mining industry in mexico - deloitte us

Mining industry in Mexico

May 2012Vancouver, Canada

2 © Deloitte & Touche LLP and affiliated entities.

Highlights

A large country…•Population:109million(World’s11thlargest)•Area:2.0millionkm(World’s5thlargest)•GDP:$1.0trillion(Latam´s2ndlargest)•GeographicalproximitytotheUnitedStates(“US”)

… with a strong economy…•Politicalstability

•RealGDPgrowth:1.5%(2008),5.5%(2010)

•Inflation:6.5%(2008),3.6%(2009),4.4%(2010)

•Rating:Baa1(Moody’s),BBB(Fitch)

•Foreigndirectinvestment:$27billion(2008),$16billion(2009),$20billion(2010)

… and an attractive financial market…•125listedcompanieswithover$802billionmarketcap

•Thecompanieslistedinthestockexchangerepresentapproximately69%ofMexico´stotalGDP

•Continuedcreditgrowthremainsakeyfactorexplainingtheexpectedincreaseinprivateconsumptiongrowth

•Bankfinancingisprovidingsupporttoeconomicgrowth,particularlyasexchangeratevolatilitymaybedrivingsomecompaniestoincreasetheirborrowinginlocalcurrency

Source:SIEM

Geographic overview by number of companies

México - Overview

2,088

203 154 41

1,034

370

-

500

1,000

1,500

2,000

2,500

Brazil Chile Peru Uruguay Mexico Argentina

Gross Domestic Product 2010 (US$Bn)

GDP - Latin America Comparison

Source:DeloitteResearch(fromthedataoftheEIU)


0 to 4,499

4,500 to 9,900

10,000 to 49,900

More than 50,000

Mexico, a country with a mining history, still weighs amongst the world’s largest metal producers.

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Breakdown of the Mexican mining production - 2010


Silver Fluorite Bismuth Celestite Sodium sulfate 1st 2nd 3rd 3rd 3rd 19.0% 19.5% 12.9% 3.2% 5.6%

Wollastonite Lead Molybdenum Diatomite Cadmium 4th 5th 5th 5th 6th 8.3% 4.8% 4.6% 5.0% 6.3%

Graphite Baryta Salt Plaster Manganese 7th 7th 7th 7th 8th 0.6% 1.9% 3.2% 3.2% 1.4%

Zinc Gold Feldspar Sulfur Copper 8th 11th 11th 11th 12th 3.9% 3.0% 3.9% 2.8% 1.7%

Iron Phosphate 14th 14th 0.5% 0.8%

Source: Mineral Commodity Summaries, U.S. Geological Survey, 2011 INEGI

Source: INEGI

11,786

4,299

4,716

5,651

6,937

7,088

14,170

22,696

28,993

36,288

5,000 10,000 15,000 20,000 25,000 30,000 35,000 40,000

Other

Lead

Molybdenum

Coal

Coke

Iron

Zync

Copper

Silver

Gold

Value of the Mexican mining production - 2010

Mexico’s position in mining production - 2010Mining Industry in Mexico

Mining sector in Mexico•Thecountry’sgeologicalpotentialisstillgrowing,attractingmorethan280nationalandforeigncompaniestostartnewexplorationprojects,mainlyinthenorthernstates(Sonora,ZacatecasandChihuahua)

•Attheendof2010,theminingsectorrepresentedmorethan8%ofMexico’sGDP.

•During2010,thecountryregainedtheworld´sfirstplaceinsilverproductionandalsorecordedmajorproductionofcopper,goldandzinc.

Breakdown of the Mexicanmining production - 2010

Gold26%

Silver20%

Copper16%

Zync10%

Iron5%

Coke5%

Coal4%

Lead3%

Molubdenum3%

Other8%

Value of the Mexican mining production - 2010 (Millions of pesos)

Source:INEGI

Source:MineralCommoditySummaries,U.S.GeologicalSurvey

Source:INEGI

4 © Deloitte & Touche LLP and affi liated entities.


Canada in Mexico•Canadarepresents75%ofthetotalforeigninvestmentrelatedtotheminingsectorinMexico.

•OfthetotalforeignminingcompaniesinMexico,73%areCanadian,representing44%ofCanada’stotalinvestmentinMexico.

Stock Market•AsofDecember2010,therewere141MexicancompanieslistedintheTorontoStockExchangeVenture(TSXV).

•AsofDecember2010,therewere59MexicancompanieslistedintheTorontoStockExchange(TSX).

