TORONTO, ONTARIO–(Marketwire – Oct. 18, 2011) – Primero Mining Corp. (“Primero” or the “Company”) (TSX:P)(NYSE:PPP) announced today that it has filed a formal application to the Mexican tax authorities for an advance ruling on the Company’s restructuring plan that, if successful, would result in paying income taxes in Mexico based on realized rather than spot revenue. When completed, the advance tax ruling process will provide certainty and resolution to the Company’s restructuring plan. It will also ensure the Company will avoid tax penalties that could arise should the Mexican tax authorities disagree with the restructuring plan.
Upon the acquisition of the San Dimas mine, the Company assumed the obligation to sell silver at below market prices according to a silver purchase agreement. Silver sales under the silver purchase agreement realize approximately $4 per ounce; however, the Company’s provision for income taxes is currently based on sales at spot market prices.
The Company’s restructuring plan relies on transfer pricing analysis in order to support the ongoing sale of silver from Mexico to a related party at the fixed price. Given the intensified scrutiny of transfer pricing in recent years and the significant adjustments and penalties assessed by tax authorities, many jurisdictions (including Mexico) allow companies to mitigate this risk by entering into an advance pricing agreement (“APA”). The APA process is designed to resolve actual or potential transfer pricing disputes in a principled, cooperative manner.
Primero submitted a formal APA application on October 17, 2011 after preparation of a detailed transfer pricing study. The APA review is an interactive process between the taxpayer and the tax authority, which the Company has been advised is likely to take 12 to 14 months. At the end of the APA process, the tax authority will issue a tax resolution letter specifying the pricing method that they consider appropriate for the Company to apply to intercompany sales under the silver purchase agreement.
For the duration of the APA process, the taxpayer can record its revenues and intercompany pricing under the terms that the taxpayer considers reasonable (given they are compliant with applicable transfer pricing requirements). As a result, the Company’s Mexican subsidiary intends to record revenue under the silver purchase agreement at the fixed price realized and record income taxes on the same basis. Throughout the APA process, the Company intends to identify the potential tax as a contingent liability which will be described in the notes to its financial statements, and plans to retain access to sufficient cash to satisfy that contingent liability in the event of an unfavourable ruling.
The Company has received “should-level” opinions from three professional advisors in support of its restructuring plan (meaning in their opinion the expected chance of success is considered to be greater than 70%). Although these opinions are encouraging, there remains uncertainty at this time about the likelihood of a successful outcome. The Company will provide regular updates in the future as the APA process progresses.
Accelerated Depreciation Filing Suspended
The Company announced in May 2011 that its Mexican subsidiary had claimed a deduction in its 2010 tax return for 100% of the value of its mineral concessions. This strategy results in a deferral rather than a reduction of taxes. Based on the advice of its advisors, the Company has elected to suspend the accelerated depreciation tax initiative during the APA process. As a result of the suspension of this initiative, and the APA submission, the subsidiary has re-filed its 2010 tax return reflecting amortization of the mineral concessions over approximately 20 years and revenue under the silver purchase agreement at the fixed price. The Company reserves the right to institute the accelerated depreciation filing in the future.
Silver Call Options Purchased as Insurance
As part of its ongoing tax mitigation strategy, the Company confirmed that on September 14, 2011 it purchased silver call options at a strike price of US$49 on 30% of silver production expected to be sold under its silver purchase agreement over the next 12 months. The call options are designed to offset the incremental income tax that would be payable by the Company if spot prices exceed the strike price. The total cost of the silver call options was US$3.7 million.
“At the beginning of 2011 we announced that we were committed to increasing our leverage to silver and mitigating the tax impact associated with our silver purchase agreement. We have implemented a number of interim protection strategies, but this proposed corporate restructuring offers a possible permanent solution. Should we be successful, we believe the value of the Company will be increased dramatically as will the returns to our shareholders,” stated Joseph F. Conway, President and C.E.O. of the Company.
About Primero
Primero Mining Corp. is a Canadian-based precious metals producer that owns 100% of the San Dimas gold-silver mine in Mexico. Primero offers immediate exposure to un-hedged, low cash cost gold production with a substantial resource base in a politically stable jurisdiction. The Company intends to become an intermediate gold producer by building a portfolio of high quality, low cost precious metals assets in the Americas.
