Vale SA (NYSE:VALE) and Silver Wheaton Corp. (NYSE:WPM) are facing important headwinds today. But there's a big difference between the issues each is up against. Which stock is the better buy really depends on your ability to handle uncertainty. Here's what you need to know.
Silver Wheaton is in the middle of a tax dispute with the Canadian government. Boiling down the issue to the basics, Canada says that Silver Wheaton hasn't been paying its taxes correctly. Silver Wheaton, however, insists it has been and is standing by its approach.
The issue is pretty material, too. It started with a look at the 2005 to 2010 tax years. Then it expanded to include the years between 2011 and 2013. The tax bill, using back-of-the-envelope math, could be as high as $400 million and get even larger if it extends to additional years. To put that in perspective, Silver Wheaton had adjusted net earnings, taking out one-time items, of about $210 million last year. Cash flow from operations was around $430 million. Can it handle the hit if it has to pay up? Yes, but it will still be a notable negative for a bit.
There's a lingering issue, too. If the way the company calculates its taxes changes, its future earnings results could be lower. So this tax issue has long-term consequences that investors need to keep in mind.
That kind of pales in comparison with Vale's troubles, though. Vale and 50/50 partner BHP Billiton (NYSE:BHP) are joint owners of the Samarco Mine in Brazil. A dam holding back mining waste burst at the mine, destroying nearby towns and resulting in numerous deaths. In response, the companies agreed with the Brazilian government to jointly pay roughly $5.5 billion over a 15-year period.
Only there's another case pending that pegs the costs at $44 billion, comparing the disaster to the Macondo oil spill in the Gulf of Mexico in 2010. If that $44 billion bill were to stick, it could be a really big issue for Vale, which has a market cap of roughly $27 billion. In other words, it would be hard for it to come up with that kind of money. The legal wrangling is far from over here, and, worse, the mine looks like it won't be starting back up anytime soon -- which has implications for iron ore production at Vale and for the solvency of the joint venture, adding yet another complication to the issue.
So Vale is facing the bigger potential hit from its troubles, but you can't just forget about Silver Wheaton's tax issues, either. That said, There's one more fact that you'll want to keep in mind: Vale is a miner and Silver Wheaton is a streaming company. And these two issues really highlight the difference.
Vale, as a miner, takes on the risks inherent to running mines, such as mine accidents. Silver Wheaton, on the other hand, is a streaming company. It provides cash up front to miners for the right to buy silver and gold at reduced rates in the future. It specifically doesn't take on the risks of operating a mine, because it's more like a specialty finance company and has nothing to do with the day-to-day operation of the mines from which it gets its precious metals.
There are other differences, too. For example, Vale is one of the world's largest iron ore miners, though it has a diversified portfolio of commodities it produces. Silver Wheaton's fortunes are tied to the precious-metals markets. However, if you're trying to decide which one of these is the better buy, you should pay close attention to the differences in the way they do business and what that means for the risks each of their businesses face. And right now those risks are on clear display.
For risk-averse investors, though, Silver Wheaton is probably the better option.