Mexus Gold US (MXSG)

[TMLonggun]

Generally mines do not pay taxes for the first couple years of operation. Since mines take a long time to develop (10-15) years and often cost hundreds of millions (tens of millions in Mexus' case) to open they are frequently incentivized via tax structures of the local country and tend to not be significantly taxed until those expenses are mostly paid back. A mine can't move so, like real estate, they make good targets for taxation.

Will Mexus have to pay taxes and royalties? Of course, but perhaps not immediately.

I expect Mexus to pay a bit more than a third in taxes once they have earned more than they spent developing the mine. At that point it is a "good" problem to have since it means Mexus has succeeded.

Their taxes may be increased/decreased by the JV structure and perhaps by the way Mexus itself is set up to receive the JV income. From my experience royalty and streamer companies tend to pay less tax but producers have more flexibility in writing off and expensing costs.

Mexico did change/increase their mining taxes recently:

"The Mexican government’s 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.

“While the special mining tax will generate windfall revenues for the Mexican government in the short-term, we believe it will ultimately prove a mistake as capital investment in Mexico’s mining sector will likely decrease dramatically and many new projects (and hence future tax revenues) will likely not be pushed forward.”"

http://business.financialpost.com/investing/trading-desk/mexican-tax-reforms-tough-on-canadian-miners


I am not a Mexican tax expert but Mexus should soon be rich enough to hire one. It does appear that Mexus will have to pay taxes sooner than is typical in this type of scenario, but that's Mexico for you. How much they can reduce this burden and how many loopholes exist is anyone's guess. I don't think it is a big deal though, most of the low recovery rates and low ore grades I used in my calcs were meant to provide a buffer until we know more about these expenses. Yet even if you take a 50% tax off the top there is still enough gold for us to share, although you may have to scrimp and eat off of silver plates instead of gold while vacationing on your yacht.


P.S. Shotgun I had a good chuckle the other day when you explained that Mexus sucks and we should buy a real company like GORO.

There is a reason GORO is mentioned frequently here.

Who was one of the earliest and largest investors in both GORO, US Gold, and now MXSG?

That's right, Captain Don Phillips, someone I would argue is far more credible than yourself.

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