Silver Wheaton Stock Receives Vote Of Confidence From Management Amid Uncertainty

Silver Wheaton (NYSE:SLW) has announced the buyback of up to 20.2 million shares of the company’s stock, amid weakness in the company’s stock price as a result of weak precious metal prices and tax related uncertainty. ^[1] The company management believes that current price levels underestimate the prospects of the company’s business. ^[1] However, given a potential reassessment of the tax liability pertaining to the company’s foreign subsidiaries, it remains to be seen if the management’s confidence in Silver Wheaton’s stock is well founded.

SLW Stock Price, Source: Google Finance

• Silver Wheaton’s stock price has fallen over 35% since the company received a proposal letter pertaining to a potential tax reassessment by the Canada Revenue Agency (CRA) on July 6, with falling gold and silver prices adding to the negative impact of the uncertainty created by the impact of a potential tax reassessment.
• Most of Silver Wheaton’s income generating activities are conducted by Silver Wheaton (Caymans) Ltd., which operates in the Cayman Islands and is not subject to income tax. ^[2] As per the CRA, under the transfer pricing provisions of the Income Tax Act (Canada), income earned by Silver Wheaton’s foreign subsidiaries for the years 2005-2010 should be taxed at the rates of income tax applicable within Canada. ^[3] If the proposed reassessment is carried out, Silver Wheaton could be subject to additional taxes totaling $150 million and penalties totaling $57 million for the years 2005-2010. ^[3]
• One of the factors behind the success of Silver Wheaton’s precious metal streaming business is the low tax burden as a result of its existing corporate structure and the low applicable taxes. However, given the potential reassessment by the CRA for 2005-2010, what remains unclear is whether Silver Wheaton’s income from its foreign subsidiaries would continue to be subject to zero income tax jurisdictions going forward. If the status quo prevails (as currently factored into our model), only then is the management’s optimism well founded.

See our forecasts for Silver Wheaton’s effective tax rate

See the link below for more information and analysis:

• The Potential Impact Of An Upward Revision In Silver Wheaton’s Effective Tax Rate

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1. Silver Wheaton Announces Initiation Of Normal Course Issuer Bid, Silver Wheaton Website [↩] [↩]
2. Silver Wheaton’s Q2 2015 Earnings Report, SEC [↩]
3. Silver Wheaton Remains Confident In Business Structure Following Receipt Of CRA Proposal Letter, Silver Wheaton News Release [↩] [↩]