I have some pertinent information pertaining to 5 of our stocks. I’ll post them 1 each day. The first is…
“Silver Wheaton (NYSE: SLW)
Silver Wheaton is the largest precious metals streaming company in the world. Like other royalty companies, it advances cash to base-metal miners in exchange for a claim on some of the silver and gold they produce.
Simply put, when a copper (or zinc or iron) miner extracts ore from its mine, that rock likely includes a lot of other minerals – including silver. The copper miner doesn’t want the hassle of smelting and dealing with the silver from the mine. So Silver Wheaton will make a deal up front for the silver or gold.
From the base-metal miner’s perspective, it’s a good deal because the company gets guaranteed income for the precious metals. And it’s a great deal for Silver Wheaton because it gets a guaranteed supply of silver without the hassles and risks of actually mining it.
Typically, Silver Wheaton currently pays about $4 for an ounce of silver and nearly $400 for an ounce of gold. Plus, it allows for small adjustments to inflation in most contracts. Silver Wheaton has a portfolio of long-term purchase agreements spread across 30 different operating mines and development projects.
Other than the initial upfront payment, Silver Wheaton typically does not contribute to future capital expenditures or exploration costs invested by the miner. But it benefits greatly from the production and exploration growth that results from these expenditures… The more precious metals it can buy at below-market prices, the better. Plus, any increase in precious metals prices goes right to Silver Wheaton’s bottom line.
The company produced 47.7 million silver-equivalent ounces in 2015. That’s a 35% increase compared with 2014. And it’s projected to increase to 54 million silver-equivalent ounces in 2016.
Revenue for 2015 was almost $649 million – up 5% from the prior year. Operating cash flow remained flat in 2015 at $431 million.
Silver Wheaton’s future-growth profile is expected to be driven by precious metals streams on two of Vale’s (VALE) operations – Salobo in Brazil and Sudbury in Canada – as well as the start of commercial operations at HudBay Minerals’ (HBM) Constancia project in Peru. The Salobo agreement with Vale entitles Silver Wheaton to 50% of the gold production for the life of the mine at $400 per ounce. And it has a similar agreement for Vale’s Sudbury mining project, which has 18 years left.
The company entered an agreement with Barrick Gold for silver production in its Pascua-Lama project on the border of Chile and Argentina in 2013… This project has been halted due to class-action suits filed against Barrick Gold that alleges misstated facts relative to environmental and regulatory concerns. As a result, Silver Wheaton amended its purchase agreement last year, entitling it to 100% of the silver production from Barrick Gold’s Lagunas Norte, Pierina, and Veladero mines until March 2018.
You may have heard about some potential tax liabilities weighing on Silver Wheaton’s share price. Last April, we sat down with Randy Smallwood, president and chief executive officer of Silver Wheaton, to discuss the issue in his office in downtown Vancouver, Canada.
He explained that the Canada Revenue Agency (CRA) – Canada’s equivalent to the U.S. IRS – is attempting to impose taxes. No one knows with any certainty, as this action is unprecedented, but estimates suggest the tax bill could reach as much as C$715 million (US$550 million) with penalties approaching C$300 million (US$230 million) for income earned from mines outside of Canada. After several years of good-faith efforts to reach an agreement, negotiations have reached an impasse and the matter is headed to court.
Smallwood believes Silver Wheaton has a strong case – and we tend to agree. It has been in strict compliance with the law. It’s unlikely that Canada will set a precedent that may cause mining companies to flee the country. The two sides will likely reach a settlement.
Regardless of the outcome, this issue has been public knowledge for several years and has weighed on the current share price. Absent an extremely negative ruling – which is unlikely due to implications on the entire Canadian economy – a large tax payment is already priced into the shares. If a favorable settlement is reached, the stock will likely rally.”
It never hurts to know something about the firm whose stock you’ve bought into. I’ve been a long-time holder of shares in SLW, through thick and thin. As I type, it’s changing hands at $29.20, and I’ve a 112% gain it, not including any dividend payments over all that time.
Here’s to your accumulation of real wealth!
Harold F Crowell