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Research: Metals & Mining
On 13 December, Wheaton Precious Metals (WPM) announced it had reached a ‘principled settlement’ for its tax dispute with the Canada Revenue Agency (CRA). Whereas the CRA had been seeking at least US$265m from WPM in taxes, penalties and interest in relation to its reassessment for the 2005–10 tax years with subsequent years left open to similar re-assessment, under the terms of the settlement WPM will actually pay the CRA cash taxes of US$5m for the 2011–17 tax years, US$15m in deferred tax and US$3–4m in interest. More importantly, the settlement creates a framework for both WPM and the CRA to assess tax in future years whereby foreign income on earnings generated by WPM’s international subsidiaries will not be subject to tax in Canada.
Wheaton Precious Metals |
CRAziness averted |
Legal dispute with CRA settled |
Metals & mining |
18 December 2018 |
Share price performance
Business description
Next events
Analyst
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On 13 December, Wheaton Precious Metals (WPM) announced it had reached a ‘principled settlement’ for its tax dispute with the Canada Revenue Agency (CRA). Whereas the CRA had been seeking at least US$265m from WPM in taxes, penalties and interest in relation to its reassessment for the 2005–10 tax years with subsequent years left open to similar re-assessment, under the terms of the settlement WPM will actually pay the CRA cash taxes of US$5m for the 2011–17 tax years, US$15m in deferred tax and US$3–4m in interest. More importantly, the settlement creates a framework for both WPM and the CRA to assess tax in future years whereby foreign income on earnings generated by WPM’s international subsidiaries will not be subject to tax in Canada.
Year end |
Revenue (US$m) |
PBT* |
EPS* |
DPS |
P/E |
Yield |
12/16 |
891.6 |
269.8 |
62 |
21 |
30.5 |
1.1 |
12/17 |
843.2 |
277.4 |
63 |
33 |
30.1 |
1.7 |
12/18e |
792.8 |
200.4 |
40 |
34 |
46.9 |
1.8 |
12/19e |
844.6 |
208.8 |
47 |
32 |
40.4 |
1.7 |
Note: *PBT and EPS are normalised, excluding amortisation of acquired intangibles, exceptional items and share-based payments.
‘Exceptional’ US$30m effect on Q418/FY18 earnings
The above taxes and interest are expected to be accounted for in WPM’s Q418 results and are now included in our ‘current’ Q418 and FY18 forecasts. However, readers should note that nothing else has changed in our forecasts and that, inasmuch as these effects may be considered one off or exceptional, our ‘previous’ forecasts (see Exhibit 1) effectively represent a valid representation of ‘normalised’ earnings, whereas our ‘current’ forecast effectively represents forecast, as reported, headline earnings excluding impairments (ie the gain relating to the Primero stream renegotiation, which is included in Exhibit 4).
Future effect c US$1m in additional Canadian tax pa
Using FY17 as a proxy for a typical year, WPM estimates the settlement will result in WPM’s recording an additional US$3–4m in income subject to Canadian income tax, resulting in an additional tax charge of c US$1m, per year.
Valuation: C$42.77 in FY20
Assuming no material purchases of additional streams (which we think unlikely), we now forecast a value per share for WPM of US$31.95, or C$42.77 in FY20 at average precious metals prices of US$25.95/oz Ag and US$1,482/oz Au (vs US$32.48, or C$42.97, previously). This valuation excludes the value of 20.9m shares in First Majestic held by WPM, with an immediate value of C$150.4m, or US$0.27 per WPM share. In the meantime, WPM’s shares are trading on near-term financial ratios that are cheaper than those of its royalty/streaming ‘peers’ in at least 70% of financial measures considered in Exhibit 3 (see page 5), and the averages of the miners themselves in at least seven out of 12 of the same measures, despite being associated with materially less operating and cost risk.
WPM reaches principled settlement with CRA
Principles
On 13 December, WPM announced it had reached a ‘principled settlement’ with the CRA, which provides for a final resolution in relation to the CRA’s reassessment of WPM’s tax returns for the period 2005–10 and, in particular, its attempt to re-characterise income earned by WPM’s foreign subsidiaries ‘such that the income of Silver Wheaton [sic] subject to tax in Canada should be increased by an amount equal to substantially all of the income earned outside of Canada by the company’s foreign subsidiaries for the 2005–2010 taxation years’.
