Silver Wheaton’s Q2 Earnings Review: Lower Precious Metal Prices Weigh On Results As Potential Tax Reassessment Creates Uncertainty

SLW: Wheaton Precious Metals logo
SLW
Wheaton Precious Metals

Silver Wheaton (NYSE:SLW) released its second quarter results on August 11 and conducted a conference call with analysts the next day. [1] As expected, lower precious metal prices negatively impacted the company’s results, with higher sales volumes partially offsetting the negative impact of lower precious metal prices. The company reported a 15% year-over-year decline in net income to $54 million in Q2 2015. [2] The key takeaway from the earnings conference call was the management’s stand pertaining to the Canada Revenue Agency’s (CRA) recent proposal to reassess the company’s tax liability pertaining to the years 2005-2010. Though the management remains confident that it has complied with the relevant provisions of Canada’s tax regime, the uncertainty caused by a potential reassessment of the company’s tax liability is weighing on the company’s stock price, which currently stands around 20% lower than on July 6, when the company received a proposal letter from the CRA. [3]

Precious Metal Prices

Silver Wheaton’s averaged realized price stood at $16.38 per silver equivalent ounce sold in Q2 2015, around 17% lower than in the corresponding period of last year. [2] Precious metal 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 winding down of QE implied strengthening U.S. economic growth. Precious metals as investments are often regarded 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. With the economy strengthening, the Fed is expected to raise interest rates some time in 2015. [4] 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 dampened precious metal prices this year, as shown in the chart below.

Silver Prices in 2015, Source: Kitco

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Rising Production Volumes

Silver Wheaton’s attributable production, or the share of the company’s production from its streaming agreements, rose to 10.9 million silver equivalent ounces in Q2 2015, which is around 29% higher than in the corresponding period a year ago. The increase in production was primarily driven by higher production from the Salobo mine, from which Silver Wheaton’s attributable production increased by nearly 228% on a year-over-year basis in Q2. [2] The increase in attributable production from the Salobo mine resulted from the signing of a streaming agreement between Silver Wheaton and Vale for the acquisition of an additional 25% of the gold by-product stream produced at the Salobo copper mine in Brazil for a period that extends until the end of the mine’s life. [5] 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. [6] 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. [7]

Tax-related Issues

Silver Wheaton received a proposal letter from the CRA on July 6, in which the CRA proposed to reassess the company’s tax liability for the years 2005-2010. As per the CRA, under the transfer pricing provisions of the Income Tax Act (Canada) relating to the income earned by the company’s subsidiaries located outside Canada, the company’s income subject to taxation in Canada should be increased by US $567 million for the years 2005 to 2010. [8] Silver Wheaton’s international subsidiaries are headquartered in jurisdictions that are subject to low rates of income tax. If the CRA’s proposed reassessment materializes, the company could be subject to additional taxes totaling $150 million and penalties totaling $57 million for the years 2005-2010. [8] The company management expressed confidence that Silver Wheaton remained in compliance with all relevant tax provisions in its earnings conference call. [9] However, the uncertainty created by the potential tax reassessment has taken its toll on the company’s stock price. A quick resolution of this matter would certainly boost Silver Wheaton’s prospects.

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Notes:
  1. Silver Wheaton To Release 2015 Second Quarter Results On August 11, 2015, Silver Wheaton Website []
  2. Silver Wheaton’s Q2 2o15 Earnings Release, SEC [] [] []
  3. Silver Wheaton Stock Price, Google Finance []
  4. Powell says Fed could hike rates mid-2015; cites low inflation, Reuters []
  5. Silver Wheaton Acquires Additional Gold Stream From Vale’s Salobo Mine, Silver Wheaton News Release []
  6. Silver Wheaton’s 2013 40-F, SEC []
  7. Silver Wheaton’s Q2 2014 Earnings Release, SEC []
  8. Silver Wheaton Remains Confident In Business Structure Following Receipt Of CRA Proposal Letter, Silver Wheaton News Release [] []
  9. Silver Wheaton’s Q2 2015 Earnings Conference Call Transcript, Seeking Alpha []