•AccordingtothepresidentoftheMexicanStockExchange(BMV),LuisTellez,theBMVisworkingwiththeTSXtoreviewitslistingrulesinordertopromotethelistingamongsmallcompaniesinMexicoandCanada.

•TheCanadianambassadorinMexico,GuillermoRischchynski,statedthattheregulationstothemininglaw,havecontributedtothesuccessoftheCanadianminingprojectsinMexico.

Impact of Canada in the Mexican mining sector

2009 2010 2011

Total M&A Transactions 25 44 48

Canada as a Buyer 15 24 20

%ofTotalTransactions 60.0% 54.5% 41.7%

Mexico as a Buyer 5 10 8


Source:CapitalIQ

Main companies

AgnicoEagle FirstMajestic Goldcorp

AlamosGold FronteraCopper PanAmericanSilver

FarallonResources GammonLake TeckCominco

Canadian Companies in Mexico

Investment in the mining industry

Local and Foreign Investment•Intermsofmininginvestmentattraction,MexicoranksfourthintheworldandfirstinLATAM.

•During2010,totalinvestmentrelatedtotheminingindustryinMexicoincreasedby16%toUS$3.3bn.Investmentin2007-2010periodwasUS$11.9bn.

•In2010,theglobalinvestmentrelatedtominingexplorationaccountedforUS$11.5bn,anincreaseof45%comparedto2009.

•70%oftotalexplorationinvestmentintheMexicanminingindustryismadebyforeigncompanies;however,60%ofthetotalproductionvalueisgeneratedbyMexicancompanies.

Source: Cámara Minera de México

Mining sector investment - activity breakdown(US$ millions)

970

707 663 485 491

1,681

1,077

848 760

365

$0

$400

$800

$1,200

$1,600

$2,000

Equipment acquisition

Expansion projects

Exploration projects

New projects Other

2010 2011E


Investment in mining exploration - 2010

70%

30%

Foreign

Mexican


Local & foreign investment(US$ millions)

258 348585

9121,257

2,156

3,656

2,858

3,316

4,731 4,561

$1,000

$2,000

$3,000

$4,000

$5,000

$6,000

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011E 2012E

Investment in mining exploration (2010)

Local & Foreign Investment (US$ millions)

Mining Sector Investment- Activity Breakdown (US$ millions)


Mining sector investment - activity breakdown(US$ millions)

970

707 663 485 491

1,681

1,077

848 760

365

$0

$400

$800

$1,200

$1,600

$2,000

Equipment acquisition

Expansion projects

Exploration projects

New projects Other

2010 2011ESource:CámaraMineradeMéxico

Source:CámaraMineradeMéxico

Source:CámaraMineradeMéxico

M&A Canada-Mexico

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Impact of Canada in the Mexican mining sector

2009 2010 2011

Total M&A Transactions 25 44 48

Canada as a Buyer 15 24 20


Mexico as a Buyer 5 10 8


Main companies

AgnicoEagle FirstMajestic Goldcorp

AlamosGold FronteraCopper PanAmericanSilver

FarallonResources GammonLake TeckCominco

Canadian Companies in Mexico

M&A Canada-Mexico

Mining in Mexico - Top tax issues to keep in mind

Upcoming presidential elections

MexicowillhavepresidentialandcongresselectionsinJuly2012andthenewpresidentwillenterintoofficeonDecember1,2012.Atthistime,thereisnoclearexpectationastowhowillwin.

OneofthemajorissueseverypartyseemstoagreeuponisthatthereisneedforintegraltaxreforminMexicothatwouldshakeupthecurrentsystem.However,thelegislatorshavenotbeenabletoarrivetoaconsensusastothedetailsofthereform.Weexpectthetalksonthismattertointensifyoncethenewregimecomesintopower,andiftherulingpartyalsoobtainsmajorityinCongress,thereisahigherchancethatsomeofthesereformsmighttakeplace.

Mining royalty discussions

UnlikeotherLatinAmericanjurisdictionssuchasChile,Peruandothers,Mexicodoesnotcurrentlyhaveanyminingtaxes.WehaveseenproposalsintheearlystagesofdiscussionforanewminingtaxinMexico;howeverthesehavenotpassedtheinitialstages.TheseinitiativesintheMexicanCongressaskfor4%ongrossrevenue,3%onEBITDA,andalsoanunassignedratetothetotalmineralsalesbasedonanaveragemarketprice.