At the time of our last detailed note on the subject (Silver Wheaton, Q415e results, Cotabambas analysis and CRA, published on 15 February 2016), the CRA was claiming at least US$265m from WPM in taxes, penalties and interest in relation to its reassessment for the 2005–10 tax years, with the status of subsequent years left ‘open’ or ‘under audit’ with regard to the potential for similar reassessments.
In the event, WPM reached an agreement with the CRA whereby:
■
Foreign income on earnings generated by WPM’s overseas subsidiaries will not be re-characterised for the years 2005–10 and will therefore not be subject to Canadian tax.
■
The transfer pricing penalties in the reassessments for 2005–10 made by the CRA will be reversed and interest claimed adjusted accordingly (subject to some minor adjustments).
■
The transfer pricing principles established between WPM and the CRA for the years 2005–10 will also apply to all taxation years after 2010 and into the future.
In compensation, the service fee charged by WPM to Wheaton International will be adjusted to:
■
include capital-raising costs associated with Wheaton for the purposes of funding streaming transactions entered into by Wheaton International; and
■
increase the mark-up applied to Wheaton’s cost of providing services to Wheaton International, including capital raising costs, from the current 20% to 30%.
Practice
From a practical perspective, WPM estimates the effects of the effects of the settlement to be as follows:
■
Zero cash taxes for the period 2005–10, but perhaps a small interest charge.
■
Cash taxes of c US$5m payable for the period 2011–17.
■
An additional US$3–4m in interest charges for all past tax years, 2005–17, such that the overall cash outlay in direct relation to the dispute is less than US$10m.
■
US$15m in deferred taxes recognised in WPM’s income statement relating to capital raising costs, offset by a deferred tax recovery in its statement of equity.
■
An implied additional US$6–7m in Q418 relating to legal costs, such that the total effect on Q4 profit after tax is US$30m.
■
An estimate that the changes for a typical WPM year in the future (based on using FY17 as a proxy) will result in an additional US$3–4m in income subject to Canadian income tax, resulting in an additional tax charge of c US$1m per year.
Mechanics
From a mechanical perspective, WPM expects to:
■
receive a revised notice of reassessment for the 2005–10 tax years
■
re-file its returns for subsequent years on the new basis for the 2011–17 tax years
■
pay any additional taxes owing under the settlement
■
then receive notices of reassessment relating to the interest charges on the additional taxes relating to the 2011-17 tax years
Updated Q418 and FY18
All of the above are expected to be accounted for in WPM’s Q418 results and are now included in our ‘current’ Q418 and FY18 forecasts. However, nothing else has changed with respect to our forecasts other than the effects of the settlement between WPM and the CRA. Inasmuch as these effects may be considered one-off, or exceptional, however, our ‘previous’ forecasts effectively represent a valid representation of ‘normalised’ earnings, whereas our ‘current’ forecast effectively represents forecast, as reported, headline earnings excluding impairments (ie the gain relating to the Primero stream renegotiation, which is included in Exhibit 4).
