Primero Mining launches NAFTA challenge against Mexico, puts tax concerns at centre

June 3, 2016

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TORONTO — Primero Mining Corp. has launched a NAFTA challenge against the Mexican government, claiming authorities are trying to revoke its legal rights in order to collect more tax.

The Toronto-based silver miner announced the arbitration action Thursday night. Chief executive Ernie Mast said in an interview that he hopes the move will shine light on the issue and ensure his company is treated fairly under the North American Free Trade Agreement.

“NAFTA was set up with provisions for just this purpose: to protect foreign investors within the three NAFTA countries,” he said.

The central question in the dispute is how silver output from the company’s San Dimas mine should be taxed. In 2012, a Mexican court ruled that Primero should be taxed based on the realized silver price it receives on its sales. Now authorities want to repeal that ruling and tax the company based on the prevailing spot price instead.

The spot price for silver is far higher than Primero’s realized price, because Primero is obligated to sell a chunk of its output to Silver Wheaton Corp. at a heavily discounted rate. The company’s realized price was just US$5.34 an ounce in 2015, while silver averaged nearly US$16 an ounce.

Mast said that if Primero were taxed at spot prices, it would be paying an additional US$20 million to US$30 million of tax per year on phantom revenues. “It’s very significant,” he said.

Primero inherited the Silver Wheaton obligation when it acquired the San Dimas mine from Goldcorp Inc. in 2010.

The 2012 tax ruling only covered the period between 2010 and 2014, but Mast said it was viewed as a “confirmation” on how taxes should be paid. He speculated that there could be some political motivation behind the proposed changes to the regime, but that he is not certain why Primero is being targeted.

“If you give someone a legal agreement and they make investments based on that, you can’t just take it away,” he said, adding that this is an “unprecedented” move in Mexico.

The company was already challenging the tax authorities in Mexican courts, but pursuing a NAFTA challenge gives the case a far greater profile.

We do feel it’s a very good defence for the company

The move could anger some individuals in the Mexican government, but Mast said Primero spike with numerous government representatives (outside of the tax authority) that thought it was an appropriate measure.

The NAFTA challenge is being launched just a few weeks before the so-called “Three Amigos” summit between the leaders of Canada, the United States and Mexico, which is being held in Ottawa on June 29. Primero hopes this issue comes up at the conference.

A NAFTA challenge is a lengthy process. Primero has filed a notice of intent to submit a claim, which triggers a 90-day process to file the actual claim. Then an arbitrator has to be established to hear both sides of the story. Mast estimated that this case could take approximately a year if the issue is not resolved before that time.

“This is not a short remedy. It will drag on, but we do feel it’s a very good defence for the company,” he said.

Financial Post

Category: General