Rio Alto/Sulliden -- summary under Share-for-Share

Overview

Following the spin-off of SpinCo on a s. 86 reorg of Sulliden on the basis of 0.10 of a SpinCo Share for each (common) Sulliden Share, all of the outstanding Sulliden Shares will be exchanged for (common) Rio Alto Shares on the basis of 0.525 of one Rio Alto share for each Sulliden Share. Sulliden, upon amalgamation with Rio Alto NewCo, will become a wholly-owned subsidiary of Rio Alto. Rio Alto expects to issue Rio Alto Shares, equal in number to 86.5% of the non-diluted Rio Alto Shares outstanding immediately prior to the Circular date, thereby requiring Rio Alto shareholder approval. The reorganization is considered to likely qualify as a Code s. 368(a) reorg in light inter alia of SpinCo representing less than 10% of Sulliden's net assets. This likely implies that the transaction is viewed as a reverse triangular merger under s. 368(a)(2)(E) rather than as a forward triangular merger governed by s. 368(a)(2)(D). A 1992 temporary PFIC regulation indicates that the transaction would not qualify for nonrecognition given that Sulliden is a PFIC and Rio Alto is not. The U.S. disclosure suggests that the transaction nonetheless should qualify for nonrecognition if these regulations are not finalized in their current form.

Rio Alto

The main business of Rio Alto (a B.C. company listed on the TSX, NYSE and BVL) is the mining, production and sale of gold from the La Arena Project located in Peru and held in a lower-tier Peruvian subsidiary.

Sulliden

Sulliden (listed on the TSX and BVL) is a QBCA Canadian-based precious metals company focused on the exploration and development of the Shahuindo Project located in Peru and held in a lower-tier Peruvian subsidiary. As a preliminary step, Sulliden will be continued from Quebec to Ontario.

SpinCo

SpinCo is currently a wholly-owned OBCA subsidiary of Sulliden that has been established to acquire and hold the "SpinCo Assets" (principally an exploration project in the Abitibi region of Quebec) and assume related liabilities. It has applied for a TSX listing.

Rio Alto Newco

A wholly-owned OBCA subsidiary of Rio Alto, named "Shahuindo Gold Limited," incorporated at least one day before the effective time of the Plan of Arrangement.

U.S. securities laws

The securities issued under the Arrangement have not been registered under the U.S. Securities Act, and are being issued in reliance on the Section 3(a)(10) exemption.

Ontario Plan of Arrangement

1. Sulliden Shares held by a dissenting shareholder will be deemed to be transferred to Rio Alto.
2. All outstanding Sulliden RSUs and DSUs shall be deemed to have vested, and shall be settled;
3. Sulliden will assign and transfer the SpinCo Assets and SpinCo Liabilities to SpinCo in consideration for SpinCo Shares;
4. Rio Alto will lend Sulliden $25M by way of a non-interest bearing demand promissory note, and subject to Rio Alto's election, Sulliden will subscribe for $10M of Rio Alto Shares.
5. Sulliden will subscribe for $25M of additional SpinCo Shares in cash – or as to $15M in cash and as to $10M trough the transfer of the Rio Alto acquired in 5;
6. Sulliden Options will be exchanged for Sulliden Class A Options and 0.10 of a SpinCo Option;
7. Following the amendment of the authorized share capital of Sulliden to redesignate the Sulliden Shares as Class B Shares (common shares with one vote per share) and create Class A Shares (common shares with two votes per share), Sulliden shall undertake a reorganization of capital whereby each outstanding Class B Share will be exchanged with Sulliden for one Class A Share and 0.10 of a SpinCo Share;
8. Each outstanding Class A Share (other than Class A Shares held by Rio Alto or any affiliate thereof) will be transferred to Rio Alto for 0.525 of a Rio Alto Share;
9. Each Sulliden Class A Option shall be exchanged for a Rio Alto Replacement Option;
10. Each Class A Share held by Rio Alto will be transferred to Rio Alto Newco in consideration of the issue by Rio Alto Newco to Rio Alto of one common share of Rio Alto Newco for each Class A Share so transferred;
11. Rio Alto NewCo and Sulliden shall amalgamate to form Amalco with the same effect as if they had amalgamated under Section 177 of the OBCA.; and
12. The terms of the Sulliden Warrants will be consequentially adjusted.

Canadian tax consequences

S. 86 reorg. The fair market value, however, of the SpinCo Shares at the time of this exchange is expected to be less than the paid-up capital of the exchanged Class B Shares immediately before the exchange and consequently Sulliden Shareholders should not be deemed to receive a dividend from Sulliden…

Share exchange

On the subsequent exchange of Class A Shares for Rio Alto Shares pursuant to the Arrangement, Sulliden Shareholders generally may defer under s. 85.1 realizing any capital gain (or capital loss) that would otherwise arise on this exchange provided they choose not to report, in their return of income for the taxation year in which the exchange occurs, a capital gain or capital loss in respect of such exchange.

U.S. tax consequences

Continuance. The continuance of Sulliden should qualify as a tax-deferred reorganization under Section 368(1)(1)(F) of the Code.

