Primero up 36% on positive tax ruling

Primero Mining (P-T, PPP-N) soared 36% after the gold-silver producer with operations in Mexico received a favourable tax ruling from Mexican authorities on its Advanced Pricing Agreement (APA).

The ruling confirms that the Toronto-based firm’s method of recording revenues and taxes from sales under a silver purchase agreement with Silver Wheaton (SLW-T, SLW-N) at realized prices instead of spot prices is acceptable.

Primero has already announced earnings from the sales using realized prices, which is permitted while the case was being reviewed, David Haughton, an analyst at BMO, writes in a note.

However, he points out the company had a contingent liability of US$56 million on its balance sheet if the ruling didn’t go in its favour. If that happened, Primero’s earnings per share would have taken a hit.

“The positive ruling now yields a significant lift with cash flow up by US$60 million per year and valuation up roughly 87% (using 10% at spot),” Haughton says. This led Haughton to increase his price target to $8.50 per share from $6. He maintains an “outperform rating” on the stock.   

Under Mexican tax law, the company says the APA ruling is applicable for up to five years, which for Primero means fiscal years 2010 to 2014, as it entered the agreement with Silver Wheaton on Aug. 6, 2010.  

“Assuming the company sells its silver from its San Dimas mine on the same terms and there are no changes in the application of Mexican tax laws relative to the APA ruling, the company expects to pay taxes on realized prices for the life of the San Dimas mine,” Primero states in a release.

Under the contract, Primero will provide Silver Wheaton the first 3.5 million oz. of silver produced each year from the mine and 50% of any additional silver ounces produced at US$4.08 per oz., increasing by 1% per year, until Aug. 6, 2014. Thereafter, the Mexico-focused miner will deliver the first 6 million oz. silver from San Dimas each year and 50% of any excess silver produced at US$4.20 per oz., also increasing by 1% a year.

In Toronto, Primero reached a new 52-week close of $7.20 per share, up $1.90 or 36% as 5.4 million shares changed hands.