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Will 2016 Be Silver Wheaton Corp.'s Worst Year Ever?

By Dan Caplinger - Jan 30, 2016 at 9:43AM

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The streaming company faces plenty of challenges in a tough commodity market.


Image source: Silver Wheaton.

Precious metals streaming specialist Silver Wheaton (WPM -3.84%) suffered in 2015, feeling the impact of falling commodity prices and struggling along with its mining-company partners on its silver and gold streams. Even though the company made smart strategic moves to make the most of a tough situation, the big question facing Silver Wheaton is whether 2016 will bring some relief in the form of rising metals prices. There are reasons for optimism, but if higher silver and gold prices don't come, 2016 could turn out to be Silver Wheaton's worst year yet. Let's look more closely at the issues facing Silver Wheaton this year.

Timing the bottom
The biggest danger Silver Wheaton faces is that it has moved aggressively to provide financing for cash-strapped mining companies over the past year. The streaming giant is clearly betting on a long-awaited rebound in precious metals prices to justify the extensive upfront cash outlays it makes, but if a rebound is slow in coming, it could put further pressure on Silver Wheaton's finances.

For instance, in late January, Silver Wheaton announced that it would pay small producer Panoro Minerals $140 million in exchange for a 25% gold streaming and 100% silver streaming interest in the Cotabambas project in Peru. The deal involves Silver Wheaton paying $450 per ounce for the gold and $5.90 per ounce for the silver under the agreement. Similar deals with Vale (VALE -2.73%) and Glencore last year involved even larger cash payments.

Few doubt that as long as precious metals climb soon, Silver Wheaton will prove successful in opportunistically timing the market. Yet by essentially upping its bets on the health of precious metals over the long run, Silver Wheaton leaves itself further exposed to short-term price movements. That could hurt the stock dramatically if silver and gold don't cooperate in 2016.

Bad news from Revenue Canada?
Silver Wheaton also faces a continuing controversy with the Canada Revenue Agency over allegations of improper handling of its taxes. Last summer, the CRA suggested that substantial revisions to past tax years would be necessary, and it later imposed a notice of reassessment claiming tax liability, penalties, and interest of about C$350 million.

In January, Silver Wheaton filed its notice of appeal with the Tax Court of Canada, skipping the CRA's internal appeals process. Yet in the aftermath of that appeal, the CRA came back and said it would also look at subsequent tax years between 2011 and 2013 that weren't covered in the initial dispute. Although the CRA hasn't taken a position in the latter years, it's conceivable that it will come to similar conclusions and demand even more money.

Silver Wheaton will fight the tax and believes it doesn't owe anything. But having the issue hanging over it is likely a contributing factor in Silver Wheaton's share-price weakness recently, and given the length of time court proceedings take, it could hold back the stock throughout 2016 even if no formal decision is made.

Will Silver Wheaton's mining partners survive?
Finally, Silver Wheaton bears risk related to its agreements with mining companies. It has no control over mining operations, and so it relies on its partners as far as production decisions are concerned.

Moreover, Silver Wheaton has counterparty risk in that if something happens to the companies with which it has contractual relationships, the result can be extended litigation to determine its rights going forward. Given the extended drop in precious metals prices, some miners are starting to hit the wall in terms of cash costs comparing unfavorably with market prices.

For the most part, Silver Wheaton has worked with solid partners that won't be the first to fall in the industry. Nevertheless, if something does happen to a key mining company, Silver Wheaton could feel the pain.

After a poor 2015, no one wants to see Silver Wheaton's 2016 go badly. Nevertheless, if some of these things go wrong, then 2016 could turn into the worst year for Silver Wheaton ever.

Dan Caplinger has no position in any stocks mentioned. The Motley Fool owns shares of Companhia Vale Ads and 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.
WPM
$32.53 (-3.84%) $-1.30
Vale S.A. Stock Quote
Vale S.A.
VALE
$13.21 (-2.73%) $0.37

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