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Investment Overview for Silver Wheaton (NYSE:SLW)
The past year or so has been a mixed bag for Silver Wheaton. Whereas the company signed a major streaming agreement with Glencore and Vale and benefited from a recovery in precious metal prices, it is facing tax-related uncertainty vis-a-vis the Canada Revenue Agency, which has created uncertainty around the company's operations.
- Signing of streaming agreement for Antamina mine
- Silver Wheaton signed a streaming agreement in Q4 2015 for 33.75% of the silver production at Glencore's Antamina mine in Peru, until the delivery of 140 million ounces of silver and 22.5% of silver production thereafter for the life of the mine. Silver Wheaton will pay Glencore a cash consideration of $900 million for rights to purchase silver at 20% of the spot price of the metal, per ounce of silver delivered. In addition, the company signed an additional 25% gold streaming agreement with Vale for the Salobo mine in August 2016, on top of the pre-existing agreement for 50% of the gold mined from the Salobo mine. This will considerably boost Silver Wheaton's gold shipments from Salobo going forward.
- Recovery in precious metal prices
- Precious metal prices have rallied sharply in 2016 as a result of an increase in investment demand for gold and silver, amid macroeconomic uncertainty caused due to weak global economic outlook and the outcome of the UK's EU referendum. The surge in gold and silver prices has boosted the prospects of Silver Wheaton. However, going forward the tightening of interest rates by the Federal Reserve, steady improvements in the U.S. job market, and expectations of a more business friendly stance from the new government post the 2016 U.S. presidential election, have dampened gold prices. Gold prices are thus expected to grow at a more moderate pace going forward.
- Potential reassessment of tax liability
- Silver Wheaton received a proposal letter in July 2015 from the Canada Revenue Agency (CRA), 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) pertaining 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. The company received another notice in January 2016 pertaining to the audit of its international transactions for the years 2011-2013. This unresolved tax-related uncertainty has increased uncertainty pertaining to Silver Wheaton's business model.
Below are key drivers of Silver Wheaton's value that present opportunities for upside or downside to the current Trefis price estimate for Silver Wheaton:
Silver shipments and contracts
- Yauliyacu Mine Silver Shipments: Silver shipments delivered to Silver Wheaton from Glencore's Yauliyacu mine have been inconsistent since mid-2009. The Doe Run Peru La Oroya smelter, which was the largest buyer of silver concentrate produced at the mine, shut down in 2009. The Yauliyacu mine has not made adequate arrangements for smelting of ore since, and silver shipments to Silver Wheaton have remained inconsistent. Shipments bounced back strongly in 2014 but declined again in 2015. We expect the Yauliyacu mine to maintain a more consistent delivery schedule throughout our forecast period. However, if this does not materialize and shipments revert to 2013 levels, it would result in a downside of around 3% to our price estimate.
Tax liability for the company
- Silver Wheaton Tax Rate: Silver Wheaton currently does not incur any significant income taxes as it carries out its operations from its wholly-owned subsidiary Silver Wheaton Cayman, registered in the Cayman islands, where the company is exempt from income tax laws. The company's tax rate may increase gradually as governments around the world crack down on tax havens and loopholes. Should this happen and the company's tax rate increases to 25% from 2017 onward, it would present a downside of about 27% to our price estimate.
Silver Wheaton Corporation is the world's largest silver streaming company. The company currently has fourteen silver purchase agreements and two precious metals agreements, where in exchange for an upfront payment, it has the right to purchase all or a portion of, the silver production at a low fixed cost, from high-quality mines located in politically stable regions.
Based upon its current agreements and forecasts for 2015, attributable production is expected to total 54 million silver equivalent ounces, including 265,000 ounces of gold. The company's estimated average annual production over the next five years is anticipated to be approximately 52 million silver equivalent ounces, including 260,000 ounces of gold.
We have divided the company into nine divisions, based upon the silver streaming contracts it currently holds.
Salobo mine is the most valuable division
The Salobo mine consists of Silver Wheaton's 75% interest in the gold by-product produced from Vale's Salobo copper mine, located in Brazil. It accounted for nearly 54% of Silver Wheaton's gold shipments in 2015. The signing of a streaming agreement for an additional 25% of the life of mine gold production from the Salobo mine in August 2016, over and above the pre-existing agreement for 50% life of mine gold production, has significantly boost the division's shipments. The sharp rise in shipments will drive the value for this division.
Fixed rate contracts provide some visibility
Silver Wheaton's business model is to provide some of the necessary capital to other mining companies via an upfront payment to assist in the construction of mines. In return, the company gets a portion of the silver or gold produced as a by-product for a specified period (generally the life of the mine) at a fixed cost. Most of the companies assisted by Silver Wheaton produce silver as a by-product of their mining operations. Accordingly, it is a mutually beneficial arrangement for the participating companies.
On average, Silver Wheaton pays about $4-6 per ounce of silver procured from the mining companies. This fixed price is subject to change based on inflationary factors. The company does not have to pay for any additional development costs for any projects after the initial payment. Silver Wheaton sells silver at spot market prices and does not hedge.
Rising demand from emerging markets
China is the world's largest consumer of precious metals. There is robust growth in demand for precious metals. For example, Chinese private sector demand for gold will rise rapidly from 1,132 tons in 2014 to 1,350 tons in 2017.The growing demand from increasingly affluent middle classes in emerging economies such as China and India will provide support to prices of precious metals in the medium to long term.
How Does Trefis Modelling Work?
How do we get the historical numbers for this chart?
Trefis has a team of in-house Analysts who gather historical data from company filings and other verifiable sources. When historicals are available, we explain how we got them at the bottom of the Trefis analysis section below.
Who came up with the Trefis forecast for future years?
The Trefis team of in-house Analysts considers a variety of factors when projecting any forecast. The rationale for our projections is explained in the Trefis analysis section below.
How does my dragging the trendline on the chart impact the stock price?
- We use forecasts for business drivers to calculate forecasted Revenues and Profits for each division of the company.
- We then use forecasted Profits in a Discounted Cash Flow (DCF) model to obtain the Price Estimate for the company.
See more on: DCF Methodology
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