TD UpdatePrimero Mining Corp. (P-T) C$1.98 Tax Issue Overshadows Solid Operating Results at San Dimas
Event Primero reported Q4 financials. Impact: NEUTRAL With production, operating costs, and 2016 guidance all released earlier, there were no surprises in this release. Adjusted EPS of $0.00 was in line with our estimate of $0.00 but above consensus loss of $0.02. CFPS (before w/c changes) of $0.13 was below our estimate of $0.15 but in line with consensus of $0.13, reflecting higher cash taxes.
No updates on Mexican tax dispute:
The San Dimas mine continues to operate uninterrupted. Primero and its legal advisors continue to review the claim, believe that it is without merit, and intend to vigorously defend the validity of the APA, which the tax authorities themselves agreed to in 2012. Based on our estimates and the worst-case scenario that the courts rule against Primero and taxes are recalculated based on spot silver prices for the period of 2010 to 2014, we estimate a potential liability of $196mm. However, we continue to believe that a retroactive reversal to the government’s own APA is a highly unlikely scenario and are more concerned with the go-forward tax ruling.
Impairments: Total non-cash charges of $104mm were taken against the Black Fox Complex ($82.0mm related to lower metal prices, mine plan changes, and the decision to delay Grey Fox) and Cerro del Gallo project ($22.0mm related to lower metal prices and further project deferral).
We have updated our model to include the Q4 results and 2016 guidance; our NAV declines slightly to C$4.61/share from C$4.73/share earlier. Our NAV under the worst-case scenario that the courts rule against Primero on the tax issue is C$3.14/share.
TD Investment Conclusion Continued strong performance from San Dimas is being overshadowed by the tax issue, which now seems to dominate trading in the stock. In addition, we believe that any resolution to the ongoing tax negotiations would represent upside to the current share price as we believe that a worse than the worstcase scenario is already priced in the stock. We are maintaining our BUY rating, but lowering our target price to C$4.00 from C$4.25 earlier, reflecting minor model revisions.