Eventhoughtheseroyaltyproposalshavenothadsuccess,theinternationaltrendintheminingindustryhasbeentoenactorenhanceroyalties,soitmaybejustamatteroftimeuntilMexicofollowsthetrend–butnotuntilthenewregimecomesintooffice.

Permanent establishments

Significantprojectsundertakenbynon-residentsinMexicowithouttheuseofaMexicansubsidiarycorporationcanresultinthenon-residentbeingsubjecttotaxinMexico.TheIncomeTaxLawand/ortaxtreatiesraisethe

thresholdofactivitythatneedstobereachedinorderforthenon-residenttobetaxableinMexico,requiringthepresenceofa“permanentestablishment”(“PE”).IfsignificantprojectsareundertakeninMexico,thepossibilityoftaxationinMexicoshouldbeexamined.

Employee tax residency

Itiscommonforexecutivesfromanon-residentparentcompanytotravelintoMexicotooverseeoperations.Particularlywhenthesevisitsexpandtoseveralweeksduringtheyear,theremightbeaneedtoreviewtheirimmigrationstatusintoMexicoaswellasthetaxresidencyastherecouldbeelementstostatethattheyhavebecometaxresidentsofMexico.

IftherearesignificantdaysspentinMexico,anindepthreviewshouldbeperformedinordertotakethenecessarystepstomitigatetaxrisksfortheindividualaswellasthecompany,suchasuseofashadowpayroll,forexample.

Management fee charges from Canada to Mexico

ThereareanumberofservicesthattheCanadiancorporateofficemayperformforthebenefitoftheMexicanoperationsdirectlyfromCanada.IftheMexicancompanydidnothavethecorportateofficetoassistonthefunctionstheyperform,itmightbewillingtopayathirdpartyforthosegeological,geophysical,financial,operational,administrativeandotherservicesforexample.

ItispossibletopushdownthosecostsincurredinCanadathataretothebenefitoftheMexicanoperations,eveniftheprojectisstillinexplorationphase.Manyofthesechargesarenotsubjecttowithholdingtax.Specificdocumentationrequirements,togetherwithevidencesupportingtheservicewasactuallyrendered,areneededtobemetinordertohavefulldeductibilityofthesecosts.

Top tax issues

Our mining industry leaders have analyzed the current tax and business environment in Mexico and share the main tax related issues mining companies should take into consideration when investing in Mexico.


IVA recoveries

UnlikeotherjurisdictionsthatallowtheValueAddedTaxorIVA(acronyminMexico)toberecoveredonlyonexports,MexicanIVALawallowsforcompaniesinexplorationphasetobeabletorecouptheIVA(16%)paidonexpenses,eveniftheentityisintheexplorationphaseaslongastheyhaveafavorablebalance–whichisusuallythecaseatthisstageindevelopment.

IthasbeenourexperiencethattheMexicangovernmenthasbeenscrutinizingtherefundclaimsmoreindepththaninthepast.Asaresult,thereareconsiderabledelaysinthereimbursementoftheIVA.FulldocumentalsupportandcontinuedpersistencebeforethetaxauthoritiesiskeytobeabletogettheIVArefunded.

Differentthanwhatoccurswithotherfederaltaxeslikeincometax,VATreturnsarefiledonamonthlybasis.Thereisnoneedtowaituntiltheendofthefiscalyeartoclaimarefundonanaggregatedamount,sothetaxpayercanfilemonthlyrefundrequestsandexpeditetheprocess.

Share dispositions

Duringthisperiodofgrowth,companieshavebeenundertakingsignificantM&Aactivity,aswellasinternallyrestructuringtostreamlineoperations.Atthetimeofasharedisposition(andtheacquisition)ofaMexicanownedentity,thereareproceduresthatneedtobefollowedinMexicothatminingcompaniesinvolvedinshouldtakeintoconsideration.

IncaseofaMexicansharedisposition/acquisitiontransactionamongnonresidentcompaniesofMexico,thegainsareconsideredtobesourcedinMexico.Theseller’sgrossproceedsaretaxedat25%,withnodeduction.However,thereisapossibilitytobetaxedon30%ofthenetgain,throughcertaintimesensitivetaxfilings.Onthebuyerside,itisrecommendedtocheckthatthesellercomplieswiththeserequirementssinceifthisisnotthecasetheMexicanentitycouldbejointlyliableforanyomittedtax.

