The problems facing First Uranium Corp. have been well documented. Unfortunately, they are not contained to just that company. Gold Wheaton Gold Corp. owns two gold streams from First Uranium's mines, so it is also vulnerable to First Uranium's reduced production and liquidity issues.
Adam Schatzker, an analyst at RBC Capital Markets, pointed out that two of Gold Wheaton's three gold streams are from First Uranium operations, and those account for about 47% of Gold Wheaton's mining asset value. Thus, First Uranium's problems create "significant risks" to Gold Wheaton shareholders, he wrote in a research note.
In a worst-case scenario, Mr. Schatzker said that First Uranium could face insolvency. But that is not the most likely outcome. One of the company's problems is that it could face a $42-million penalty payment to Gold Wheaton, but Mr. Schatzker expects the two sides to reach some sort of compromise that will not cause further immediate trouble for First Uranium.
"It is not in [Gold Wheaton's] interest to see [First Uranium] driven to insolvency," he wrote.
He added that First Uranium's crisis highlight the risks that Gold Wheaton shareholders face when so much of the company's value is tied up in just one other entity. As a result of this situation, he has ascribed a multiple of just 1.0 times net asset value to Gold Wheaton, which is very low compared to other royalty companies. He lowered his target price to 30¢ a share from 35¢, but maintained a "sector perform" rating on the stock.
"If [Gold Wheaton] is able to make new, high quality acquisitions that diversify its risks, we would likely use higher multiples," Mr. Schatzker wrote.