I apologize in advance if I have posted this information already. I tried to answer the last question directed to me twice, and it did not seem to get to the general board.
RE U.S. tax: although the spinoff is deemed to be taxable, it will not be taxable as a dividend. It will be taxed as a capital gain.
You can elect to defer this gain under the foreign spinoff section of the tax act. Using this deferral mechanism reduces your original capital cost of the shares of MFC by $5.17
The only persons who hold this in taxable accounts, and who will pay tax on the spin off (outside of those who do not elect to defer) are those who have paid less than $5.17 U.S. per share for MXBIF.
Therefore, all else being equal, I wouldn't sell off the shares in a fully taxable account simply out of fear that I will pay tax on a non liquid security.
<<However, since the Blue Earth shares basically cannot be sold except at give-away prices,>>
I expect that these shares will trade on the pink sheets. Better than wallpaper or giveaway prices, though probably at the mercy of a scumbag market maker.
I am holding the MXBIF shares in my IRA after having sold the (smaller number of) MXBIF shares in my taxable account.
I also voted to withhold for the Board of Directors since they managed to make a sow's ear out of a silk purse with this transaction.
I suppose that we would not have this site if you guys did not own MXBIF, and that would make me sad. However, maybe MXBIF's returns and ROE are such that you would be happier if you sold your stock? Personally I like owning this company and its subsidiearies, and I am just so happy to think that Mr. Smith is now living in Hong Kong investing my money in China and swapping my cash reserves generated from iron ore into Singapore dollars. It's all so exciting.
There are lots of views and certainly some hard-working analysis. However, since the Blue Earth shares basically cannot be sold except at give-away prices, the only way we shareholders can profit from this action is:
1. get cash dividends from Blue Earth
2. see increased share price in MFC.
In the end, all the revenues supporting interest payments, royalty payments (don�t forget those), dividends, taxes, etc., derive from cobalt production in Uganda and Canada. Cobalt is a thin, volatile market. The more capacity they add in either country increases cobalt supply and puts downward pressure on prices. Uganda is a thin, volatile country. They will want some money for taking their resources at some point. I just don�t see any meaningful dividends for a while, if ever. How many years do we have until the price of cobalt drops back down to the 6-10 level?
The proxy statement is filled with misleading statements. The part about individual shareholders being able to diversify away their risk is simply nonsense. We are stuck. The �Fairness� opinion by their lapdog CPA is laughable. The continuance into BC stinks on its face.
As a shareholder, I can�t really get out of this situation, not to mention a possible tax problem, either now or later. Of course I can sell, and that appears to be what many have already done. I did think management was supposed to make me want to BUY shares, though, not sell.
This kind of business gives the company a bad odor and takes another bite out of its valuation multiple. Therefore, option 2, even if they get so many cents/year out of Blue Earth (which is us!), is probably a stretch, too. I�ve voted against everything, and am now trying to figure out how much MFC to sell. They do make money, but it's an abusive relationship and not too many people want to put up with it.
I've not made up my mind yet on how to vote my shares but here's my question. What am I supposed to do with shares in Blue Earth? If the shares are not listed I can't diversify risk as the management team suggests. How will we get vale for Blue Earth?
Thanks for your thougts.
Although the proxy states that the event is taxable for U.S. investors, The event is not being defined as a dividend, but as a capital return repayment in kind.
Therefore, a U.S. investor will simply file an election to defer their capital gain at year end. The only persons who will have a true reportable income in this fiscal year from the spinoff are those who hold MFC in a taxable account (not an IRA, 401K etc.)and who have paid less than $5.17 per share (which is the deemed dividend value of the Blue Earth Stock).
If I have misunderstood your question, please let me know and I'll take another crack at it.
I'm thinking that you are alluding to the part of the proxy circular that indicates that this event will be taxable to U.S. investors.
The text of the proxy document indicates that this transaction will be taxable to U.S. investors. However, MFC suggests in the filing that no part of the distribution will be treated as a taxable "dividend".
As this is not taxable as a dividend, then it obviously becomes a capital gain component.
"Fair market value" of the Blue Earth common shares equals $5.17 U.S. per share.
If an investor has paid more than $5.17 U.S. per share for their MFC common stock, then your "new" or ex distribution average cost basis becomes what you paid per MFC share - $5.17.
If your average cost basis is a positive number. (which will be the case if you paid $5.18 U.S. per share for MFC or higher, then you will not have a currently taxable event to contend with.
If you have paid less than $5.17 for MFC shares, then you will be currently taxable. Let's assume that you paid just $3 per share for MFC... the amount of tax to be declared will be equal to the distribution value ($5.17) - your average cost ($3) = $2.17
In short, provided that you have paid more than $5.17 per MFC common share then you will have to declare the distribution as a return of capital, but should not be taxable (all else being equal).
This applies to taxable accounts. If you hold the shares of MFC in an IRA or 401K or otherwise non taxable account, then there is no tax implication to consider.
The only persons who should have a legitimate short term concern regarding taxes with the Blue Earth spinoff would be those who paid less than $5.17 per share in a taxable account, who do not dissent (and therefore will not receive cash) and who do not have enough funds to pay 2004 income taxes on the difference. I'm guessing that this would be a rather select few.
If I have misunderstood your question, I apologize in advance, and will give it another go if you wish.
it is indeed unfortunate for Banff shareholders that they received no compensation for their investment in the cobalt operations.
The nature of the comparison between Drummond and MFC vs Banff and MFC is somewhat different.
In the case of Drummond, Drummond itself had significantly more assets than liabilities. Therefore, minority shareholders were able to effectively press a claim against MFC for a reasonable repurchase at a price that would represent at least a reasonable approximation of the assets - liabilities - minority interest penalty.
However, when looking at Banff, there was a significant mismatch of assets vs. liabilities. Banff had a significant amount of high yield junk bond debt that was non current. The fact value of the debts exceeded the value of the assets by more than 2 to 1. Banff was insolvent.
As to the actual nature of the transaction that stripped Banff of its assets, it was quite straightforward. Sutton Park (an affiliate of MFC) which held the debt of Banff, called the loan. Banff was then forced to surrender all assets as it was unable to repay the loan.
Sutton then sold the assets for a nominal sum to another affiliate of MFC, who put in some additional capital on a care and maintenance basis and subsequently reactivated the assets. An interparty agreement between Sutton Park and the affiliate was made to maintain the indebtedness at face value, as the CARRY value of the ASSETS was deemed to be LESS than 0 (which is appropriate when an unproductive asset requires annual expenditures)
While regretfull to Banff minority shareholders, all of this is legal.
What we have to keep in mind with respect to this transaction is that MFC was first and foremost a CREDITOR of Banff and was seeking to protect their interests as a creditor. The fact that the entire transaction was not arms length (in the public eye) is irrelevent. MFC has complied with the letter of the law with respect to this transaction by ensuring that the debt and the assets were held with separate companies having separate directors, and arranged for a third party evaluation.
In short, Banff shareholders don't have a leg to stand on regarding potential recourse.