Option contracts

Thetaxtreatmentonanoptioncontracttobuyamineralpropertyasopposedtoacquiresharesisvastlydifferent.Furthermore,ifamineralpropertyoptioncontractiscelebratedwithanindividual,asopposedwithaMexicancorporation,theremaybeISRandIVAwithholdingobligationsbytheholderoftheoptiondependingonthetaxregimeoftheindividual.

Tax Consolidation regime

IftheexplorationandoperatingactivitieswithinagroupinMexicoareinseparatelegalentities,theirtaxableprofitsandlosseswouldbeseparateaswell.Tooffsetthegainsinonelegalentitywiththelossesintheotherone,theconsolidationregimemightbeagoodfit.

AnauthorizationbytheMexicanTaxAuthorities(SAT)isneededinordertoenforcethebenefits.Theentitywiththelossesmusthaveprofitsofitsowninthenext5to6years;ifthatisnotthecase,thenthebenefitsoftheconsolidationwouldbereversedandinessence,obtaininga5yeartaxdeferral.

Mining in Mexico - Top tax issues to keep in mind

Top tax issues

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Regular tax compliance

Mexicohasnumeroustaxcomplianceresponsibilitiesthatneedtobeobserved.Someexamplesthesearetheannualtaxreturn(March31),theInformationReturnwherethewithholdings,relatedpartytransactionsandotherinformationisreported;thesocialsecurityremittances(monthlyandbimonthlytype),IVAreturns(monthly),aswellasseveralformalitiestocomplywithatthetimeofissuinganinvoiceortobeverifyingwhenreceivinganinvoicefromsuppliersorvendors;theMexicantaxregimeisstillaformoversubstancesystem.

Someentitiesareobligatedtofilethespecialtaxreport(Dictamen)byJune,withasignoffbyanauthorizedCPA.Thereisathresholdofrevenues($34.8MMXP),assets($69.6MMXP)oremployees(300)thattriggerthisobligation.Additionally,thereisanannualSocialSecurityreportthatismandatoryforcompanieswithover300employees.RecentPresidentialdecreeshavegrantedtheabilitytooptoutofthesetworeportsinexchangeforinformationtobefiledbythetaxpayer.

Leverage opportunities

DependingonthespecificsituationofaCompany,suchasthestageofthebusiness,cashrequirementsandorganizationalstructureamongothers,theremaybepossibilitiestoincreaseinternaldebtleverageintoMexicothustakingadvantageofthetaxshieldleverageprovides.Evenattheexplorationstage,interestchargescouldbeputinplace,dependingonthesituation.Properdocumentationandsupportmustbepreparedinordertoimplementitefficiently.ThetreatytaxwithholdingrateoninterestpaymentsfromMexicancompaniestoaresidentofCanada(andtomanyothernon-residentsofMexicoifthereisataxtreaty)is10%ingeneralwithsomespecificexceptions.

Exploration expenses current year deduction

Theexplorationexpensesgeneraltreatmentisa10%amortizationoncapitalizedexpenses.However,theMexicanlegislationallowsforthecurrentyearexpenseoftheexplorationexpensesincurredinthelocalizationandquantificationofmineraldepositstobefullydeductibleinsaidfiscalyear.Ontheotherhand,itisimportanttobalancethedecisionofmakingthisoptionagainstfutureexpectedrevenuestreamsasthetaxlossesgeneratedbytheseexpensescanonlybecarriedforward(nocarrybackallowed)foraperiodof10years(inflationaryadjustmentsapplyfortaxpurposesonlytothisandotheritems).

Immediatedepreciationopportunities:AspartofthespecialtaxincentivesthattheMexicanTaxLegislationprovides,thereisaspecialincentiverelatedtotheacquisitionofnewfixedassets.70%to87%oftheirvaluecanbeclaimedastaxdepreciationinthefirstyearofacquisition.Theremainingbalancestayswithoutdeduction.Insomecases,thecashtaxsavingsnowcomparedtotheNPVofthenon-depreciatedamountishigher.Certainsupportisneededtobeabletoapplythisincentive.

Everycasecouldhavedifferentfactpatterns,soourminingindustryprofessionalsareabletoassistyouintheseandanyotherissuesthatyouandyourcompanymayneed.


Mining in Mexico - Top accounting issues to keep in mind

The mining industry in Mexico is flourishing. Numerous and significant investments, domestic and foreign, have poured into the industry over the last several years. Deloitte has been very active in the industry to help its clients.

