Solid FY14 portends future growth
Silver Wheaton's (NYSE:SLW) net earnings in both Q414 and FY14 were closely in line with our expectations, at US$52.0m (vs US$52.1m forecast) and US$268.0m (vs US$268.0m, respectively) after record full-year silver equivalent oz sales. In simple terms, a slightly better performance (cf expectations) by its silver producing interests in Q4 offset a slightly worse one at its gold producing interests. In addition, earnings benefited from a decline in both the cost of sales and depletion compared with Q3.
Organic and corporate growth potential aplenty
From FY14, growth in the foreseeable future at Silver Wheaton will be driven by: 1) the acquisition earlier this month of an additional 25% gold stream from Salobo; 2) a return to high grades at Penasquito as well as the Concentrate Enrichment and the Pyrite Leach projects, which could be worth c 5c per share to basic EPS, and are currently the subject of definitive feasibility studies; 3) the attainment of full commercial production at Constancia from mid-FY15; 4) an increase in throughput from 2,500tpd to 3,000tpd at San Dimas in mid-2016; and 5) a return to high-grade zones at the 777 mine. Beyond such organic growth, Silver Wheaton has US$1.3bn in readily accessible funds (plus future cash flows) at its disposal to make additional, future, accretive acquisitions of by-product precious metal streams from world-class assets in the lower half of the cost curve.
Valuation: 124% potential capital upside in C$ terms
We are forecasting 40.7Moz of attributable silver equivalent production from SLW’s streams in FY15 (vs 43.5Moz management estimate). Beyond FY15, management then expects compound production growth of 17.2% pa over five years, such that silver equivalent production reaches 51Moz in 2019, including 325koz of gold, which will drive a 123.2% increase in basic EPS (Edison forecast). On this basis, we predict a value of US$42.03 (C$53.43) per share in FY19, representing a total internal rate of return to investors at the current share price of 29.2% in US dollars over five years. Current forecasts for FY15 assume average gold and silver prices of US$1,285/oz and US$19.92/oz, respectively. If prices remain at current levels for the rest of the year (US$1,180/oz and US$16.53/oz, respectively), we estimate that basic EPS will be reduced by c US$0.28/share. In the meantime, SLW trades on multiples that are cheaper than its royalty/streaming ‘peers’ in c 80% of instances considered and multiples that are cheaper than gold miners themselves in c 42% of instances considered, despite being associated with materially less risk.
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