Silver Wheaton Q3 Earnings Preview: Decline In Precious Metal Prices To Negatively Impact Results

Silver Wheaton (NYSE:SLW) will release its third quarter results on Tuesday, November 3 and conduct a conference call with analysts the next day. ^[1] We expect the decline in gold and silver 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 with Vale in Q1 for 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. ^[2] This agreement is in addition to the company’s pre-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 reported in September that it has received a notice of reassessment from the Canada Revenue Agency (CRA), consistent with the CRA’s proposal letter pertaining to the same, received by the company in July. ^[4] As per the CRA, Silver Wheaton’s tax liability pertaining to its international subsidiaries for the years 2005-2010 should be revised upwards, a position that the company management contests. The management should give more updates pertaining to this tax-related issue in the earnings conference call.

Silver and Gold Prices

Gold and silver prices have fallen over the course of the last twelve months, primarily due to fears of an interest rate hike by the Fed. Precious metals from an investment point of view are generally considered safe haven assets and investments are primarily made with the purpose of hedging against economic uncertainty and inflation. Improving economic conditions and rising interest rates tend to lower the investment demand for precious metals. Since precious metals only offer capital gains, with an increase in interest rates investors tend to shift towards interest-bearing assets. The strengthening of the U.S. economy and fears over an interest rate hike reduced the investment demand for precious metals and led to a decline in their prices. London PM Fix gold spot prices, which averaged roughly $1,280 per ounce in Q3 2014, averaged around $1,120 per ounce in Q3 2015. ^[5] Silver prices have witnessed a similar decline as well. The following chart illustrates the trajectory of silver prices so far this year. The decline in silver and gold prices will negatively impact Silver Wheaton’s Q3 results.

Silver Prices in 2015, Source: Kitco

With the Fed holding interest rates steady in its September meeting, precious metal prices have recovered somewhat. A potential interest rate hike in the future is contingent upon the rates of employment growth, inflation, and economic growth.

Volumes

With the signing of an agreement with Vale earlier on in the year for rights to an additional 25% of the gold by-product produced at the Salobo mine, Silver Wheaton’s attributable production (the company’s share of production under its streaming agreements) from Salobo is expected to be significantly higher in Q3 on a year-over-year basis. 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 should boost production pertaining to the agreement already in place. ^[6] Production pertaining to the Salobo mine was 228% higher year-over-year in Q2. ^[7]

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. ^[8] However, the increase in production from the Salobo mine is likely to offset the loss in production from the Campo Morado mine and any temporary declines in production due to the mining of lower grade ores at other mines.

Tax-Related Issues

The CRA will reassess the taxable income pertaining to the operations of Silver Wheaton’s subsidiaries outside of Canada. As per the CRA’s stance, according to the transfer pricing provisions of the Income Tax Act (Canada), Silver Wheaton’s taxable income for the years 2005 to 2010 should be increased by US $536 million. ^[4] Such a reassessment could result in an additional tax burden of approximately $151 million for the relevant years, in addition to $114 million worth of penalties and interest payments. ^[4] The company management intends to challenge the CRA’s stance by filing a notice of objection under the provisions of the Income Tax Act (Canada). ^[4] We will be looking out for updates from the company management in the earnings conference call pertaining to the latest developments relating to this tax issue. A swift resolution of this issue will boost Silver Wheaton’s prospects by clearing up the uncertainty created by the tax reassessment.

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1. Silver Wheaton To Release 2015 Third Quarter Results On November 3, 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 Receives CRA Notices Of Reassessment Consistent With Proposal, Silver Wheaton News Release [↩] [↩] [↩] [↩]
5. Gold Price Charts, Kitco [↩]
6. Silver Wheaton’s Q2 2014 Earnings Release, SEC [↩]
7. Silver Wheaton’s Q2 2o15 Earnings Release, SEC [↩]
8. Silver Wheaton Provides Updates To Barrick And Campo Morado Silver Stream Agreements, Silver Wheaton Press Release [↩]