First Majestic plans next steps in Mexico tax dispute

First Majestic Silver (TSX:FR; NYSE: AG) says it is getting ready to appeal a Mexican court decision this week that revoked a key agreement determining how the silver producer was taxed in the country.

The federal court’s ruling, yet to be formally delivered to the Canadian miner’s subsidiary, Primero Empresa Minera, cancels an Advanced Pricing Agreement (APA) governing the tax on silver sales between 2010-2014.

First Majestic said the “rushed” resolution did not follow regular procedures, as the court did not provide the company with an opportunity to present evidence supporting its case.

It also said the decision was “inconsistent with previous legal precedents,” adding that the ruling is against the Mexican constitution.

The Vancouver-based miner initiated in May an arbitration process against Mexico under the North American Free Trade Agreement (NAFTA).

The move gave President López Obrador’s administration until Aug. 11 to enter into “good faith and amicable negotiations” with the company, which disputes reassessments issued by Mexico’s tax authority totalling $209.2 million.

The 90-day process deadline expired without any resolution of the tax dispute, First Majestic said in a press release on Sept. 25.

The company, which has three producing mines and several projects in Mexico, said it continued to assess all its legal options, both domestic and international.

In June, the company announced it planned to sell its Jalisco Group of assets to Apollo Gold (TSXV: APGO). The six properties, totalling 52 sq. km, include a total of 15 highly prospective claims. First Majestic has full ownership in 13 of them and holds a 45% stake in two of them.

President Obrador has made cracking down on tax breaks a priority. Several major companies, including the local unit of U.S. retailer Walmart and Mexican conglomerate Femsa, have recently agreed to make tax payments.

First Majestic has proposed three settlement offers since 2018 before launching the trade challenge in May. Each of them has been rebuffed.

“The nullification of the APA by the Mexican Federal Court on Administrative Matters is a negative outcome for First Majestic,” BMO Capital Markets’ Ryan Thompson said in a research note. “Although the decision can be appealed in the Circuit Courts, we think this dispute will continue to act as an overhang on the stock until the market has further clarity on a final outcome.”

The mining analyst pointed out that the Mexican tax authority, Servicio de Administracion Tributaria (SAT), “has been seeking to nullify the APA since 2016.”

“Recall that the SAT is seeking $214 million for its reassessment of the 2010-2012 tax years under grounds that the APA was not valid,” he noted. “It is unclear how much the SAT is seeking for the 2013-2018 tax years. First Majestic asserts that the APA was valid from 2010 to 2014. In First Majestic’s Q2 MD&A, the company estimates that the tax differential (spot vs. realized prices) for 2010-2018 would be $158 million (before interest and penalties).”

— This article first appeared in MINING.com, part of Glacier Resource Innovation Group.