Primero/ Silver Wheaton MDA.In February 2016, Primero announced that its Mexican subsidiary received a legal claim from the Mexican tax authorities, Servicio de Administracin Tributaria (“SAT”), seeking to nullify the Advance Pricing Agreement (“2012 APA”) issued by SAT in 2012. The 2012 APA confirmed Primero’s ability to pay taxes in Mexico on the sale of silver on actual prices realized by its Mexican subsidiary in connection with silver sales under the Primero SPA for the tax years 2010 through 2014.
Primero has indicated that if the SAT is successful in retroactively nullifying the 2012 APA, the SAT may seek to audit and reassess Primero’s Mexican subsidiary in respect of sales of silver in connection with the Primero SPA for the tax years 2010 through 2014 and tax Primero on such sales at higher-than-realized prices, as opposed to the actual realized prices set under the Primero SPA.
Primero has disclosed that the amount of additional taxes that could be reassessed by the SAT for the tax years 2010 through 2014 on the silver sold in connection with the Primero SPA cannot be reasonably estimated at this time, but if SAT was successful in retroactively nullifying the 2012 APA and issuing reassessments it would likely have a material adverse effect on Primero’s results of operations, financial condition and cash flows..
SILVER WHEATON 2016 THIRD QUARTER REPORT [6] Primero has disclosed that it intends to vigorously defend the validity of the 2012 APA and that it has filed procedural and substantive responses to the claim. Primero has also disclosed that while the timing of the legal proceeding initiated by the SAT is uncertain, Primero understands that it will take at least two years for a final decision to be rendered. Further, Primero has indicated that it has until the end of 2016 to file an application for a renewed Advanced Pricing Agreement in respect of tax years 2015 though 2019.
In light of the legal challenge by the SAT to nullify the 2012 APA, Primero has indicated that it believes the SAT is unlikely to agree to an Advance Pricing Agreement for the tax years 2015 through 2019 tax years on terms similar to the 2012 APA. For the 2015 tax year and the first six months of 2016, Primero has confirmed that it continued to record its revenue for the purposes of Mexican tax accounting in a manner consistent with the 2012 APA. To the extent the SAT determines that the appropriate price to tax sales under the Primero SPA is significantly different from the actual realized prices thereunder, such determination is likely to have a material adverse effect on Primero’s business, financial condition and results of operations.
In the event that Primero is not able to defend the validity of the 2012 APA, is unable to pay taxes in Mexico based on realized silver prices or the SAT proceedings or actions otherwise have an adverse impact on the business, financial condition or results of operation of Primero, then, in Silver Wheaton’s opinion, Primero may (i) be unable to deliver some or all of the silver ounces due under the Primero SPA; (ii) otherwise default in its obligations under the Primero SPA; (iii) cease operations at San Dimas if it is uneconomic to continue to operate the mine; or (iv) become insolvent.
As a result, any of these or other adverse financial or operational consequences on Primero may also have a material adverse effect on Silver Wheaton’s business, financial condition, results of operation and cash flows. Silver production from San Dimas represented approximately 16% of Silver Wheaton’s total silver equivalent production for the year ended December 31, 2015.
If Silver Wheaton was unable to purchase any further silver under the Primero SPA, Silver Wheaton’s forecasted silver equivalent production for 2016 and average five year forecasted silver equivalent production, its revenue and cash flows and its reserves and resources would all be significantly reduced. In addition, there is no assurance that Silver Wheaton will be successful in enforcing its rights under the security interest granted by Primero and the guarantee granted by Goldcorp. See “Risks Relating to the Company – Security Over Underlying Assets” and “Risks Relating to the Mining Operations – International Operations” in the Company’s Annual Information Form for the year ended December 31, 2015. As at September 30, 2016, approximately 0.3 million ounces of cumulative payable silver ounces have been produced at San Dimas but not yet delivered to the Company, representing an increase of 0.2 million payable silver ounces during the three month period ended September 30, 2016.1 As at September 30, 2016, the Company has received approximately 74.1 million ounces of silver related to San Dimas under the agreement, generating cumulative operating cash flows of approximately $1.0 billion. As at December 31, 2015, the San Dimas mine had proven and probable silver reserves of 55.2 million ounces, measured and indicated silver resources of 7.2 million ounces and inferred silver resources of 74.0 million ounces (as described in the Attributable Reserves and Resources section of this MD&A).