Gold stocks have outperformed the market so far this year primarily due to the rally in gold prices. Gold and silver miner Silver Wheaton (SLW, Financial) is no exception to the trend as the stock is up almost 40% year to date.
The company’s business model is to use money and short-term financing to create new running deals. It then subjects shares to pay down debt it took on to support a deal. This is the reason why Silver Wheaton has been able to increase production during the slump.
Silver Wheaton has a compelling advantage over struggling miners such as Vale (VALE, Financial) and Glencore (GLEN, Financial) that badly require cash to survive in the weak market. As a matter of fact, Silver Wheaton provided those two stressed miners with approximately $1.7 billion last year.
After going through the deal with Vale for $800 million, the company handed out an equal dollar amount of new shares. Due to this, the company was able to pay down the short-term financing it used to account the deal. On the other hand, just a few months before the Glencore deal, the company declared plans to purchase back its own stock for the reason that the price of its shares has been at comparatively low levels.
Silver Wheaton’s condition was much better after the deals, and at present level, the company does not seem to be at any threat of going belly up, but its capability to do deals could be restricted if it does not have as much admittance to capital markets as compared to the past. This can also affect the company’s production growth.
Canada revenue problem
The company was in a dispute with the Canada Revenue Agency over claims of inappropriate handling of its taxes. Last summer, the CRA recommended that reviews of past tax years would be essential, and it later enforced a notice of reassessment appealing tax penalties, liability and interest of around C$350 million.
The company said that it will fight against the tax and has confidence that it does not owe anything. Bearing in mind the timespan of court proceedings, however, it could clamp back the stock during 2016.
Conclusion
Given that the stock has rallied hard this year, I think investors would be better off taking profits off the table. At current levels, the upside potential of the stock is limited, which is why I think it is a sell.
Disclosure: I don't hold a position in any of the stocks mentioned in the article.
