Wheaton Precious Metals Corp. (WPM:TSX; WPM:NYSE, 21.90) has agreed to a revised stream arrangement on the San Dimas mine, as the near-bankrupt operator, Primero Mining Corp. (P:TSX; PPP:NYSE), is acquired by First Majestic Silver Corp. (FR:TSX; AG:NYSE; FMV:FSE). 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 NAV to 5%, however.
Next hurdle: Tax dispute
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 in back taxes over Wheaton's offshore streams, prior to 2010. The window for a settlement is closing as the dispute moves to court. 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.
New projects soon
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 Gold Corp. (ABX:TSX; ABX:NYSE) toward 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.
Progress on two fronts
Nevsun Resources Ltd. (NSU:TSX; NSU:NYSE.MKT; US$2.39) has released news on both its operating mine in Eritrea and its development project in Serbia. At Bisha, mining is transitioning. Going forward, the mine is zinc-dominant, and will have to move more material to meet production, given the increased strip ratio. The quarter just finished was successful in that regard. In addition, the recoveries seem to have stabilized.
At Timok, strong drill results from both the Upper and Lower zones (the latter in joint venture with Freeport-McMoRan Inc. [FCX:NYSE]) have been released confirming the high grade and continuity of the deposit. This quarter, Nevsun expects to release an updated inferred resource and then a prefeasibility study. The latter, in particular, will be closely watched and could be a catalyst for the share price.
Separately, a British Columbian court ruled that an NGO lawsuit against the company over forced labor claims can continue, striking a blow to the company. Of course, the company did not release this significant item of news, though it was in the newspapers.
We are holding.
New mine and improved balance sheet
Yamana Gold Inc. (YRI:TSX; AUY:NYSE; YAU:LSE; US$3.44) is on track with the construction of its next major mine, Cerro Moro, on schedule and on budget, with commercial production expected before mid-year. Cerro Morro will increase the company's cash flow by 25%.
The company announced that production and costs for 2017 were slightly better than guidance. And it has taken steps to improve its balance sheet, by selling its share of the exploration ground around Canadian Malartic mine for $163 million; issuing senior notes for $300 million; and finally selling forward at a discount some of its copper for $125 million. All these moves improve the battered balance sheet.By addressing the issues that have hurt Yamana, and with a new mine ahead, the company could be turning around. However, the stock no longer trades at a discount to its peers, so we are holding.
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Adrian Day, London-born and a graduate of the London School of Economics, heads the money management firm Adrian Day Asset Management, where he manages discretionary accounts in both global and resource areas. Day is also sub-adviser to the EuroPacific Gold Fund (EPGFX). His latest book is "Investing in Resources: How to Profit from the Outsized Potential and Avoid the Risks."
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1) Adrian Day: I, or members of my immediate household or family, own shares of the following companies mentioned in this article: Nevsun Resources. I personally am, or members of my immediate household or family are, paid by the following companies mentioned in this article: None. My company has a financial relationship with the following companies mentioned in this article: None. Funds controlled by Adrian Day Asset Management hold shares of the following companies mentioned in this article: Wheaton Precious Metals, Nevsun Resources, Yamana Gold. I determined which companies would be included in this article based on my research and understanding of the sector.
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