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Silver Wheaton Corp.: Is the Sell-Off Overdone?

Silver Wheaton Corp. (TSX:SLW)(NYSE:SLW) is taking it on the chin right now, and investors are wondering if the steep pullback is an opportunity to buy.

Let’s take a look at the current situation to see if Silver Wheaton deserves to be in your portfolio.

Trump effect

The markets are doing the exact opposite of what most pundits expected in the wake of the surprise Trump victory in the U.S. election.

Leading into the final days of the vote, many analysts were calling for market plunges of up to 20% on a Trump win, and most people believed a rush to safety would drive gold and silver prices much higher.

As we have seen in the past few trading sessions, that isn’t the case at all. The Dow is at a record high, and the situation in the mining sector is nothing short of a bloodbath.

What’s going on?

Bonds are selling off and pushing up yields. This normally makes holding precious metals less attractive.

At the same time, the strong market reaction is boosting expectations of a December interest rate hike in the United States and fuelling gains in the American dollar. This also tends to be negative for gold and silver.

How bad is it?

At the time of writing, Silver Wheaton is trading for $25 per share on the TSX, down more than 20% in two days and off 37% over the past three months.

Financial results

Silver Wheaton reported Q3 2016 net earnings of US$83 million, or $0.19 per share, compared to a net loss of US$96 million in the same period last year.

The company’s streaming agreements delivered record gold production of 109,200 ounces in the quarter. Gold sales also hit a record and helped drive a 62% increase in operating cash flow as compared with Q3 2015.

Revenues jumped 52% in the quarter as the company saw a 30% gain in its average realized sale price for silver and an 18% jump in the price it received for gold.

Silver Wheaton raised its dividend by 20% on the back of the stronger operating cash flow.

Should you buy?

Silver Wheaton isn’t a mining company; it simply provides funds to miners to help them move their projects from development to production. In return, the company is given the right to buy gold or silver produced at the mine for very attractive prices.

This makes Silver Wheaton an appealing way to play the gold and silver market because you don’t have the direct operational risks that come with owning the miners.

The huge drop in the stock price looks like a great opportunity to buy, but the market remains volatile, and we could see more downside in the near term. For the moment, I would stay on the sidelines and wait for the reversal to clearly run its course before adding this stock to your portfolio.

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Fool contributor Andrew Walker has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton. Silver Wheaton Corp. is a recommendation of Stock Advisor Canada.

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