Is a Turnaround on Tap for Wheaton Precious Metals?

01/26/2018 5:00 am EST

Focus: FINANCIALS

Adrian Day

Chairman and CEO, Adrian Day Asset Management

Recent developments at Wheaton Precious Metals (WPM) suggest the stock may be turning around, making the stock a good buy at current levels, notes resource sector expert Adrian Day, editor of Global Analyst.

Wheaton has agreed to a revised stream arrangement on the San Dimas mine, as the near-bankrupt operator, Primero, is acquired by First Majestic.

Wheaton will now receive a lower stream (25% of the gold and silver) with a higher ongoing payment; it received $151 million worth of First Majestic shares in compensation for the reduced stream.

The deal is positive for Wheaton, since it allows the company to continue receiving a stream and avoiding a potentially long shutdown in a bankruptcy. The mine goes from 8% of net asset value to 5%, however.

Having got that problem out of the way, the next major hurdle for Wheaton is the ongoing tax dispute with the Canada tax authorities. Canada Revenue is seeking $267 million back taxes over Wheaton’s offshore streams, prior to 2010. The window for a settlement is closing as the dispute moves to court.


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If Wheaton were to lose, the Revenue would then audit very carefully all offshore deals post 2010. Many observers believe that Wheaton has tightened its process in recent years and would not be subject to back taxes on all of its offshore deals.

Wheaton, therefore, has an incentive to settle if any agreement can include post-2010 deals. Absent a settlement, the case may not be ruled on until next year. If Wheaton were to lose completely on pre-2010 deals, this would be a blow but far from fatal, and is already discounted in the share price.

After nearly two years without any new deals, the pipeline is moving forward, with expansions at two of its large streams (Salabo and Pensaquito), plus the restart of another mine this year.

In addition, progress by Barrick (ABX) towards a limited underground mine at Pascua Lama, which would obviate the environmental objections, will generate strong cash flow for Wheaton.

Resolution of the Canadian tax dispute as well as a sharp move in silver—Wheaton is more sensitive to the silver price than its peers—could see the stock move sharply higher. It is certainly undervalued relative to the other large royalty companies and the stock price has lagged over the past year.

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