WPM hopeful of reaching CRA settlement deal; progress on new $500m+ contracts

VANCOUVER (miningweekly.com) – The world’s largest precious metals streaming firm Wheaton Precious Metals (WPM) has reached out to the Canadian Revenue Agency (CRA) to try and reach a settlement, but to no avail yet, president and CEO Randy Smallwood told Mining Weekly Online in an interview on Monday.

The Vancouver-based miner has been locked in a bitter feud with the CRA regarding income earned by the company’s offshore subsidiaries, where it takes delivery of its precious metals products. The CRA argues that all of the income generated by its offshore entities are taxable under Canadian law, and WPM is defending vigorously against the agency’s assertions.

“No amounts have been recorded for any potential liability arising from this matter,” Smallwood stresses, adding that he believes the company has filed all its tax returns and paid applicable taxes in compliance with Canadian tax law.

“We’ve reached out to them to try and reach a settlement. We still do not believe that there is the slightest thing they can hang a case on against us. It takes two to dance, and while they are not dancing at the moment, it does not mean that we couldn't arrive at a settled agreement before our 2019 court date arrives,” he says.

The company has pioneered the streaming model, whereby it provides upfront capital to mine developers in return for a portion of future silver or gold production, which would usually be a secondary product stream. This gives mine developers a more competitive avenue of project financing, which avoids dilution to shareholders.

Smallwood notes that WPM is eager to move down the settlement path, but until then, the company is preparing for trial in the Canadian Tax Court, where a trial date has been set down for two months starting mid-September 2019. “I look forward to standing up in court and defending our position, because we have clearly followed the law. However, we remain hopeful that there will be some settlement discussions before then,” Smallwood states.

Critically, Smallwood points out that while there are very few similarities between its dispute with the CRA and that of Cameco, he does think that should a verdict be delivered on the Cameco case, it could potentially help its own dispute with the domestic tax gatherer. The 2016 victory of Canadian oil sands operator Suncor, which won its case against the CRA, reinforces the possibility that the CRA can be beaten.

In September 2015, WPM received notice that the CRA has reassessed the company’s 2005 to 2010 taxation years and that it is seeking to increase Wheaton’s income subject to tax in Canada by C$715-million. This could potentially make the company liable for an additional income tax of C$201-million. An appeal in the Tax Court of Canada commenced on January 8, 2016.

Further, the CRA has started an audit on the 2011 to 2015 tax years, seeking to add about C$1.6-billion to its taxable income, resulting in potential added tax charges of C$435-million to its account.

The potential exists for the CRA to also want to reassess the 2016 and 2017 tax years, which could add further to the company’s tax burden.

Since the CRA first introduced transfer pricing rules in 1998 to counteract base erosion and profit shifting, various Canadian resource firms have been singled out for their purported aggressive tax planning.

Among the high-profile miners that have filed pleadings with the Canadian Tax Court are Cameco, WPM, Burlington Resources, Conoco Funding Company and Suncor Energy. Cameco’s case is the only one that has started hearings.

‘BUSY AS EVER’
Meanwhile, Smallwood revealed that WPM is working on three transactions over the $500-million-mark, that management hopes to close over the next several months.

“We’ve got the inside track on at least one of them – it’s now a matter of getting things done and it’s never over until we get the signatures on paper, but our corporate development team is as busy as ever pursing new deals.”

He notes that while the company is “more than happy” with any deal of $100-million or higher – as anything lower than that will find it tough to move the needle forward for the company – there seems to be cut-throat competition in that smaller deal segment up to $200-million. For that reason, WPM is focused on anything higher than about $200-million.

Of these three deals, some are already in operation and others are at the development stage, he notes without tipping his hand, saying only “we think that they are good quality assets and will be great additions to our portfolio”.

Smallwood points out that one of the key advantages of streaming partnerships, as opposed to a royalty agreement, is that it is a partnership between two companies, the aim from start to end being to deliver a win-win situation for both sides. “If there are improvements to be made to the contract to generate more value for us, we will entertain changes. If there are any updates we can make to a contract to incentivise the partner to make improvements, we are all for it,” he says.

One of the best examples of this principle in action is with Eldorado Gold, in Greece, and their Stratoni lead/silver mine. Since gold is Eldorado’s main focus, the mine was supposed to shut down a year ago on the back of depletion. Smallwood notes that even when WPM first signed the streaming deal on the mine, it was a small deal, only expected to last about six or seven years.

However, WPM approached Eldorado to see if they could get them to do some exploration to see if they could keep the mine going. “We wanted to see if we could incentivise Eldorado to undertake some more exploration, while not taking on additional risk.”

WPM offered that for every predetermined amount of drilling undertaken, to increase the production payment on silver, and so, it stimulated Eldorado to undertake a drill campaign that to date has succeeded in adding about four to five years of additional reserves. “Yes, we now pay higher production payments, but it is on production we were not even expecting,” he points out.

WPM had done a similar thing with Alexco Resource at the Keno Hill project, in Canada’s Yukon Territory, where it incentivised the company with silver spot price-linked production payments that decrease with lower mill silver head grades and lower silver prices, and increase with higher mill silver head grades and higher silver prices, as a way to incentivise the miner to pursue more silver mineralisation.

The same happened at First Majestic Silver’s new San Dimas mine, in Mexico, where the renegotiated streaming agreement covers 25% silver and 25% gold, whereas the previous agreement covered only silver. “It allows our partners to look at more holistically at their mining operations,” he says.

CONTRACT FLEXIBILITY
Smallwood points out that the recent renegotiation of the San Dimas streaming agreement with new owner First Majestic Silver allows for greater flexibility on both sides of the equation, as it frees the miner up to perhaps pursue other gold-bearing veins that it might otherwise have left because of its focus on silver.

“In the case of San Dimas, it is such a strong asset, that we can cover off weaknesses in other assets with this one asset. We’ve maintained a minimum budget of a million ounces a quarter out of the mine and while First Majestic has been running the site since January, they’ve already had great success, producing 1.6-million ounces of silver to our credit, which is a 60% increase in the first quarter.

“I underscore that I really believe First Majestic will have great success at San Dimas. We are now their largest shareholder and I think we’re going to be happy shareholders. It’s a mine that suits their experience,” Smallwood says.

“We don’t just sit back and count our money. We actively administer a portfolio that we are paid to manage,” he quips.

WPM last week reported a 14.2% year-on-year rise in first-quarter headline earnings to $69.95-million, or $0.16 a share. Revenue for the three-month period rose 0.7% to $199.25-million, as silver sales rose 21.4% to 6.34-million ounces, but gold sales fell 20.8% to 69 973 oz.