First-time adoption of IFRS and potential challenges in subsequent Years

Potential implications of adopting IFRS at a statutory level in MexicoManycompaniesareevaluatingthepossibilityofadoptingIFRSatastatutorylevelinMexicotoaligntheirlocalaccountingpolicieswiththoseoftheirparentcompany.Therearemanybenefitsassociatedwiththisdecision;howeveritisimportanttofullyunderstandallthepotentialimplicationsofIFRSadoptiononastatutorylevel(tax,legal).

Principal differences between Mexican Financial Reporting Standards (“MFRS”) and IFRSWhilemanysubsidiariesofpubliccompaniesreportIFRStotheirparentcompaniesforpurposesofissuingconsolidatedfinancialstatements,localmanagementhasoftenbeentrainedfromanMFRSperspectiveandthereforeitisimportanttomaintainsoundcontrolsandprocedurestoensuretheidentificationandadjustmentofpotentialdifferencesbetweenMFRSandIFRS.SomeofthemostcommondifferencesbetweenMFRSandIFRSapplicabletotheminingindustryinclude:impairmentoflong-livedassetsoncertainitems,valuationandmeasurementoffinancialinstruments,recognitionofinflationeffects,effectsofforeignexchangerates,employeebenefits,deferredincometaxes;componentizationofproperty,plantandequipmentandsignificantdisclosuredifferences.

Involving an IFRS specialist can help support local management CompaniesadoptingIFRSfacemanyhurdlesandmaintainingIFRScompliantfinancialstatementsinsubsequentyearscancontinuetopresentunforeseenchallengesgiventhesignificantchangesinaccountingstandardsbeingcontemplatedbytheInternationalAccountingStandardsBoard(“IASB”).ManyIFRSconversionprojectswereledbycorporatemanagementandbecauseofthisariskofthatlocalmanagementisnotfullypreparedtocomplywithIFRSarises.ThereisaneedforIFRStrainingforlocalmanagement

andtherecanbemanybenefitsofinvolvinganexternalIFRSadvisorwhospeaksSpanishandunderstandsthechallengesofworkinginMexico.

Mineral interests

IFRS 6: Exploration for and evaluation of mineral assetsMineralinterestsrepresentasignificantaccountbalanceinaminingentity’sfinancialstatementsandtherearetechnicalanddetailedaccountingrequirementsimpactingtheindustryasitrelatestotheiraccountingdependingonthestageofanentity’sminingoperations.

AnentityshalltreatexplorationandevaluationassetsasaseparateclassofassetsandmakethedisclosuresrequiredbyeitherIAS16(PP&E)orIAS38(Intangibles)consistentwithhowtheassetsareclassified.IFRS6requiresexplorationandevaluationassetstobemeasuredoninitialrecognitionatcost,suchas:acquisitionofrightstoexplore;topographicalandgeologicalstudies;exploratorydrilling;sampling;andactivitiesinrelationtoevaluatingthetechnicalfeasibilityandcommercialviabilityofextractingamineralresource.

Anentityshoulddevelopanaccountingpolicyforthetreatmentofexplorationandevaluationexpenditures,includingborrowingcosts,andapplyitconsistently.

IAS 16: Componentization of property, plant and equipmentIAS16Property,PlantandEquipmentplacesmoreemphasisthanMFRSona“componentization”approachtodepreciation,underwhichcostsareallocatedto“significantparts”ofanassetandeachpartisseparatelydepreciated.Forexample,largecomponentsofamillthatbedepletedatadifferentratefromthemillshouldbeseparatelydepreciated.ThedeterminationofwhatlevelofcomponentstoseparatelyaccountforwillrequiresomethoughtasIAS16alsoprovidesexplicitguidanceontherecognitionoflossesonthereplacementofundepreciatedpartsofassets.

Top accounting issues

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IAS 36: Identification of impairment indicatorsInmanyinstances,theevaluationofimpairmentindicatorsandimpairmenttestingisperformedataconsolidatedlevelandthereforecarefulcommunicationisnecessarywithlocalmanagementtoensureallpotentialissuesarebeingconsidered.

IFRIC 20: Accounting policy for stripping production phase of a surface mineIFRIC20,StrippingCostsintheProductionPhaseofaSurfaceMineiseffectiveJanuary1,2013andrequiresthatthecostsofstrippingactivitytobeaccountedforinaccordancewiththeprinciplesofIAS2Inventoriestotheextentthatthebenefitfromthestrippingactivityisrealizedintheformofinventoryproduced.

