TD UpdatePrimero Mining Corp. (P-T) C$2.67 Mexican Tax Authorities Backtrack on Tax Agreement Event Primero announced this morning that it has received a legal claim from the Mexican tax authorities which seeks to nullify the Advance Pricing Agreement (APA) covering taxes on silver sales at the San Dimas mine in Mexico.
Impact – Potentially NEGATIVE As a reminder, the APA allows Primero to pay tax on its silver sales based on the realized price it receives (net of discounted sales to Silver Wheaton), which is a fraction of the spot silver price. For reference, Primero's realized silver price averaged $7.46 in 2014, $6.97 in 2013 and $7.52 in 2012.
The worst case impact would be paying the full 30% tax rate on the difference versus spot. Primero and its legal advisors are currently reviewing the claim, believe it is without merit and intend to vigorously defend the validity of the APA, which the tax authorities themselves agreed to in 2012.
With the agreement having expired in 2014, the company is currently in negotiations with the tax authorities to validate the tax regime going forward (Primero’s view being the APA regime would remain in place). They believe that this move by the tax authorities is a negotiating tactic (which if seen through could be in the courts for years). Primero's Mexican legal counsel indicated that the Mexican Supreme Court recently concluded that there can be no retroactive consequences or payments levied against a taxpayer that obtained a tax ruling in good faith. Also the current legal claim by SAT does not indicate an alternative tax structure.
At this time, we have made no changes to our estimates (they will continue to pay taxes under the current structure). However, we estimate that under a worst case scenario of paying taxes at full spot silver going forward, our NAV would decline by 26% to C$3.50/sh, 2017 CFPS would decline by $0.14/sh and FCF would decline by ~$23mm.
TD Investment Conclusion The market has clearly built the worst case scenario in immediately with stock down ~25%. We are lowering our target price to C$4.25 (from C$6.50) based on the same NAV multiple and our worst case NAV estimate. We believe that any resolution to the ongoing tax negotiations better than this case would represent upside to the current share price