Silver Wheaton’s Year In Review: Opportunities And Pitfalls Of A Weak Commodity Pricing Environment

The year 2015 was characterized by weak pricing for almost all metallic commodities, including silver and gold, the two metals sold by Silver Wheaton (NYSE:SLW), the pioneer of the precious metal streaming business. The weakness in commodity prices, specifically the prices of gold and base metals, provided a conducive environment to Silver Wheaton for the acquisition of new streaming deals. Silver Wheaton duly capitalized on the opportunity provided by the weakness in commodity prices, announcing two major streaming agreements during the year. Though the subdued commodity pricing environment allowed Silver Wheaton to sign new streaming agreements, the decline in precious metal prices negatively impacted the company’s stock price.  Other major developments during the year for Silver Wheaton included the receipt of a notice of reassessment from the Canada Revenue Agency (CRA) for taxes paid by the company’s  foreign subsidiaries in the years 2005-2010. In this article, we will take a look back at the major developments of 2015 for Silver Wheaton.

New Streaming Deals

The bulk of the world’s mined silver is produced as a by-product of the mining of gold and base metals. Precious metals produced as by-products of other mining operations generally constitute the underlying commodities in the company’s streaming agreements. As per Silver Wheaton’s estimate, roughly 70% of the world’s mined silver is produced as a by-product from gold or base metal mines, which constitutes the potential target market for the company. ^[1]

During a downturn in commodity prices, precious metal streaming deals become an attractive source of funding for mining companies. Debt is hard to come by for most mining companies in an environment of subdued commodity prices. Moreover, most mining companies look to deleverage during a downturn in commodity prices. With equity valuations subdued, issuing stock is not the most desirable way to raise capital, either. With capital hard to come by, precious metal streaming deals can partially meet the funding needs of mining companies.

Silver Wheaton made the most of the downturn in copper prices during the year. Copper prices have plummeted over the course of the past year, due to an economic slowdown in China and weakening demand for the commodity. The following chart illustrates the decline in copper prices over the course of 2015.

Copper Prices in 2015, Source: LME

Capitalizing on the decline in copper prices, Silver Wheaton signed two mega streaming deals with upfront payments of $900 million each with Vale and Glencore. The deals pertain to precious metal streams from the Salobo and Antamina copper mines. These two agreements are among the largest ever signed by Silver Wheaton.

Weakening Gold and Silver Prices

Gold and silver prices have averaged roughly 8% and 18% lower respectively, on a year-over-year basis in 2015. ^[2] This has largely been due to fears over a potential interest rate hike by the Fed, which finally materialized in December. From an investment perspective, precious metals are largely considered safe haven assets. Improving economic conditions and rising interest rates dampen the investment demand for silver and gold. Since precious metals do not offer any returns besides capital gains, rising interest rates prompt investors to shift towards interest bearing securities.

Gold Prices in 2015, Source: Kitco

Declining precious metal prices were primarily responsible for the decline in Silver Wheaton’s stock price in 2015, as illustrated by the chart shown below.

Silver Wheaton Stock Price, Source: Google Finance

Tax-related Issues

Besides the decline in precious metal prices, tax-related issues also created uncertainty around Silver Wheaton’s stock during the year. Silver Wheaton received a notice of reassessment from the CRA pertaining to taxes on revenue earned by the company’s foreign subsidiaries during the course of the year. The majority of the company’s income generating activities are conducted by Silver Wheaton (Caymans) Ltd., which operates from the Cayman Islands and is not subject to income tax. ^[3] According to the CRA, as per 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. ^[4] If the CRA’s stand is valid, Silver Wheaton could be subject to additional taxes totaling $151 million and penalties totaling $114 million for the years 2005-2010. ^[5] However, the company management remains confident that it has complied with all relevant Canadian tax laws. A favorable outcome in this tax-related matter will certainly boost Silver Wheaton’s prospects.

The year 2016 is likely to mirror 2015 in terms of precious metal pricing, with a strengthening U.S. economy raising the likelihood of further rate hikes, in turn pressuring precious metal prices. In addition, a slowing Chinese economy is likely to keep base metal prices subdued as well. The continuation of the subdued commodity pricing environment could present Silver Wheaton with more opportunities for the acquisition of precious metal streams in 2016. Should Silver Wheaton take advantage of these potential opportunities next year, like it did this year, it would lay a solid foundation for the company to build upon in the years to come.

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1. Silver Wheaton’s November 2015 Corporate Presentation, Silver Wheaton Website [↩]
2. Historical Gold and Silver Prices, Kitco [↩]
3. Silver Wheaton’s Q2 2015 Earnings Report, SEC [↩]
4. Silver Wheaton Remains Confident In Business Structure Following Receipt Of CRA Proposal Letter, Silver Wheaton News Release [↩]
5. Silver Wheaton Receives CRA Notices Of Reassessment Consistent With Proposal, Silver Wheaton News Release [↩]