Exhibit 1: Wheaton Precious Metals FY18 forecast, by quarter*
US$000s |
Q118 |
Q218 |
Q318 |
Q418e (previous) |
Q418e (current) |
FY18e |
FY18e |
Silver production (koz) |
7,428 |
6,091 |
5,701 |
5,623 |
5,623 |
24,843 |
24,843 |
Gold production (oz) |
79,657 |
85,292 |
101,552 |
89,516 |
89,516 |
356,017 |
356,017 |
Palladium production (oz) |
0 |
0 |
8,817 |
5,200 |
5,200 |
14,017 |
14,017 |
Silver sales (koz) |
6,343 |
5,972 |
5,018 |
5,627 |
5,627 |
22,960 |
22,960 |
Gold sales (oz) |
69,973 |
87,140 |
89,242 |
89,914 |
89,914 |
336,269 |
336,269 |
Palladium sales (oz) |
0 |
0 |
3,668 |
5,179 |
5,179 |
8,847 |
8,847 |
Avg realised Ag price (US$/oz) |
16.73 |
16.52 |
14.80 |
14.32 |
14.32 |
15.66 |
15.66 |
Avg realised Au price (US$/oz) |
1,330 |
1,305 |
1,210 |
1,213 |
1,213 |
1,261 |
1,261 |
Avg realised Pd price (US$/oz) |
N/A |
N/A |
955 |
1,111 |
1,111 |
1,046 |
1,046 |
Avg Ag cash cost (US$/oz) |
4.49 |
4.54 |
5.04 |
4.88 |
4.88 |
4.72 |
4.72 |
Avg Au cash cost (US$/oz) |
399 |
407 |
418 |
415 |
415 |
410 |
410 |
Avg Pd cash cost (US$/oz) |
N/A |
N/A |
169 |
200 |
200 |
187 |
187 |
Sales |
199,252 |
212,400 |
185,769 |
195,403 |
195,403 |
792,824 |
792,824 |
Cost of sales |
|||||||
Cost of sales, excluding depletion |
56,414 |
62,580 |
63,202 |
65,809 |
65,809 |
248,005 |
248,005 |
Depletion |
57,265 |
62,494 |
64,684 |
71,579 |
71,579 |
256,022 |
256,022 |
Total cost of sales |
113,679 |
125,074 |
127,886 |
137,388 |
137,388 |
504,027 |
504,027 |
Earnings from operations |
85,573 |
87,326 |
57,883 |
58,015 |
58,015 |
288,797 |
288,797 |
Expenses and other income |
|||||||
- General and administrative** |
9,757 |
11,972 |
8,779 |
8,750 |
15,250 |
39,258 |
45,758 |
- Foreign exchange (gain)/loss |
(170) |
26 |
0 |
(144) |
(144) |
||
- Net interest paid/(received) |
5,591 |
5,659 |
12,877 |
14,970 |
18,470 |
39,097 |
42,597 |
- Other (income)/expense |
2,757 |
466 |
1,301 |
4,524 |
4,524 |
||
Total expenses and other income |
17,935 |
18,123 |
22,957 |
23,720 |
33,720 |
82,735 |
92,735 |
Earnings before income taxes |
67,638 |
69,203 |
34,926 |
34,295 |
24,295 |
206,062 |
196,062 |
Income tax expense/(recovery) |
(485) |
(3,224) |
905 |
20,000 |
-2,804 |
17,196 |
|
Marginal tax rate (%) |
(0.7) |
(4.7) |
2.6 |
0.0 |
82.3 |
(1.4) |
8.8 |
Net earnings |
68,123 |
72,427 |
34,021 |
34,295 |
4,295 |
208,866 |
178,866 |
Ave. no. shares in issue (000s) |
442,728 |
443,191 |
443,634 |
443,634 |
443,634 |
443,297 |
443,297 |
Basic EPS (US$) |
0.15 |
0.16 |
0.08 |
0.08 |
0.01 |
0.47 |
0.40 |
Diluted EPS (US$) |
0.15 |
0.16 |
0.08 |
0.08 |
0.01 |
0.47 |
0.40 |
DPS (US$) |
0.09 |
0.09 |
0.09 |
0.07 |
0.07 |
0.34 |
0.34 |
Source: Wheaton Precious Metals, Edison Investment Research. Note: *Excluding impairments and exceptional gains. **Forecasts exclude stock-based compensation costs. Totals may not add up owing to rounding.
Note that these forecasts compare with a consensus forecast of US$0.481/share (source: Bloomberg 17 December), within a range of US$0.41–0.52 per share.
Our forecasts for FY19 (see Exhibits 3 and 4), which are based on precious metals’ prices of US$1,263/oz and US$15.30/oz for gold and silver, respectively, compare with a consensus forecast of US$0.525/share (source: Bloomberg 17 December) within a range of US$0.37–0.69 per share.