Integrated transaction

The share exchange, amalgamation and the transfer of the SpinCo Share Consideration (collectively, the "Acquisition") "should be treated as a single integrated transaction for U.S. federal income tax purposes. This summary assumes that the Acquisition will be treated for U.S. federal income tax purposes as if Rio Alto NewCo and Sulliden merged to form Amalco as specified in the Plan of Arrangement and the Sulliden Shareholders exchanged their Sulliden Shares for Rio Alto Shares and the SpinCo Share Consideration as part of such merger. If the Acquisition is treated as a single integrated transaction for U.S. federal income tax purposes, the SpinCo Share Consideration is treated as part of the consideration paid by Rio Alto for the Sulliden Shares, and the Substantially All Assets Requirement discussed below is satisfied, although not free from doubt, the Acquisition should qualify as a tax-deferred "reorganization" within the meaning of Section 368(a) of the Code (a "Reorganization"), subject to the PFIC rules described below.

Substantially all requirement

Amalco must acquire "substantially all" of the assets of Sulliden (the "Substantially All Assets Requirement")…For ruling purposes, the IRS defines "substantially all" as at least 70% of the gross assets and at least 90% of the net assets of Sulliden….If the fair market value of the Sulliden Shares on the Effective Date of the Acquisition approximately equals its value on the date of this Circular, Rio Alto and Sulliden believe that the Substantially All Assets Requirement should be satisfied.

Consequences of integrated transaction

Assuming the Acquisition is treated as a Reorganization, and subject to special rules applicable to interests in PFIC, the U.S. Holders of Sulliden Shares should not recognize gain or loss, except to the extent of the SpinCo Share Consideration received, for U.S. federal income tax purposes on the exchange of Sulliden Shares for Rio Alto Shares and the SpinCo Share Consideration pursuant to the Acquisition. In addition, the distribution of the SpinCo Shares not treated as additional consideration paid by Rio Alto for the Sulliden Shares should generally be treated as a taxable distribution.

Treatment of SpinCo share distribution

"Because of the form of the distribution of SpinCo Shares and the fact that the assets of SpinCo will consist, in part, of historic Rio Alto assets, the treatment of the distribution of SpinCo Shares with regard to U.S. Holders receiving such shares is not clear. Specifically, in the event that the Acquisition qualifies as a Reorganization, upon the receipt of the distribution of SpinCo Shares, U.S. Holders receiving such shares may be treated as receiving: (a) additional consideration paid by Rio Alto to U.S. Holders for their Sulliden Shares in the Acquisition to the extent that the value of the SpinCo Shares is attributable to the historic assets of Rio Alto, with the remaining value of such SpinCo Shares treated as a taxable distribution under Section 302(b)(2) or under Section 301 of the Code; (b) additional consideration paid by Rio Alto to U.S. Holders for their Sulliden Shares in the Acquisition to the extent of the entire value of the SpinCo Shares; or (c) a taxable distribution under Section 302(b)(2) or under Section 301 of the Code (because the distribution would not qualify as a tax-free spin-off under Section 355 of the Code). Although the matter is unclear, to the extent that the value of the SpinCo Shares distributed to U.S. Holders is attributable to the historic assets of Rio Alto, this summary assumes that such SpinCo Shares will be treated as additional consideration paid by Rio Alto to U.S. Holders for their Sulliden Shares in the Acquisition."

PFIC rules

"Under proposed U.S. Treasury Regulations, a Non-Electing Shareholder does not recognize gain in a Reorganization where the Non-Electing Shareholder transfers stock in a PFIC so long as such Non-Electing Shareholder receives in exchange stock of another corporation that qualifies as a PFIC for its taxable year that includes the day after the transfer. For purposes of this summary, this exception will be referred to as the "PFICfor-PFIC Exception". However, a Non-Electing Shareholder generally does recognize gain (but not loss) in a Reorganization where the Non-Electing Shareholder transfers stock in a PFIC and receives in exchange stock of another corporation that does not qualify as a PFIC for its taxable year that includes the day after the transfer. While it is anticipated that Sulliden will be classified as a PFIC, based on current business plans and financial projections, Rio Alto does not expect to be classified as a PFIC for the tax year that includes the day after the Effective Date of the Acquisition. Consequently, it is not expected that the "PFIC-for PFIC Exception" will be satisfied, and under the foregoing rules contained in the proposed U.S. Treasury Regulations, a Non-Electing Shareholder will recognize gain (but not loss) on the Acquisition under the rules applicable to excess distributions and dispositions of PFIC stock set forth in Section 1291 of the Code, regardless of whether the Acquisition qualifies as a Reorganization. ...The proposed U.S. Treasury Regulations discussed above were proposed in 1992 and have not been adopted in final form. ... In the absence of the proposed U.S. Treasury Regulations being finalized in their current form, if the Acquisition qualifies as a Reorganization, the U.S. federal income tax consequences to a U.S. Holder should be generally as set forth [above]... ; however, it is unclear whether the IRS would agree with this interpretation."