Also,thecostsofstrippingactivitywhichprovidesabenefitintheformofimprovedaccesstoorearerecognizedasanon-current‘strippingactivityasset’wherethefollowingcriteriaaremet:itisprobablethatthefutureeconomicbenefit(improvedaccesstotheorebody)associatedwiththestrippingactivitywillflowtotheentity;theentitycanidentifythecomponentoftheorebodyforwhichaccesshasbeenimproved;andthecostsrelatingtothestrippingactivityassociatedwiththatcomponentcanbemeasuredreliably.

Whenthecostsofthestrippingactivityassetandtheinventoryproducedarenotseparatelyidentifiable,productionstrippingcostsareallocatedbetweentheinventoryproducedandthestrippingactivityassetbyusinganallocationbasisthatisbasedonarelevantproductionmeasure.

Astrippingactivityassetisdepreciatedoramortisedonasystematicbasis,overtheexpectedusefullifeoftheidentifiedcomponentoftheorebodythatbecomesmoreaccessibleasaresultofthestrippingactivity.Theunitsofproductionmethodisusedunlessanothermethodismoreappropriate.

Revenue

IAS 18: Revenue recognition regarding the sale of dore bars and concentratesMFRSappliestheguidanceinIAS18,Revenueforpurposesofestablishingrevenuerecognitionaccountingpolicies.AccordingtoIAS18,revenueismeasuredatthefairvalueoftheconsiderationreceivedorreceivable.Revenueisgenerallyrecognizedwhenitisprobablethattheeconomicbenefitwillflowtotheentity,andwhentheamountofrevenuecanbemeasuredreliably,andwhensignificantrisksandrewardshavebeentransferredtobuyer,sellerhaslosteffectivecontrol,andcostcanbereliablemeasured.Productpricingisdeterminedwhenrevenueisrecognizedbyreferencetoactiveandfreelytradedcommoditymarkets.

Asitrelatestotheminingindustrytherearecommonconsiderationsfordefiningthemomentwhenrevenuerecognitionoccurs,whichgenerallydependsonthetermsoftheagreementswiththecustomer.Ordinarily,revenuesfrommetalconcentratearesubjecttoadjustmentuponfinalsettlementofmetalprices.Finalweightsandassaysareadjustedonfinalsettlementwhichcantakemonthsafterthedeliverydate.Anadjustmenttorevenuesbasedonquotedforwardpricesfortheexpectedsettlementperiodisgenerallyrecordedtoreflecttheconsiderationtobereceived.Additionally,adjustmentsforweightsandassaysarerecordedwhenresultsarereasonablydeterminableoronfinalsettlement.Asaresult,thevaluesoftheconcentratereceivablechangesastheunderlyingcommoditymarketpricesvary.Thiscomponentofthecontractisconsideredtobeanembeddedderivative,whichisrecordedatfairvaluewithchangesinfairvaluerecordedinrevenuesandtradereceivables.Refiningandtreatmentchargesarenettedagainstrevenuesfrommetalsconcentratesales.


Mining in Mexico - Top accounting issues to keep in mind

Top accounting issues

Internal control impacts throughout the revenue cycleCertainsignificantrisksaroundtherevenuecycleinclude:revenuefromthesaleofmetalscanbemisstatedduetorevenuesbeingrecordedatinappropriatemetalpricesandexchangerates,revenuefromthesaleofmetalscanalsobeinaccuratelyrecordediftheyarenotadjustedtoreflectthespecifictermsofestablishedsalescontracts(e.g.,ifthespecificmetalpriceindexandexchangerateindexesasstipulatedinthecontractarenotused);revenuefromthesaleofmetalcanbemisstatedduetousingincorrectmetalpricesandincorrectsettlementdatestorecordadjustmentsbasedonthelagtimeofthesettlementstipulatedintheestablishedcontract(duetofinalsettlementofweightsandassays);revenuefromthesaleofmetalscanbemisstatedduetosalestransactionsrecordedintheincorrectperiod,duetotimingofshipmentsandtherelevantmetalpricesontherecordingdatecomparedtotheactualtransactiondate;and,consolidatedrevenuecanbemisstatedduetointercompanysalesbetweentheparentcompanyanditsMexicansubsidiariesnotbeingcorrectlyeliminatedinconsolidation.

Provisions and contingencies

IAS 37: Accounting for Mexican legal and tax contingenciesAccordingtoIAS37Provisions,ContingentLiabilitiesandContingentAssetsaprovisionshallberecognizedwhenandonlywhen:a)theentityhasapresentobligation(legalorconstructive)asaresultofpastevents;b)itisprobablethatanoutflowofresourcesembodyingeconomicbenefitswillberequiredtosettletheobligationandc)asufficientlyreliableestimateoftheamountoftheobligationcannotbemade.Recognitionofprovisionsisnotallowedifalltheseconditionsarenotsatisfied.

