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Silver Wheaton Corp.'s Worst Moves in 2015

By Dan Caplinger - Jan 5, 2016 at 10:50AM

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The streaming company didn't have everything go right last year.

Pascua-Lama mine, on which Silver Wheaton has a streaming interest. Image source: Barrick Gold.

2015 wasn't a great year for Silver Wheaton (WPM 1.31%), with weak prices for silver and gold weighing on the streaming giant's returns. Although the company did a relatively good job of finding ways to keep its business moving forward, Silver Wheaton also suffered some setbacks that made things go less smoothly than many had hoped. Let's take a look at some of the most unfortunate events Silver Wheaton had to endure in 2015.

Extending Pascua-Lama (again)
During the precious-metals boom, one of the most exciting mining projects that Silver Wheaton was associated with was the Pascua-Lama project of Barrick Gold (GOLD 2.07%) along the border between Chile and Argentina. In 2009, Silver Wheaton offered $625 million in financing to get into the Pascua-Lama project, with the company saying that it saw the mine as likely to become "one of the largest and lowest-cost gold mines in the world, with an expected mine life in excess of 25 years."

Unfortunately, since then, Pascua-Lama has been plagued with controversy. Even when gold prices were high, environmental opposition led Barrick Gold to put the brakes on the project. Now, there's no certainty about when Pascua-Lama might come on line.

In early 2015, Silver Wheaton agreed to change the terms of its agreement with Barrick Gold to give the miner more time to satisfy various tests. In particular, Silver Wheaton has given Barrick Gold until mid-2020 to complete the Pascua-Lama mine to at least 75% of design capacity. If Barrick doesn't finish in time, Silver Wheaton would be entitled to receive its initial $625 million investment back, less credits for silver that Barrick has delivered under the contract. Silver Wheaton also agreed to accept production from other Barrick mines, and the revision also extended the date of that arrangement through March 2018.

If Pascua-Lama ever gets completed, then Silver Wheaton's patience will bring nice rewards to company shareholders. For now, though, there's little reason for optimism about the beleaguered project.

A big potential tax hit
In July, Silver Wheaton got the bad news that the Canada Revenue Agency would seek to reassess the streaming company's tax liability under Canadian tax law. In essence, the CRA believed that the way in which Silver Wheaton accounted for its relationships with its foreign subsidiaries would make the company subject to certain rules governing transfer pricing. The result would be an increase in taxable income for the years from 2005 to 2010 adding up to about C$715 million.

The CRA followed up in September with a formal notice of reassessment that was consistent with its initial communication. The added income produced proposed additional tax of about C$200 million, and with interest and penalties, the total potential bill due exceeds C$350 million.

Silver Wheaton was entitled to file an objection to the assessment within 90 days, but it had to deposit half of the proposed reassessment amount in the form of a letter of credit. CEO Randy Smallwood remains confident that the company has handled its taxes properly, but even though Silver Wheaton will fight the added tax, there's no guarantee that it will avoid having to pay a higher tax bill.

Glencore deal includes variable payments
One of the best things about Silver Wheaton's business model is that it gives investors effectively leveraged exposure to silver prices. Under typical arrangements, Silver Wheaton would negotiate a nominal fixed price per ounce for streaming production, pocketing the excess. For instance, Silver Wheaton's initial deal with Barrick on Pascua-Lama included a $3.90-per-ounce payment for silver production, subject to an annual inflation adjustment.

However, Silver Wheaton's recent deal with Glencore used a different formula for calculating payments under the streaming agreement, using 20% of the spot price. That protects Silver Wheaton if silver prices fall further, but it also limits the amount of gains that accrue to the streaming company if silver prices jump. For those who are bullish on silver's prospects, variable payments aren't quite as lucrative as fixed payments -- even if they do provide some protection against further downturns.

Silver Wheaton's 2015 didn't go nearly as well as investors had hoped, with poor precious-metals prices weighing on its strong production results. If the commodity markets start behaving, then Silver Wheaton has put itself in a good position to benefit as much as possible from a rebound.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Silver Wheaton (USA). Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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Stocks Mentioned

Wheaton Precious Metals Corp. Stock Quote
Wheaton Precious Metals Corp.
$34.09 (1.31%) $0.44
Barrick Gold Corporation Stock Quote
Barrick Gold Corporation
$16.74 (2.07%) $0.34

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