Silver Wheaton Earnings Preview: Lower Gold And Silver Prices To Weigh On Q2 Results

Silver Wheaton (NYSE:SLW) will release its second quarter results on August 11 and conduct a conference call with analysts the next day. ^[1] We expect the decline in precious metal prices over the course of the last twelve months to negatively impact the company’s results. Silver Wheaton’s production volumes are likely to be boosted by the signing of a streaming agreement earlier in the year for an additional 25% of the gold by-product stream produced at Vale’s Salobo copper mine in Brazil for a period that extends until the end of the mine’s life. ^[2] This agreement is in addition to Silver Wheaton’s existing agreement  with Vale for the sale of 25% of the gold by-products produced at the Salobo mine. ^[3] The increase in production volumes from the company’s streaming agreement for the Salobo mine is likely to offset production declines pertaining to some of Silver Wheaton’s other streaming agreements.

Silver Wheaton’s stock price has tumbled more than 25% over the course of the last month or so after the Canada Revenue Agency decided to reassess the company’s tax liability under the provisions of the Income Tax Act (Canada). ^[4] In this article, we will take a closer look at this issue in addition to what to expect from the company’s Q2 results.

Silver and Gold Prices

Gold and silver prices have fallen over the course of the last twelve months, reacting to cues pertaining to the tapering of the Federal Reserve’s Quantitative Easing (QE) program and expectations of an interest rate hike. The tapering of QE implied strengthening U.S. economic growth. Precious metals as investments are often viewed as a hedge against inflation and economic weakness. The strengthening of the U.S. economy reduced the investment demand for gold and silver and led to a fall in prices of these metals. London PM Fix gold spot prices, which averaged close to $1,300 per ounce in Q2 2014, have averaged close to levels of $1,200 per ounce in Q2 2015. ^[5] Similarly, London Fix silver spot prices averaged $19-20 per ounce in Q2 2014, as compared to $16-17 per ounce in Q2 2015. ^[6] 

With the economy strengthening, the Fed is expected to raise interest rates some time in 2015. ^[7] Though the exact timing of an interest rate hike remains unclear, a rate hike is likely to lead to a decline in precious metal prices, as investors shift towards higher yielding assets. The impending interest rate hike has weighed on precious metal prices so far this year, as illustrated in the chart below.

Gold Prices in 2015, Source: Kitco

Volumes

Silver Wheaton’s attributable production from the Salobo mine is expected to be significantly higher on a year-over-year basis in Q2. The company recently announced the signing of an agreement with Vale for the acquisition of an additional 25% of the gold by-product stream produced at Vale’s Salobo copper mine in Brazil for a period that extends until the end of the mine’s life. ^[2] The company already had a streaming agreement in place with Vale for the sale of 25% of the gold by-products produced at the Salobo mine since 2013. ^[3] In addition, a project to expand mill throughput capacity at the Salobo mine from 12 million tons per annum (Mtpa) to 24 Mtpa was completed in Q2 2014, which boosted production pertaining to the agreement already in place.((Silver Wheaton’s Q2 2014 Earnings Release, SEC)) Production pertaining to the Salobo mine was 205% higher year-over-year in Q1. ^[8]

The increase in production at the Salobo mine will be partially offset by lower production volumes pertaining to some of the company’s other streaming agreements. Silver Wheaton announced the termination of its streaming agreement with Nyrstar Mining for the Campo Morado mine in January due to the depletion of ore grades at the mine. ^[9] In addition, the mining of lower grade ores at the Peñasquito and the Cozamin mines led to a decline in production from these mines in Q1. ^[10] The same could hold true for Q2. However, the increase in production from the Salobo mine is likely to offset any such production declines for Silver Wheaton in Q2.

Other Developments

Silver Wheaton received a letter from the Canada Revenue Agency (CRA) last month, in which the CRA informed the company that as per transfer pricing provisions of the Income Tax Act (Canada) relating to income earned by the company’s subsidiaries outside of Canada, Silver Wheaton’s taxable income for the years 2005 to 2010 should be increased by US $567 million. ^[4] As per the company’s estimates, this could result in an additional tax burden of approximately $150 million for the relevant years. ^[4] Though the company management intends to challenge the CRA’s position, the uncertainty created by this development has led to a sharp decline in the company’s stock price over the last month.

Silver Wheaton Stock Price, Source: Google Finance

We will be looking out for the company management’s views on the taxation issue in the Q2 earnings conference call. More information on this front will shed some light on the road ahead for Silver Wheaton.

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1. Silver Wheaton To Release 2015 Second Quarter Results On August 11, 2015, Silver Wheaton Website [↩]
2. Silver Wheaton Acquires Additional Gold Stream From Vale’s Salobo Mine, Silver Wheaton News Release [↩] [↩]
3. Silver Wheaton’s 2013 40-F, SEC [↩] [↩]
4. Silver Wheaton Remains Confident In Business Structure Following Receipt Of CRA Proposal Letter, Silver Wheaton News Release [↩] [↩] [↩]
5. Gold Price Charts, Kitco [↩]
6. Silver Price Chart, Kitco [↩]
7. Powell says Fed could hike rates mid-2015; cites low inflation, Reuters [↩]
8. Silver Wheaton’s Q1 2o15 Earnings Release, SEC [↩]
9. Silver Wheaton Provides Updates To Barrick And Campo Morado Silver Stream Agreements, Silver Wheaton Press Release [↩]
10. Silver Wheaton’s Q1 2o15 Earnings Release, SEC [↩]