Duetotheeconomic,politicalandsocialenvironmentintheminingindustryinMexico,itisnecessarytocontinuallymonitorandassessthepotentiallegalandtaxcontingenciesandtheirimpactsfrombotharecognitionanddisclosureperspectiveateachfinancialreportingperiod.

Effects of change in foreign exchange rates

IAS 21: Foreign currency mattersAforeignoperationisanentitythatisasubsidiary,associate,jointventureorbranchofareportingentity,theactivitiesofwhicharebasedorconductedinacountryorcurrencyotherthanthoseofthereportingentity.IAS21

prescribestheaccountingtreatmentforanentity’sforeigncurrencytransactionsandforeignoperations.

MostMexicanentitiesoperatingintheminingindustryhavedefinedtheirfunctionalcurrencytobetheUSdollarandthereforetheconversionfromthelocalcurrency(MXP)tothefunctionalcurrencymustbeperformedinaccordancewithIAS21.Risksexistrelatedtothisconversionprocessfromasystemsperspectiveandifacompanyperformsthisconversionusingexcel.

Income taxes

IAS 12: Deferred income taxesCurrenttaxliabilitiesandassetsarerecognisedforcurrentandpriorperiodtaxes,measuredattheratethathasbeenenactedorsubstantiallyenactedbytheendofthereportingperiod.Atemporarydifferenceisadifferencebetweenthecarryingamountofanassetorliabilityanditstaxbase.Deferredassetsandliabilitiesarenotdiscountedtoreflectthetimevalueofmoney.

Deferredtaxliabilitiesarerecognisedforthefuturetaxconsequencesofalltaxabletemporarydifferenceswiththreeexceptions:wherethedeferredtaxliabilityarisesfromtheinitialrecognitionofgoodwill;theinitialrecognitionofanasset/liabilityotherthanabusinesscombinationswhich,atthetimeofthetransaction,doesnotaffecteithertheaccountingorthetaxableprofit(thisexceptionoftenappliestoMexicancompaniesforthepurchaseofvehiclesandforthoseentitiesthattakeanimmediatedeductionregardingthepurchaseofqualifyingproperty,plantandequipment);and,differencesarisingfrominvestmentsinsubsidiaries,branchesandassociatesandinterestsinjointventureswheretheentityisabletocontrolthetimingofthereversalofthedifferenceanditisprobablethatthereversalwillnotoccurintheforeseeablefuture.

Deferredtaxassetsarerecognisedfordeductibletemporarydifferences,unusedtaxlosses,andunusedtaxcredits,totheextentthatitisprobablethattaxableprofitwillbeavailableagainstwhichthedeductibletemporarydifferencescanbeutilized.NetoperatinglosscarryforwardsinMexicoexpirein10years.

Internal control impacts throughout the income tax cycleThemostsignificantrisksaroundtherevenuecycleare:Currenttaxprovisionanddeferredtaxassetorliabilityismisstatedduetoincorrecttaxratesbeingused(Mexican

11

taxratesarecurrentlydecreasingandwillreach28%in2014);amathematicalerrorinthecalculation;thetaxratesuseddonotreflectthemannerortiminginwhichtheentityexpectstorecoverthecarryingamountoftherelatingassetorliability;andIncorrecttreatmentofdeductibledifferencesincalculations.GiventhecomplexityoftheMexicanTaxLaws,itisrecommendedtoinvolveanexternaladvisorasneeded.

Employee benefits

Involvement of a qualified actuary and reviewing the assumptions itilized ItisimportanttohireaqualifiedactuarywhoisfamiliarwiththerequirementsofIFRS,especiallyasitrelatestominingcompanies.Inmanycases,theactuariesinMexicoprovidemanagementwiththeirsuggestionregardingthesignificantassumptionstoutilizeforpurposesofcalculatingthefairvalueofplanassetsandpensionliabilitiesanditisimportanttoensurethatlocalmanagementchallengestheactuarialassumptionutilizedtoensuretheyreflecttheconditionsapplicabletotheCompany.

Impacts of adopting IAS 19 (2011)Currently,IAS19EmployeeBenefitsrequiresthatentitiesdetermineanaccountingpolicyfortherecognitionofactuarialgainsandlosses(usingthecorridorapproachtodefersuchamountsandrecognizethemovertheestimatedlaborlifeofemployeesortorecognizethemimmediatelywithinothercomprehensiveincome).

