   

Silver Wheaton will pay HudBay $750 million for the acquisition, of which $500 million was paid following the transaction closure. The remaining two payments of $125 million each will be made upon the satisfaction of specific conditions by Constancia. Production from the 777 mine was 733,000 in the third quarter.

Silver Wheaton expects that 777 and Constancia together will raise its long-term average annual silver equivalent production by roughly 4.9 million ounces. Factoring in the contributions of these assets, the company expects silver equivalent production of around 28 million ounces in 2012.

Silver Wheaton currently retains a Zacks #3 Rank, which translates into a short-term Hold rating.

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