The Taxman vs. Friends and ExcellonIf a debenture holder is paid out in cash for whatever number of oz of silver, the watchful Taxman will deem that as a sale and trigger Tax on the capital gain. For those who want to hold silver for the longer term, it will be an immediately undesirable consequence. No one should be surprised that some major holders in that position would have happily elected or even initiated the extension so they can receive the full amount in silver and reap the benefit of tax deferral.
What should the company do if it was a proposition from the debenture holders?
Firstly, what has the company got to lose and gain? It has to pay for the custodian fees and storages charges a little longer, but on the other hand, its cash (millions) remains in the bank and keep collecting interest.
Then what have the debenture holders done for the company? Their funds helped launch the Platosa mine, right? But before that occurred, Excellon was in a takeover bid on Destorbelle Mines Ltd - a part holder of the company’s present properties. To help close the deal in time, already on an extension of a previous deadline, a major subscriber to the debenture (Top Gold A.G) made an advance payment of US$3.5mln two months ahead of time to Excellon.
In regard to the FRIENDS and RELATIVES theory, the ENRICHMENT part was dead wrong and rotten (as elaborated in previous posts 6/27/2007, 6/13/2007), however that event indicated indeed a friendly and helpful hand lent to the company at a needy time. Now if those folks behind that subscription, possibly others as well, prefer a delay in repayment of our debt so they can receive the full amount in silver, does it make any sense not to reciprocate and accommodate such desire with no or insignificant expense to the company?
Let’s now go over to the company side. Alas…. there is another watchful Taxman standing by! For every oz of silver the company sent to the trust, this Taxman deemed that as a sale at fair market value although not a penny was received of course from the trust. Since the company is already operating in profitability, we can bet that tax bill is going to be hefty.
How to reduce that tax burden? We are probably out of luck as far as paying back the principle portion of the debenture is concerned, but anything above and beyond that may be deemed as expense and qualify for tax deduction.
If we look again at the debenture structure, it was effectively a forward sale of silver with a money back guarantee to be settled in 3 years time. The sale price was US$5.5/oz and the cost would be the fair market values assessed upon delivery to the trust from time to time. Let’s say if the average works out to be US$10.5/oz, then we have a loss of US$5.0 for each oz sold in 2004 and to be delivered in 2007. This will form the basis for tax deduction claims.
Whatever case the company and its tax advisors want to pursue should be of little concern to us. We only need to recognize that there are significant tax implications at maturity of the debenture and the company needs to take measures to protect itself from any avoidable tax burden or recapture those taxes if already paid.
Soon after the announcement of first debenture extension, it was cited on this board that the company offered tax issue as reason for the extension. Then came the second extension as announced in the August 31 NR – a puzzlement perhaps to some, but it also shed more light on the tax implication. The company said it had intended to have its Mexican subsidiary assume the Debenture obligation at its onset but wasn’t able to do so until now. Why did they intended to do so and finally did it at such a late stage?
Let’s see who is on the frontline facing the forces of the Taxman? The Mexican sub is the one that has been mining, selling and sending silver to the trust. It is also obviously the one that has to declare profits (both virtual and real in the millions) and pay taxes first, isn’t it?
Using the $5/oz estimated figure, the total loss incurred at maturity will be $9 mln ($5/oz x1.8 mln oz), and the same eligible for tax deduction. We want to avoid paying taxes on something like $9 mln or recapture them (if already paid) as soon as possible, don’t we? Whatever the case may be, tax advantage is now realizable by having the debenture obligation and its tax reduction value transferred to the subsidiary. It is worth the wait, isn’t it?
Referencing the 2007 presentation - Ag production: Avg 247,000oz/month; Ag in trust: 1.51mln oz on May 10, 2007, silver went to the trust at over 120,000 oz/month meaning at that rate, the debenture should have been fully funded well before Aug 31 (end of first extension).
So the pieces are now in place to explain the company’s acts: 1st extension due to shortage of ounces + tax purposes; 2nd extension for tax purpose alone. There have been no underhanded dealings to confer undue favours to anybody. The Friends and Relatives Enrichment scheme was just an invention based on a nonexistent “original term” invented by the theorists and suspicionists.
While no one can read others’ mind in terms of their honesty and other faculties, we can certainly assess them from their past acts. They have built a profitable company with huge exploration potential literally from the ground up through arrangements cautiously taking care of risks and protecting shareholder value, with excellent vision and execution both on the business side as well as the exploration side bringing us to this point. The series of latest events hints at the setup of a stage whereby the company may be launched into its next phase – in which it will be counted in the major league.
Good luck and happy investing.
KT