TheimprovementstoIAS19(2011)EmployeeBenefits,eliminatestheuseofthecorridorapproach,whichtendstodefertheactuarialgains/lossesoversubsequentperiodsandrequirescompaniestorecognizeactuarialgainsandlossesimmediatelyinothercomprehensiveincome(suchamountsareneverreclassifiedtoearnings).Additionally,itincludesimprovementstothedisclosuresofdefinedbenefitplans,amendstheaccountingforbenefitsfromtermination,includingthedistinctionbetweenthebenefitsofferedinanexchangeinserviceandthosethatprovidefortheemploymentterminationandaffecttheirrecognitionandmeasurementofthebenefitsfromtermination.Thestandardalsoclarifiestheclassificationoftheemployeebenefits,actualestimatesofmortalityrates,taxandadministrativecostsaswellasrisksandconditionalindexedcharacteristics.IAS19(2011)isapplicabletoperiodsbeginningJanuary1,2013.Earlyadoptionispermitted.

Recognition of Mexican termination benefitsDifferencesbetweenMFRSandIFRSexistwithrespecttotheaccountingforMexicanterminationbenefits,wherebysuchbenefitsaregenerallycalculatedandaccruedforpurposesofMFRSandareonlyrecognizedunderIFRSwhenaconstructiveobligationexistsandtheemployeehasbeennotifiedorhasacceptedthetermsoftheterminationbenefitstobereceived.

Interim financial reporting

IAS 34: Interim reporting matters

IAS34InterimFinancialReportingdescribestheminimumcontentforaninterimfinancialreport,andtheprinciplesforrecognitionandmeasurementincompleteandcondensedfinancialstatementsforaninterimperiod.

Entitiesarerequiredtoprovideanexplanationofeventsandtransactionsthataresignificanttoanunderstandingofthechangesinfinancialpositionandperformanceoftheentitysincetheendofthelastannualreportingperiod.Theinformationdisclosedinrelationtothoseeventsandtransactionsshouldupdatetherelevantinformationpresentedinthemostrecentannualfinancialreport.Thefollowingisanon-exhaustivelistofeventsandtransactionsforwhichdisclosureswouldberequirediftheyaresignificant:thewrite-downofinventoriestonetrealizablevalueandthereversalofanysuchwrite-down;recognitionofalossarisingfromtheimpairmentoffinancialassets,property,plant,andequipment,intangibleassets,orotherassets,andthereversalofanysuchimpairmentloss;acquisitionsanddisposalsofitemsofproperty,plant,andequipment;correctionsofpriorperioderrors;andrelatedpartytransactions.Iftherehasbeenanychangeintheentity’saccountingpoliciessincethemostrecentannualfinancialstatements,theinterimfinancialreportisrequiredtoincludeadescriptionofthenatureandeffectofthechange.

Mexicansubsidiariesofpubliccompaniesgenerallyprepareinternalreportingpackagesforpurposesofprovidingtheirfinancialinformationforpurposesofconsolidation.ExcellentcommunicationbetweentheCompany’slocalandcorporatemanagementaswellasfromtheirexternalauditorisnecessarytoavoidunforeseensurprisesduringtheyear-endcloseprocess.

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Contacts

Luis LiñeroPartner,TaxMexicoCity,[email protected]

Jaime CastillaPartner,TaxMonterrey,[email protected]

Brad GordicaPartner,TaxVancouver,[email protected]

Roberto LozanoSeniorManager,TaxVancouver,[email protected]

Norma Kraay Partner,TaxToronto,[email protected]

Bruce McCarley Partner,TaxToronto,[email protected]

Carlos GonzalezDirector,TaxTorreon,[email protected]

Tax

Audit

Cesar GarzaPartner,AuditTorreon,[email protected]

Hector GarciaPartner,AuditMonterrey,[email protected]

Jim BarronPartner,AuditVancouver,[email protected]

Marshall DiazPartner,TechnicalAccountingMonterrey,[email protected]

Gerardo CastilloPartner,AuditTorreon,[email protected]

Jaime NunezManager,AuditVancouver,[email protected]

Roberto BenavidesPartner,AuditMonterrey,[email protected]

Jorge SchaarPartner,FinancialAdvisoryMexicoCity,[email protected]

Financial Advisory

Graeme FalkowskySeniorManager,FinancialAdvisoryVancouver,[email protected]

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