Valuation
Excluding FY04 (part-year), WPM’s shares have historically traded on a contemporary average P/E multiple of 27.6x current year basic underlying EPS, ie excluding impairments (cf 40.2x Edison underlying earnings with the settlement’s taxes, interest and legal fees considered as ‘exceptional’ or 39.4x Bloomberg consensus FY18e, currently – see Exhibit 3).
|
Exhibit 2: WPM’s historical current year P/E multiples |
|
|
Source: Edison Investment Research |
Applying this multiple to our updated EPS forecast of US$1.16 in FY20 (cf US$1.18 previously to reflect an assumed additional US$1m in Canadian tax in the intervening years) implies a potential value per share for WPM of US$31.95, or C$42.77 in that year (vs US$32.48, or C$42.97 previously). Note this valuation excludes the value of 20.9m shares in First Majestic held by WPM, with an immediate value of C$150.4m, or US$0.27 per WPM share (priced as at 15 November).
In the meantime, from a relative perspective, it is notable that WPM is cheaper than its royalty/streaming ‘peers’ in at least 70% (17 out of 24) of the valuation measures used in Exhibit 3 and on multiples that are cheaper than the averages of the miners themselves in seven out of 12 of the same valuation measures (effectively irrespective of whether Edison or consensus forecasts are used), despite being associated with materially less operational and cost risk (as WPM’s costs are contractually predetermined).
Exhibit 3: WPM comparative valuation vs a sample of operating and royalty/streaming companies
P/E (x) |
Yield (%) |
P/CF (x) |
||||
Year 1 |
Year 2 |
Year 1 |
Year 2 |
Year 1 |
Year 2 |
|
Royalty companies |
||||||
Franco-Nevada |
61.8 |
56.1 |
1.3 |
1.4 |
28.1 |
24.9 |
Royal Gold |
47.9 |
34.8 |
1.3 |
1.4 |
17.4 |
15.5 |
Sandstorm Gold |
75.0 |
47.3 |
0.0 |
0.0 |
16.4 |
14.6 |
Osisko |
102.9 |
63.6 |
1.9 |
1.9 |
19.3 |
16.9 |
Average |
71.9 |
50.5 |
1.1 |
1.2 |
20.3 |
18.0 |
WPM (Edison forecasts) |
40.2 |
39.0 |
1.8 |
1.8 |
17.0 |
17.0 |
WPM (consensus) |
39.4 |
36.1 |
1.9 |
1.7 |
17.6 |
16.2 |
Gold producers |
||||||
Barrick |
33.1 |
29.6 |
1.0 |
1.0 |
7.5 |
8.3 |
Newmont |
27.5 |
27.3 |
1.7 |
1.6 |
9.1 |
8.6 |
Goldcorp |
152.0 |
24.4 |
0.9 |
0.9 |
7.8 |
5.3 |
Newcrest |
23.1 |
17.6 |
1.2 |
1.5 |
9.3 |
8.1 |
Kinross |
36.4 |
29.4 |
0.0 |
0.0 |
4.2 |
3.8 |
Agnico-Eagle |
220.4 |
68.3 |
1.1 |
1.2 |
14.5 |
12.1 |
Eldorado |
N/A |
N/A |
0.3 |
0.5 |
6.0 |
4.0 |
Yamana |
22.3 |
17.1 |
0.9 |
0.9 |
4.0 |
3.7 |
Randgold Resources |
30.7 |
24.8 |
3.2 |
4.1 |
15.1 |
12.2 |
Average |
68.2 |
29.8 |
1.2 |
1.3 |
8.6 |
7.3 |
Silver producers |
||||||
Hecla |
N/A |
328.6 |
0.4 |
0.4 |
7.7 |
6.8 |
Pan American |
31.2 |
23.7 |
0.9 |
1.4 |
11.2 |
8.9 |
Coeur Mining |
N/A |
30.1 |
0.0 |
0.0 |
8.4 |
4.0 |
First Majestic |
N/A |
64.3 |
0.0 |
0.0 |
14.2 |
8.6 |
Hocschild |
78.5 |
33.4 |
1.9 |
2.1 |
4.6 |
5.4 |
Fresnillo |
9.9 |
9.5 |
2.8 |
2.8 |
9.9 |
9.5 |
Average |
39.9 |
81.6 |
1.0 |
1.1 |
9.3 |
7.2 |
Source: Bloomberg, Edison Investment Research. Note: Peers priced on 17 December 2018.
