TORONTO (miningweekly.com) – Primero Mining, which abandoned a merger with Toronto- and New York-listed peer Northgate Minerals, in August, after AuRico bid more for the company, said on Tuesday it started formal proceedings seeking a more favourable tax rate for its Mexican San Dimas mine.
UBS said in a research note a favourable ruling on the matter, though in no way guaranteed, could lift Primero's 2013 earnings by 83%, using current spot prices.
The Toronto-based firm sells the bulk of San Dimas’ silver production to Silver Wheaton at around $4/oz, but pays tax on this as though it was receiving spot silver prices, which stood at $31.82/oz on Tuesday, cutting into profits.
The advanced tax ruling that Primero is seeking would see it taxed on realised silver prices, rather than spot, the company said, adding that it expected a decision in 12 to 14 months time.
Primero said there had been intensified scrutiny of so-called transfer pricing in recent years and that countries including Mexico allowed companies to reduce risks by entering into an advance pricing agreement, designed to resolve disputes.
Transfer prices are what companies charge for goods or services they trade with subsidiaries in foreign markets.
If Primero were to successfully secure an advanced pricing agreement, the Mexican revenue authorities would allow it to pay tax on the metal it sells to Silver Wheaton at a rate the government considers “appropriate”.
The company said three professional advisors had given it a 70%-plus chance of success in reaching an advanced pricing agreement.
“Although these opinions are encouraging, there remains uncertainty at this time about the likelihood of a successful outcome,” Primero added in a statement.
CEO Joseph Conway said the move could provide a “permanent solution” to the company’s tax issues in Mexico.
“Should we be successful, we believe the value of the company will be increased dramatically as will the returns to our shareholders,” he commented.
Primero inherited the Silver Wheaton streaming agreement from when it bought San Dimas from Goldcorp, its 40% shareholder, last year.
In August, when silver was trading at around $40/oz, Conway said Primero could benefit to the tune of $35-million to $40-million a year if it was taxed on realised price as opposed to spot.
UBS analyst Dan Rollins said a positive tax ruling would lift Primero's earnings significantly, and could increase the firm's net asset value by 132%, from $5.40/share to $12.54/share, using current spot metal prices.
The following month, the company said its 2011 gold output would be as much as 15% less than it previously forecast because of a strike at San Dimas, but its silver production guidance remained the same at 4.5-million to 5-million ounces.
Primero last week announced it had appointed former Iamgold Americas operations VP Renaud Adams as COO.
The company’s share price slipped 1% in Toronto to end the day at C$2.87.