Silver Wheaton Corp. 3Q Earnings: A Lot of Moving Parts

Silver Wheaton posted unspectacular third quarter earnings, but there were other things going on that overshadowed that news

Reuben Gregg Brewer
Reuben Gregg Brewer
Nov 7, 2015 at 10:35AM
Energy, Materials, and Utilities

Taking into consideration the difficult silver and gold markets, Silver Wheaton Corp. (USA) (NYSE:SLW) posted respectable numbers in the third quarter. That said, there was a lot more going on in the earnings release, including a tax dispute update and the announcement of a new streaming deal. 

Decent numbers
Silver Wheaton's top line came in at $153 million in the third quarter, down from the roughly $166 million in the year ago period. Analysts had been expecting around $169 million. The streaming company's silver equivalent "production" was roughly 11 million ounces in the quarter, a record. The silver equivalent figure puts gold and silver on par with each other so the two can be reported as one number. That was up from around 8.4 million ounces in the same period last year. It sold around 10.2 million silver equivalent ounces, up from 8.7 million last year.

Precious metal. Source: Silver Wheaton

On the bottom line, meanwhile, the company lost $0.24 a share. Excluding one-time items, though, it earned $0.12 a share. Wall Street was looking for $0.13 and last year it earned $0.20 a share, excluding one-time items. The biggest culprit in the top- and bottom-line misses, and fall off from the year ago period, is the company's realized price for silver, which fell from just under $19 an ounce to a little over $15 an ounce, year over year. Falling commodity prices, however, have been the general backdrop for some time. In the end, Silver Wheaton is doing reasonably well in a tough market.

For a comparison, look at miner Barrick Gold (NYSE:GOLD), which reported a loss of $0.23 a share in the third quarter. Although the miner was profitable if you adjust for one-time charges, just like Silver Wheaton, there's a notable difference between Silver Wheaton and Barrick over the last couple of years: Barrick has lost money in six of the last 10 quarters while this is Silver Wheaton's first quarter of red ink in that span.

Apples and oranges?
It's not completely fair to make a comparison between these two companies. Barrick is a miner and Silver Wheaton is a streaming company, which is why "production" is in quotes up above. But this difference and the difference in earnings results helps to show why an investor might prefer one company over the other.

Silver Wheaton provides financing to miners in exchange for the right to buy future silver (roughly 60% of the top line) and gold (about 40%) production at adventitious prices. So Silver Wheaton's cost structure is much lower. Barrick has to bear the costs and risks of running precious metals mines. To put some numbers on this, Silver Wheaton's cost for gold is around $400 an ounce (its cost for silver is around $4 an ounce). It costs Barrick more than twice that amount to pull an ounce of gold out of the ground, also known as all in sustaining costs.

And, in the end, both companies make their money selling physical precious metals. So, perhaps, the comparison isn't as unfair as it seems.

The basic Silver Wheaton business model. Source: Silver Wheaton

The bad news and other developments
That said, the biggest takeaway from the third quarter didn't have much to do with earnings. The tax dispute between Silver Wheaton and Canada has taken a turn for the worse. The government effectively told Silver Wheaton it owes $265 million in back taxes, interest, and penalties. The company will have to put up half that sum as it seeks to fight the assessment, though it's going to try to use a letter of credit instead of cash.

Related Articles

This isn't a life and death event by any means, but it would put a damper on the company's results if it ultimately lost the tax dispute since it hasn't put any money aside for this issue. It is a relatively large sum of money for a company that had net income of just $268 million in 2014, when commodity prices were generally higher than they are today. And with only around $80 million of cash on the balance sheet at the end of the quarter, Silver Wheaton would probably have to issue shares, take on debt, or tap credit lines to pay off that kind of bill. So expect the tax issue to remain an overhang on the shares until it is resolved.

That said, Silver Wheaton also announced a bit of good news when it reported that it had signed a $900 million streaming deal with struggling mining giant Glencore. In exchange for that up-front payment, Silver Wheaton will buy roughly 33% of the silver produced from the Antamina mine up to 140 million ounces, effectively all of Glencore's share in the joint mining project. After that point Silver Wheaton will get around 22% of the mine's silver output. Silver Wheaton will pay just 20% of spot prices for the silver. The deal is expected to immediately help both the top- and bottom-lines and led the streaming company to up its long-term production guidance. So despite the negative overhang of the tax dispute, Silver Wheaton is still taking advantage of weakened miners to improve its own business prospects.

Holding up well, but...
Essentially, Silver Wheaton is performing reasonably well in a difficult commodities market. That should please investors. Unfortunately, that little tax issue could make life more difficult for this streaming giant, even though it continues to take advantage of what is a good investment environment. So, at best, the third quarter's results were mixed. That said, Silver Wheaton's shares have notably lagged peers, which suggests that much of the bad news here might already be priced in.