Silver Wheaton’s Year 2016 In Review: Ongoing Tax Related Uncertainty Takes Sheen Off Success In Signing New Streaming Agreements

The year 2016 was a mixed bag for Silver Wheaton, with the signing of two major streaming agreements the highlights amid uncertainty created by the company’s ongoing tax related dispute with the Canada Revenue Agency (CRA). In addition, the year saw considerable volatility in the prices of gold and silver. In this article, we will look back at the salient developments of the year for Silver Wheaton and look ahead to what next year holds for the company.

Fluctuations in Precious Metal Prices

(Source: Kitco)

The prices of both silver and gold experienced considerable volatility during the year. Precious metals are considered safe-haven assets from an investment point of view, with macroeconomic uncertainty usually driving investors towards these assets. Moreover, since precious metals offer only capital gains as returns, rising interest rates tend to shift investors away from precious metals towards interest-linked securities.

Silver prices rose considerably in the first half of the year from levels of around $14 per ounce at the beginning of the year, as concerns over global macroeconomic growth drove the investment demand for precious metals. Prices shot above $20 per ounce in the weeks following the unexpected outcome of the UK’s June 23 EU referendum. However, prices declined to levels close to $16 per ounce towards the end of the year, in anticipation of an interest rate hike by the Fed. The Fed raised interest rate by 25 basis points earlier on in the month and indicated that more rate hikes could be in the cards next year amid strengthening U.S. economic conditions and rising inflation. ^[1]

The following chart illustrates the movements in gold prices over the course of the year, with the investment demand for gold driving fluctuations in prices, mirroring movements in silver prices.

Signing of New Streaming Agreements And Higher Production

Silver Wheaton signed two major streaming agreements in 2016 – an Early Deposit agreement with Panoro Minerals Ltd. and an agreement for an additional 25% stream from Vale’s Salobo mine. The Early Deposit agreement signed with Panoro for $140 million in March entitles Silver Wheaton to a share of the silver and gold production from the Cotabambas copper-gold-silver project in Peru, once the mine commences production. ^[2] Whereas the agreement with Panoro will augment Silver Wheaton’s output once the mine commences production, the agreement signed with Vale during the year boosted its 2016 gold production guidance by 15%. ^[3] The signing of the additional agreement with Vale boosts Silver Wheaton’s share of gold production from the Salobo mine to 75% and also boosts the company’s estimated future gold production through 2020 by 27%. ^[3]

Tax Related Uncertainty

Whereas the signing of the additional precious metal streaming agreements during the year was the highlight of the year, Silver Wheaton’s business continues to be dogged by uncertainty pertaining to the company’s tax dispute with the CRA. The CRA commenced a reassessment of the taxes earned by Silver Wheaton’s foreign subsidiaries for the years 2005-2010 in 2015, arguing that this income should be subject to taxes in Canada. ^[4]  In addition, the CRA also commenced an audit of Silver Wheaton’s international transactions for the years 2011-2013. ^[4] The majority of Silver Wheaton’s income generating activities are conducted by its subsidiary, Silver Wheaton (Caymans) Ltd, which is subject to the income tax jurisdiction of the Cayman Islands and hence does not pay income tax. ^[4] With Silver Wheaton contesting the CRA’s position in its ongoing dispute with the regulatory authority, a potential disruption of the company’s high-margin business model by actions taken by the CRA continues to create uncertainty around the company’s stock.

The Road Ahead

The prices of base metals such as copper have strengthened considerably over the past couple of months, with expectations of higher economic growth under the new White House administration in the U.S. driving up prices of these metals. Whereas base metal prices do not directly impact Silver Wheaton’s operations, a significant proportion of the company’s streaming agreements are signed with base metal miners that produce silver or gold as a by-product. Subdued base metal prices create conditions conducive to the signing of more streaming agreements, with capital for expansion in production or new projects from traditional sources hard to come by in times of an extended downturn in prices. To the extent that base metal prices remain elevated, opportunities for signing new streaming agreements could be harder to come by for Silver Wheaton next year. In addition, the ongoing CRA issue continues to be a source of uncertainty for the company. A swift resolution of this issue will certainly boost the company’s prospects.

Have more questions about Silver Wheaton? See the links below.

• What Is Silver Wheaton’s Revenue And EBITDA Breakdown?
• What Is Silver Wheaton’s Fundamental Value Based On Expected 2015 Results?
• How Has Silver Wheaton’s Revenue Composition Changed Over The Last 4 Years?
• By What Percentage Did Silver Wheaton’s Revenue & EBITDA Decline In The Last 4 Years?
• By What Percentage Can Silver Wheaton’s Revenue & EBITDA Grow In The Next 3 Years?
• By What Percentage Will Silver Wheaton’s Silver Equivalent Production Increase If Production Commences At The Pascua-Lama Mine?
• How Will Silver Wheaton’s Revenue Composition Change Over The Next 5 Years?
• How Do Silver Wheaton’s Margins Compare With Those Of Traditional Precious Metal Mining Companies?

Notes:

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Notes:

1. Fed Raises Rates for First Time in 2016, Anticipates 3 Increases in 2017, Wall Street Journal [↩]
2. Silver Wheaton Announces Closing of the Early Deposit Precious Metals Purchase Agreement with Panoro Minerals, Silver Wheaton News Release [↩]
3. Silver Wheaton increases its gold stream from the Salobo Mine and revises production guidance, Silver Wheaton News Release [↩] [↩]
4. Silver Wheaton’s Q3 2016 Earnings Release, SEC [↩] [↩] [↩]