Exhibit 4: Financial summary
US$000s |
2012 |
2013 |
2014 |
2015 |
2016 |
2017 |
2018e |
2019e |
||
Dec |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
IFRS |
||
PROFIT & LOSS |
||||||||||
Revenue |
|
|
849,560 |
706,472 |
620,176 |
648,687 |
891,557 |
843,215 |
792,824 |
844,565 |
Cost of Sales |
(117,489) |
(139,352) |
(151,097) |
(190,214) |
(254,434) |
(243,801) |
(248,005) |
(262,755) |
||
Gross Profit |
732,071 |
567,120 |
469,079 |
458,473 |
637,123 |
599,414 |
544,819 |
581,810 |
||
EBITDA |
|
|
701,232 |
531,812 |
431,219 |
426,236 |
602,684 |
564,741 |
499,061 |
536,052 |
Operating Profit (before amort. and except.) |
600,003 |
387,659 |
271,039 |
227,655 |
293,982 |
302,361 |
243,039 |
259,340 |
||
Intangible Amortisation |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Exceptionals |
0 |
0 |
(68,151) |
(384,922) |
(71,000) |
(228,680) |
245,715 |
0 |
||
Other |
788 |
(11,202) |
(1,830) |
(4,076) |
(4,982) |
8,129 |
(4,380) |
0 |
||
Operating Profit |
600,791 |
376,457 |
201,058 |
(161,343) |
218,000 |
81,810 |
484,374 |
259,340 |
||
Net Interest |
0 |
(6,083) |
(2,277) |
(4,090) |
(24,193) |
(24,993) |
(42,597) |
(50,522) |
||
Profit Before Tax (norm) |
|
|
600,003 |
381,576 |
268,762 |
223,565 |
269,789 |
277,368 |
200,442 |
208,818 |
Profit Before Tax (FRS 3) |
|
|
600,791 |
370,374 |
198,781 |
(165,433) |
193,807 |
56,817 |
441,777 |
208,818 |
Tax |
(14,755) |
5,121 |
1,045 |
3,391 |
1,330 |
886 |
(17,196) |
(1,000) |
||
Profit After Tax (norm) |
586,036 |
375,495 |
267,977 |
222,880 |
266,137 |
286,383 |
178,866 |
207,818 |
||
Profit After Tax (FRS 3) |
586,036 |
375,495 |
199,826 |
(162,042) |
195,137 |
57,703 |
424,581 |
207,818 |
||
Average Number of Shares Outstanding (m) |
353.9 |
355.6 |
359.4 |
395.8 |
430.5 |
442.0 |
443.3 |
443.6 |
||
EPS - normalised (c) |
|
|
166 |
106 |
75 |
53 |
62 |
63 |
40 |
46.8 |
EPS - normalised and fully diluted (c) |
|
165 |
105 |
74 |
53 |
62 |
63 |
40 |
47 |
|
EPS - (IFRS) (c) |
|
|
166 |
106 |
56 |
(-41) |
45 |
13 |
96 |
47 |
Dividend per share (c) |
35 |
45 |
26 |
20 |
21 |
33 |
34 |
32 |
||
Gross Margin (%) |
86.2 |
80.3 |
75.6 |
70.7 |
71.5 |
71.1 |
68.7 |
68.9 |
||
EBITDA Margin (%) |
82.5 |
75.3 |
69.5 |
65.7 |
67.6 |
67.0 |
62.9 |
63.5 |
||
Operating Margin (before GW and except.) (%) |
70.6 |
54.9 |
43.7 |
35.1 |
33.0 |
35.9 |
30.7 |
30.7 |
||
BALANCE SHEET |
||||||||||
Fixed Assets |
|
|
2,403,958 |
4,288,557 |
4,309,270 |
5,526,335 |
6,025,227 |
5,579,898 |
6,215,876 |
6,011,164 |
Intangible Assets |
2,281,234 |
4,242,086 |
4,270,971 |
5,494,244 |
5,948,443 |
5,454,106 |
6,090,084 |
5,885,372 |
||
Tangible Assets |
1,347 |
5,670 |
5,427 |
12,315 |
12,163 |
30,060 |
30,060 |
30,060 |
||
Investments |
121,377 |
40,801 |
32,872 |
19,776 |
64,621 |
95,732 |
95,732 |
95,732 |
||
Current Assets |
|
|
785,379 |
101,287 |
338,493 |
105,876 |
128,092 |
103,415 |
3,596 |
3,830 |
Stocks |
966 |
845 |
26,263 |
1,455 |
1,481 |
1,700 |
1,423 |
1,516 |
||
Debtors |
6,197 |
4,619 |
4,132 |
1,124 |
2,316 |
3,194 |
2,172 |
2,314 |
||
Cash |
778,216 |
95,823 |
308,098 |
103,297 |
124,295 |
