Significant reforms to Mexicos tax regime, which moved one step closer to reality this week, are the latest headwind negatively impacting Canadas beleaguered mining sector.
Shares in several Canadian miners with Mexican operations are swooning after Mexicos Senate on Tuesday gave its general approval of tax reforms hard sought by President Enrique Pena Nieto.
Argonaut Gold Inc. has been among the hardest hit, falling by double digits this week, but its not alone. Aurcana Corp., Endeavour International Corp., Great Panther Silver Corp. and Silvercrest Mines Inc. have also been off. Falling prices for precious metals arent helping either.
The new mining tax regime in Mexico has come at an inopportune time as precious metals prices are near their two-year lows, industry costs remain high and equity valuations for the mining space are depressed, said Christos Doulis, analyst at Stonecap Securities, in a note to clients.
The Mexican governments tax reforms will come into effect Jan. 1, 2014, and include four significant changes: an increase in the corporate income tax rate to 30%; a 10% withholding tax on dividends paid to non-resident shareholders: a 7.5% mining royalty on EBITDA (tax deductible for income tax purposes); and a 0.5% environmental erosion fee (precious metals only) based on gross revenues (tax deductible for income tax purposes).
Mr. Doulis noted the approved proposal also disallows immediate deductions for exploration expenses in the period in which they occurred. Instead, miners will get an allowable 10% amortization of exploration expenses per year.
He said the changes will impact valuations for miners with operations in Mexico and limits any future upside in their shares.
The fact that the special tax is on EBITDA rather than EBIT is of particular concern as the mining industry is characterized by high initial capital investment and none of this is deductible against the special tax, he said.
Mr. Doulis estimates the new tax regime will bring the effective marginal tax rate on income for mining companies operating in Mexico to roughly 41% from about 30%, although it varies on a case-by-case basis primarily due to the extra 0.5% tax for precious metals.
This total tax burden puts Mexico on par with jurisdictions such as Peru from a tax perspective and we classify such jurisdictions as high tax regimes, he said.