98,521 |
0 |
0 |
||
Other |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Current Liabilities |
|
|
(49,458) |
(21,134) |
(16,171) |
(12,568) |
(19,057) |
(12,143) |
(504,256) |
(236,019) |
Creditors |
(20,898) |
(21,134) |
(16,171) |
(12,568) |
(19,057) |
(12,143) |
(24,486) |
(25,941) |
||
Short term borrowings |
(28,560) |
0 |
0 |
0 |
0 |
0 |
(479,770) |
(210,078) |
||
Long Term Liabilities |
|
|
(32,805) |
(1,002,164) |
(1,002,856) |
(1,468,908) |
(1,194,274) |
(771,506) |
(771,506) |
(771,506) |
Long term borrowings |
(21,500) |
(998,136) |
(998,518) |
(1,466,000) |
(1,193,000) |
(770,000) |
(770,000) |
(770,000) |
||
Other long term liabilities |
(11,305) |
(4,028) |
(4,338) |
(2,908) |
(1,274) |
(1,506) |
(1,506) |
(1,506) |
||
Net Assets |
|
|
3,107,074 |
3,366,546 |
3,628,736 |
4,150,735 |
4,939,988 |
4,899,664 |
4,943,710 |
5,007,469 |
CASH FLOW |
||||||||||
Operating Cash Flow |
|
|
720,209 |
540,597 |
434,582 |
435,783 |
608,503 |
564,187 |
508,322 |
537,273 |
Net Interest |
0 |
(6,083) |
(2,277) |
(4,090) |
(24,193) |
(24,993) |
(42,597) |
(50,522) |
||
Tax |
(725) |
(154) |
(204) |
(208) |
28 |
(326) |
(2,196) |
(1,000) |
||
Capex |
(641,976) |
(2,050,681) |
(146,249) |
(1,791,275) |
(805,472) |
(19,633) |
(892,000) |
(72,000) |
||
Acquisitions/disposals |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Financing |
12,919 |
58,004 |
6,819 |
761,824 |
595,140 |
1,236 |
0 |
0 |
||
Dividends |
(123,852) |
(160,013) |
(79,775) |
(68,593) |
(78,708) |
(121,934) |
(149,820) |
(144,059) |
||
Net Cash Flow |
(33,425) |
(1,618,330) |
212,896 |
(666,559) |
295,298 |
398,537 |
(578,291) |
269,692 |
||
Opening net debt/(cash) |
|
|
(761,581) |
(728,156) |
902,313 |
690,420 |
1,362,703 |
1,068,705 |
671,479 |
1,249,770 |
HP finance leases initiated |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
0 |
||
Other |
0 |
(12,139) |
(1,003) |
(5,724) |
(1,300) |
(1,311) |
0 |
0 |
||
Closing net debt/(cash) |
|
|
(728,156) |
902,313 |
690,420 |
1,362,703 |
1,068,705 |
671,479 |
1,249,770 |
980,078 |
Source: Company sources, Edison Investment Research
|
|
Aberdeen Asian Income Fund (AAIF) aims to provide its investors with an attractive income, plus the potential for capital growth, by investing across the Asia Pacific region. The fund’s target c 4.5% yield is fully funded from portfolio income. AAIF’s investment process is bottom-up, with a strong focus on finding quality companies at attractive valuations. The managers meet all the companies they hold at least twice a year, and place great emphasis on understanding each company’s balance sheet and growth drivers to ensure everything in the c 40–70 stock portfolio is worthy of its place. AAIF’s quality and income focus means it has a natural bias to some more defensive areas, which could stand it in good stead in the current bout of market volatility. Its managers note that valuations in Asia are low in relation to Europe, North America and their own historical averages, and some individual stocks are very inexpensive versus history.
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